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What does the UK want?

12 January 2019

31 letters making 8 points

2 December 2018

The Brexit Rule-Taker Myth

21 May 2018

George Yarrow

It has been repeatedly asserted in Brexit discourse that, if it remained a member of the European Economic Area, the UK would be a ‘rule-taker’, with no control over a swathe of market-related regulation to which it would be subject. The claim does not stand up to even the lightest of scrutiny. It is, nevertheless, endlessly repeated.

Since the UK public will no doubt hear the proposition being asserted again over the next few weeks, it may be useful refresh memories as to why it is untrue, pure and simple.

There are some initial, general points to make:

1. The language of ‘control’ is misleading at the outset. No party has ‘control’ of commercial rule making. The substantive issues are to do with the ‘degree of influence’ that a party might have. The UK will continue to have some influence on EU rule making whatever the Brexit outcome.

2. Even if, contrary to evidence sitting in the EEA Agreement’s Protocols and Annexes, it was assumed that Norway has little influence over market rules, that would carry no very strong implications for the standing of a post-Brexit UK. Rule-making influence tends to be positively correlated with size and resources. UK membership of the Efta Pillar of the EEA would see the population covered by that Pillar jump from around 5-6 million to over 70 million (and close to 80 million if, consequential on retained UK membership, Switzerland was also tempted into the fold). That step-change alone could be expected to significantly increase the collective influence of the Efta States.

3. Relative to the EEA, all other Brexit options currently in contemplation could be expected to lead to a significant loss of influence in rule-making for European markets, which collectively, and by a large margin, account for the largest slice of demand for UK exports of goods and services.

One aspect of the situation that is common to all Brexit options is that the UK will not have a seat on the European Council or European Commission and will not send representatives to the European Parliament. This is one sub-set of channels of influence that will undoubtedly be lost, but the loss is not a major consideration when considering the merits of alternative Brexit options: it only becomes a significant if the comparator is ‘Remain in the EU’. In the latter case the focus shifts to the question: how big a loss would it be? There is scope for reasonable disagreement about the answer.

It would nearly certainly be a felt as a great loss to senior politicians who almost invariably want to have a seat at the highest tables (it is what makes many of them politicians in the first place), want to be members of the most exclusive clubs. Like Aaron Burr in the musical Hamilton, they want to be “in the room where it happens”.

This political aspiration rests on an enduring delusion however. In relation to regulatory rule-making, these rooms are not where the vast majority of things happen. Rather, things get settled via diffuse processes of horse trading and of technocratic interchanges, which take place in many rooms, in many different places, involving myriad meetings. The Jefferson/Hamilton/Madison compromise has its slot on the West End stage by virtue of being an exceptional event, not a bog standard horse trade. In the EEA, the UK would be an active participant in these processes: outside the EEA the UK would be an occasional interlocutor, save in one, important respect.

All Brexit options, including the EEA, would see the UK get its own, independent seat in global rule-making and standard settings processes, a seat that it currently does not have because of the EU’s Common Commercial Policy. In this arena the UK might easily find itself being petitioned for support by the EU, in the EU’s struggle with the USA and China to be the leading global standards setter, or alternatively by one or more of the EU Member States whose own position on a specific global issue is out of line with that of the EU (acting on behalf of its members collectively). Global rule-making and standard-setting affects European decisions. This is a first channel of influence and it can be expected to have significant bandwidth.

This sort of interaction is more than conjectural. As EU Member States Denmark and Sweden do not participate directly in the global processes, but Norway does. What could be more natural than that these friendly, EU neighbours should discuss their global rule-making concerns with Norway, or that, when talking about these matters, Norway might mention its own worries about draft regulations that are progressing through the EU processes in the direction of the European Council and Parliament, institutions in which the friendly neighbours participate but Norway doesn’t.

This global channel of influence will be open whatever form Brexit might take, but other channels are open only under the EEA option. The one most similar in its operation to the global body channel arises from the EEA Agreement’s Financial Mechanism. Contrary to another widely promulgated myth, the Efta States are not required to make any mandatory contributions to the EU budget. They have though committed to a form of direct international aid to assist poorer EEA Member States, by providing funding support for social and economic development projects. The projects are managed by the Efta States and the recipients, not by the EU. Officials meet and talk, in conversations not necessarily always restricted to the projects themselves. This EEA-specific channel has costs, but it also has benefits.

The highest bandwith channel arises from the ‘decision shaping’ rights of Efta States, whereby Efta State technical experts have rights of participation in the Commission’s preparation of draft legislation. These are the processes where the vast bulk of regulatory work is done: they are the engine rooms of regulation.

To get a sense of the significance of the relevant bandwidth of influence, think of a very large multinational company that is likely to be routinely affected by regulatory decisions. Suppose it was offered extensive participation rights in the engine rooms.

It might reasonably be thought that this would be an opportunity to die for. Others might reasonably scream at the scandalous privilege. Only the most other worldly members of the human species could think that it would not affect the regulations that came out of the pipeline.

Further down the track of the EEA rule-making process, the Efta States are afforded channels of influence that are not available to any other country, not even to EU Member States. They are unique to the Efta States.

First they get to decide whether a particular piece of legislation is or is not ‘EEA relevant’. The great majority of EU legislation is manifestly not EEA-relevant, because the objectives and provisions of the EEA Agreement are much narrower than those of the EU Treaties. Of the rest, it is usually fairly obvious that much of it is relevant. These decisions require little cognitive effort.

There are, however, less clear-cut cases which, though relatively few in number, can be of substantial regulatory significance. The boundary/border of EEA-relevance is therefore a contested one: it is where the EEA is vulnerable to mission creep by the EU, which is almost invariably content to see its own political agendas intrude into the EEA.

