Prime Minister Theresa May speaks in the House of Commons in London during a debate on whether to renew the Trident nuclear deterrent. PRESS ASSOCIATION Photo. Picture date: Monday July 18, 2016. See PA story POLITICS Trident. Photo credit should read: PA Wire
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As Theresa May sets about trying to define Britain’s pathway out of the EU, one thing is increasingly clear: at first glance none of her options looks very good.

If the prime minister takes the course adopted by Norway — joining the European Economic Area — Britain will retain access to the single market but will be unable to curb free movement as the Brexiters in her cabinet want. But if she insists on curbing free movement, it will come at the price of reducing Britain’s access to the single market, potentially damaging the UK economy.

She could, of course, decide that it really isn’t a good idea to be leaving the EU after all. But she has blocked off that path by declaring that “Brexit means Brexit”.

One compromise is increasingly being suggested to navigate through this impasse: that the UK declares it will enter the EEA for a transitional period. Shortly after the Brexit vote, Professor Richard Whitman of Chatham House published a blog calling on the EEA to be seen as a “safe harbour” where Britain could work out a stable transition through the Brexit storm.

Last week, the Adam Smith Institute developed the idea in a paper, saying that participation in the EEA could be a “compromise position for the short and medium term”. In its proposal, Britain would declare that it is not joining the EEA as a long-term proposition. Instead, it would set a time limit, by when it would review its place in the EEA.
 
The advantages of this are clear. By entering the EEA, the UK would formally leave the EU, thereby honouring the referendum decision. It would also protect access to the single market over the medium term, as British business desires. 
 
But once inside the EEA, the UK and EU would have plenty of time to try to agree a bespoke trade deal, something that cannot be concluded within the two-year Article 50 timeframe. Britain would also have far more time to strike trade deals with non-EU states, something that will take many years and which it cannot begin to do until it has formally left the EU.
 
Two questions arise from this. First, would EU governments view a time-limited transitional membership of the EEA favourably? Wolfgang Munchau, who discusses the ASI plan in his Eurointelligence blog, is confident they would. In his view, it would minimise the economic fallout from Brexit, something Europe would want to avoid “given the eurozone’s extreme vulnerability to even the smallest shocks”.
 
The second question regards free movement. There is still no way the EU will allow Britain, as an EEA member, to introduce EU border controls. This is bound to be seen by some Leave campaigners as a betrayal of the spirit behind the June 23 vote. The only way for Mrs May to confront this problem would be to stress the transitional nature of the arrangement, insisting that migration curbs would become possible once Britain has left the EEA and entered a free-trade agreement with the EU.
 
Selling such a compromise to the Brexiters will be hard. But Mrs May has cards to play. She could argue that a transitional EEA arrangement is the only way to win Scotland’s agreement to stay in the union. She could also say that it is the only hope the UK has of easing the crushing burden of simultaneously seeking to renegotiate its trade relationship with the EU and all of its other trade partners.
 
And it could become a more attractive option by the end of the year as the economic costs of Brexit become more apparent to the British public.

Background reading

John Lanchester's analysis of why Britain voted for Brexit, and the social divisions at the heart of the referendum, is being widely — and rightly — praised as a must-read. Adapting Kipling, he asks: “What do they know of the UK who only London know?” 

Gordon Brown last week gave his thoughts on how Britain should approach the Brexit negotiations in a piece for the World Economic Forum. He says the UK should “quickly announce” that it will negotiate on the basis of the Norway option. He says the EEA talks should begin on the basis that there will be a protocol on migration. 

Robert Tombs asks whether the vote to leave the EU was an English revolt or part of a wider, transnational movement away from conventional politics.

Meanwhile, the Guardian reports that European capitals are considering whether to allow the UK an exemption from EU rules on freedom of movement for up to seven years while retaining access to the single market.

Hard numbers

From FT Alphaville

JPMorgan’s Malcolm Barr has referred to Tory MP John Redwood’s idea that the UK should not negotiate an exit from the EU via Article 50 but instead repeal the 1972 European Communities Act. According to Redwood, once this is done, current EU law would be passed into UK law to provide continuity, whilst a new border regime would be implemented and payments to the EU budget cancelled immediately. Once this happened, Redwood claims, the UK could revert to trading with the EU based on WTO rules. He also says that the move can be justified under the Vienna Convention on the Law of Treaties as there has been a “fundamental change of circumstances”. 

Barr, however, argues in a note that there are very good legal, political and economic reasons to not proceed on this path. Legally, the Vienna Convention doesn’t provide a route through which responsibilities under the Lisbon treaty can be unwound. Leaving the EU without going through Article 50 would land the UK in years of costly litigation, he says. Politically, the unilateral nature of the move would antagonise EU trading partners and undermine the UK’s credibility with regards to future international agreements. And economically, a reversion to WTO rules creates no framework for ongoing services trade between the UK and the EU.

“The “incompleteness” of the single market has always been a source of complaint from the UK. But EU membership has at least provided a basis upon which to ensure that the direction of travel was toward opening of these sectors and removal of non-tariff barriers in these sectors,” says Barr.

Meanwhile, the FT's John Authers warns UK holidaymakers to be wary of being overcharged on foreign exchange rates at airports because the Brexit vote seems to have given money exchangers the excuse to widen their spreads to exceptional levels. After landing in London last week, Authers says he couldn’t quite believe the rates being offered at the Moneycorp desk. “I thought there must have been another referendum while I was on the plane,” he told us this morning. Over on Twitter, @HaigAndy provides a snapshot of Monday's rates, where the spread on GBPEUR is 1.0447/1.4307 and for GBPUSD is 1.1519/1.5774. 

Letter in response to this article

Free movement and a case for market mechanisms / Dr R Barrass

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