Would the ‘Norwegian model’ be right for the UK?

Theresa May spent much of last week touring European capitals for talks with her counterparts. Aside from the fact that the UK government does not intend to invoke Article 50 until early 2017 at the earliest, what is becoming increasingly clear is that there is still no clear answer to the “Brexit means Brexit” conundrum. The PM regularly reminds us, likely more for political reasons than anything else, that she will deliver on the voters’ calls for tighter controls on migration. She also remains set on achieving the best possible future trade deal for the UK, and has admitted that we may end up with an arrangement that is “not necessarily … on the shelf already”. In this note we turn our thoughts to the ‘Norwegian model’, often cited in recent weeks as an alternative to EU membership that the UK could opt for and which could potentially deliver a ‘soft Brexit’.

The European Economic Area (EEA) agreement was entered into in 1992 between the EU member states and five members of the European Free Trade Association (Norway, Sweden, Austria, Iceland and Finland). In 1995 Liechtenstein signed up to the EEA agreement with Austria, Sweden and Finland joining the EU. Switzerland has remained a member of EFTA but has entered into a bilateral agreement with the EU, which left the EEA agreement applying to Norway, Liechtenstein and Iceland.

At its most basic level, the EEA agreement encompasses the EU’s four freedoms (goods, services, persons and capital), onto which are overlaid various ‘horizontal provisions’ (such as consumer protection and environmental regulation) and ‘flanking areas’ (such as R&D and education). A key element for Norway is that it remains free to set its own rules and policies in agriculture and fisheries, as well as trade and foreign policy. Outside the EEA agreement, Norway has also chosen to extend its cooperation with the EU into certain areas of common interest: membership of the Schengen area, participation in Europol, participation in certain EU-led military operations.

The EEA agreement and its related patchwork of rules has provided Norway with access to the EU’s single market for over 20 years and it has, by and large, been a positive experience for the Scandinavian country. Norwegians have taken to the polls twice, in 1972 and in 1994, and voted against full membership of the EU both times; a “no” vote would more than likely be repeated were another referendum held now. Single market access through membership of the EEA does, however, come at a threefold cost: Norway is required to contribute to the EU coffers (albeit to a lesser extent per capita than if it were a full EU member), it must allow freedom of movement, and it has relatively little say in the EU legislative process.

Norway and Liechtenstein are entitled, under the EEA agreement, to limit the free movement of people across their borders under the so-called safeguard clause where “serious economic, societal or regional difficulties of a sectoral or regional nature arise”. Fearing retaliation in the form of restrictions on goods or services it exports to EU member states, Norway has never made use of this provision. Liechtenstein, however, has since 1998 imposed quotas on EEA nationals living and working in the country. A number of European leaders and other senior EU figures suggest that the UK would find it difficult to reach agreement for them to acquire unfettered access to the single market without providing for freedom of movement of people. Some have suggested the UK could look to an ‘EEA minus’ option, with a “bit more immigration control and a bit less single market”; that would point to a bespoke arrangement rather than taking the EEA model off the shelf.  That is before even considering that Norway has a very different set of priorities vis-à-vis the EU and so may be reticent to allow the UK to bully its way in to an EEA arrangement in which Norway has been the largest contributor and the loudest voice.

Joining Norway in its membership of the EEA may well allow the UK to negotiate free-trade deals with countries outside the EU, but since it would not be a member of the EU customs union it would mean that all UK exports to the EU would have to pass through strict customs checks which would likely increase costs and compliance burden for businesses.

One of the thorniest barriers that the UK government would need to overcome, if something akin to the EEA model could be replicated in the Brexit negotiations, remains the UK losing its ‘seat at the table’ when it comes to the shaping of EU legislation and policy. Norway has adopted roughly 75% of EU rules (and has in fact been found to be one of the quickest to implement, including over many EU member states) but has relatively little say in how those rules are made. Over time Norway has become accustomed to its limited role at EU level: participation in expert groups, preparatory work with the EU Commission, working with representatives of the Parliament and Council but – crucially – not having a vote on such matters. It is unlikely that having such limited influence on matters of policy and legislation would be palatable to the UK. Not forgetting, of course, that a large proportion of ‘Leave’ voters were swayed by the largely disingenuous claims made by Brexiteers during the referendum campaign that an exit from the EU would enable the UK to “take back control” over its immigration policy.

Many unanswered questions remain, and we will provide updates in due course; although EEA membership has served Norway well, it may not be the most appropriate model as a blueprint for the UK’s exit from the EU.

Jan Greve

Jan is widely experienced in commercial, corporate and dispute resolution work and assists Norwegian and other Scandinavian clients seeking solutions to international legal questions.

Max Beazley

Max’s primary practice focus is on cross-border M&A and equity capital markets. Max has extensive experience with UK domestic and cross-border private and public acquisitions and divestitures. Max also advises banks and issuers on IPOs and secondary issues, both on AIM and the Main Market of the London Stock Exchange. Max advises on private equity, venture capital and angel investments, as well as on banking and finance transactions. In addition, EU and US companies look to Max for advice on the UK and EU securities law elements of cross-border fundraising transactions and on UK corporate governance and compliance matters.

Carsten Greve

Carsten’s practice focuses on institutional-facing private equity transactions, including management buy-outs and buy-ins and development capital deals. Carsten also regularly guides individuals and management teams through private equity backed transactions.

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