The EEA Agreement gives the Efta States the formal capacity to resist the pressures. At bottom it is, as Nancy Reagan said in the context of her anti-drugs campaign, a case of “Just say no.” But the border requires monitoring and policing, and those things require administrative resources. The continued membership of the UK in the EEA and its participation in the Efta Pillar could be expected to make a substantial difference: it is an example of the general point made at the outset, that greater economic size and resources brings more power.

The second unique-to-Efta-States channel is the ability to adapt EU legislation for EEA purposes. In the political language of today, this implies an ability to negotiate ‘divergence’ that doesn’t conflict with the EEA Agreement’s over-riding trade and economic cooperation objective.

This may sound astonishing to those who rely on the media for information, but it is unfortunately the case that the whole ‘regulatory divergence’ debate that has developed since the Brexit referendum is, to a good first approximation, a mine of misinformation. There is actually very considerable divergence in regulatory practice within the EU system itself. How could it believed otherwise when, for example, an EU Directive that calls for a target of 80% household penetration of smart energy meters by 2020 leads to the UK (ever wanting to gold plate regulations) setting a domestic target of 100% (which is near insane in terms of cost-effectiveness) and to Germany declining to set a domestic target at all, but currently working towards a figure between 20% and 25%. That is a pretty hefty divergence.

In truth, the EU system is, in most regulatory areas, a little like the Holy Roman Empire: broad statements of harmonised principles and allegiances are accompanied by considerable diversity of practice from place to place on the ground. (It also, of course, has its Napoleonic elements and the tension between these two, differing views of a ‘European political system’ lies at the heart of its past and future challenges.)

The diversity has a self-sustaining quality to it. Many parties may disapprove of a specific practice of one of their number, but they are held back from seeking to outlaw it for the good reason that they, in turn, would not want to see one of their own idiosyncrasies put to the test. Territories outside the system tend not to enjoy such tolerance, a point that tends to be missed or dismissed by those who would favour an ‘ourselves alone’, post-Brexit future for the UK.

Starting from the EU system, the EEA adds scope for further flexibility and divergence, and in this context the word control is no longer too strong, because there is no majority voting in decisions to adopt a specific piece of (amended or unamended) EU legislation into the EEA. Each Efta State has a de facto veto, consistent with its Treaty status as independent, sovereign nation whose laws can be determined only by its own parliament and judicial system.

EU Member States do not have this degree of control: they are subject to the ‘direct effect’ of EU law. Nor, a fortiori, would the UK in the event of adoption of the WTO option. It is to be remembered at this point that the EEA comprises EU Member States as well as Efta Member States, and its rule-book applies to both. EEA rules determine the terms on which Efta states trade with EU member states and the EEA Agreement gives the Efta States a considerable influence on those roles, up to and including the application of a veto. The WTO option does not do that: it would afford significantly less control/influence on market rule-making.

The truth in all this is that EU system itself, and a fortiori the EEA system, allows considerable scope for cherry picking and divergence at the level of Directives and Regulations. Those at the court of the Emperor naturally don’t emphasise this, their task is to sustain the principles that bind the diversity together and it is those principles (not the diversity) that they naturally proclaim and advertise (in what Mrs Thatcher referred to as the EU’s slogans and lofty tones). In Westminster the position is more opaque. For unfathomable reasons the EEA, with its depth of coverage, scope for bespoke adjustments (including on free movement of workers) and its Efta State privileges was given the ‘no platform’ treatment from the outset.

The only explanations offered were that what the UK really wanted was a deep, special and bespoke ‘deal’. That is not unlike a dog owner expressing a wish to have a dog. The rest of the world, after initial puzzlement, has been waiting ever since for an indication of what other type of dog might be wanted. It still does: like the surfer in the Guinness advertisement, “we wait, that’s what we do, … tick follows tock, follows tick (follows tock) … waiting, waiting” (in a mist of enduring regulatory uncertainty).

Any notion of a deal or bargain is egregiously misleading in the current context. The issues are to do with market governance, not with picking or sorting through good and bad clauses in a contract. When the EU says ‘no cherry picking’ it is speaking in the former frame of refence, not the latter. Like the EU Treaties, the EEA Agreement establishes structures and processes of governance, but over a much narrower field of human conduct (trade and economic relations) than Lisbon and with a much more specific aim (to reduce trade barriers across Europe).

Like all market governance systems the EEA is algorithmic in nature: it establishes structures, rules and processes for first resolving problems as and when they arise and for discovering ever better solutions for problems that have been first addressed previously. Its benefits and costs are properly evaluated in terms of its algorithmic power. A nation is either in the system, or it is outside the system. That’s what the EU’s “no cherry picking” means, not “there is no scope for national divergence in relation to particular Directives and Regulations”.

It is also important to recognise that the EEA is an adaptive system, meaning that it can change its own rules. It encompasses structures and processes by which rule-change can be effected. Within the system a nation has much more influence over the adaptations than it does outside the system. Again, it is an in/out issue, and it is now time for the UK to make that choice.

The referendum result was to “Leave the EU”, but it was in large part determined by a strong sentiment to “take back control”. For the rest things were left to Government and Parliament. However, the same popular sentiment (“take back control”), if applied to the choice of means of leaving the EU, points rather decisively to the EEA option. The EEA affords significantly more post-Brexit European rule-making influence to the UK post-Brexit than any other Brexit option under contemplation, and it does this without foreclosing the possibility of realising any of the global economic dreams of advocates of other options. A politician might say that it offers “the best of both worlds”, although that seems to be an expression much more favoured when standing on Scottish soil than when standing on English soil.

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