An EEA-minus deal for the UK is wishful thinking

10/7/2016

By Wolfgang Münchau

Britain’s idea is like John Major’s hard ecu: France and Germany are not interested

Over the past three decades I have observed British negotiating tactics in Europe fail and succeed. One of the biggest failures was John Major’s “hard ecu”, a scheme intended as a clever alternative to the euro. If the former UK prime minister had only spoken to his German and French colleagues, he would not have made the proposal in the first place. They wanted a single currency, not a common one.

Today, I have a feeling of déjà vu when I hear British officials and commentators talk about “EEA-minus” — the hard ecu of our times. This refers to the idea that Britain will join the European Economic Area while simultaneously retaining some control over immigration.

The EEA is an enlarged single market. Its non-EU members — Norway, Iceland and Liechtenstein — have no say over the rules, but pay into the EU budget and accept free movement of labour. I am sure the EU would offer Britain an EEA deal. I think the UK should take it. But there is a catch. EEA membership would respect only the letter of the referendum result, not the spirit. It would not allow London to impose controls on immigration. The idea behind EEA-minus is for the UK to get the best of both worlds: keep undesirable EU aliens out — and then offer them British financial services in their home country.

Why should the EU offer Britain a deal that would set incentives for other member states tempted to quit the bloc? While the exit agreement only requires a qualified majority vote, an EEA-minus one would require unanimity. The French and Belgians have said non.

If the UK rejects an EEA deal, it has only two further Brexit options: a free-trade agreement or no deal at all.

There is a fundamental difference between a free-trade deal and membership of the single market. Access to the single market is an inalienable right for EU members; an FTA is an international agreement. Such an agreement can be constructed to produce a similar economic outcome as single market access.

A recent amendment to the EU’s financial services regulations makes it possible for third countries to access the bloc’s financial market if they have an equivalent regulatory regime. This might preserve the City of London’s cherished rights for the passporting of financial services across the EU.

To assess the costs and benefits of the available options under an FTA, we should ask two questions: what is the actual value of the single passport, and how much can be salvaged outside the single market?

My guess is that the UK will be unable to preserve all benefits, but more than people think. Many big financial services businesses are registered in more than one EU country. They already have multiple passports. With Brexit, they have one less.

While the EU does not allow Delaware-style “letterbox” companies to circumvent its domicile rules, there is leeway for UK companies to operate through EU subsidiaries. No one could stop London trading in euro derivatives offshore. There are reasons why the City has emerged as a global financial centre and why Paris and Frankfurt have not: know-how, language, education, tax regimes and, most important of all, professional networks.

So what about no deal at all, a hard Brexit? British goods and services would become subject to tariffs but there would be compensating factors. Sterling has devalued, and will devalue more if there is hard Brexit. The UK’s proposed cut in the corporation tax rate would provide further compensation for companies. Since Britain runs a very large current account deficit with the rest of the EU, expect others to suffer too.

The biggest problem Brexit negotiators face is an expectation fuelled by the media in other EU member states that Brexit may never happen. I think it is a mistaken assumption. If your counterparts think you are bluffing, they are not going to offer you a good deal.

I would go in to these negotiations with two clearly stated commitments: a self-imposed deadline and a steely determination to accept a hard Brexit if a good deal is not on offer.

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