Brexit sequencing and the ‘interim period problem’: Limbo in our time?

Withdrawal from the EU (Brexit) will occur at an instant on 29 March 2019 and that moment divides the policy questions and processes entailed by Brexit into two periods. The post-Brexit period will itself be divided into two stages since any new, long-term trade arrangements will not be in place on the day after Brexit. It will take time for them to be negotiated, then ratified and implemented. The time sequence we face is therefore:

Article 50 period -> Interim period -> Operational long-term agreement period

Over the two years since the referendum the great arguments about Brexit have revolved largely around the first and third intervals of this sequence, but the interim period is important too. It will be when the substantive long-term negotiations take place and some of its features will be important influences on the outcomes of those later negotiations. The two that I will focus on are the likely length of the period and the degree of control over rule-making that the UK will enjoy during it.

Even now, close to its opening though we are, it is impossible to forecast the detail of how things will pan out during the interim period: there are too many possibilities to contemplate and assess. Even if it were feasible, there is little value in trying to plan out now, in any great detail, what the UK’s ‘positions to take’ on particular issues should be. As Field Marshall von Moltke (the Elder) put it: “No plan of battle survives first contact with the enemy”. Flexibility is required to adjust to changing realities and to have influence on them. It depends on having (a) a menu of options to choose from and (b) the power to exercise those options. This is what is meant by ‘control’ or, in broader terms, possessing ‘sovereignty’ over decisions.

Since ‘taking back control’ was the major theme of Vote Leave’s referendum campaign, it is natural to ask the following question: In the early part of the interim period, what progress in ‘taking back control’ can be expected? The ‘taking back’ aspect of the question implies that the assessment is benchmarked against the current status quo, in which the UK is a Member State of the EU.

More specifically, consider first what the UK’s degree of control over market rules and regulations will look like on the day after Brexit. Ask of each of the two long-term Brexit proposals currently receiving most attention (Canada+ and Chequers): Will it lead to a stronger or weaker position for the UK on the 30 March 2019? Will it provide more or less control/influence over rule-making?

Approaching things in this way, it is immediately apparent that the terms of the current, draft Withdrawal Agreement (WA) imply that Brexit Day will see a reduction in UK control. That is, in response to a popular injunction to ‘take back control’ the Government will have delivered a surrender of control (judged relative to the status quo ante, the EU system). This can be called the “interim period problem”, since it is likely that this initial control deficit will persist throughout the period (although its severity may vary over time). On the control/sovereignty agenda of the referendum campaigns, the UK will have paddled backwards.

That is a major point, because other things equal very few voters would favour a reduction in sovereignty.  Remainers are no different to Leavers in this respect: they might argue for a lesser sovereignty, but only if it was accompanied by the prospect of compensating benefits of greater value.  Taken by and of itself (i.e. ‘other things being equal’) a loss of sovereignty is a negative factor.

As things stand under the draft WA of March 2018 there is a plan for a ‘transitional period’ that will last for 21 months, but ‘no plan survives its first contact with realities’. At the start of almost any complex process of negotiation it is difficult to be confident about how long it will take. Benchmarked on international FTA experiences, a four-year start-to-implementation length would be a very impressive achievement for an agreement of the depth, scope and complexity anticipated by the Canada+ and Chequers proposals. These things look simple in abstract, but they invariably turn out to be more challenging in practice. It has, after all, taken the Government more than two years even to come up with only a very broad outline of its own aspirations (Chequers).

The WA in its present form would therefore see a division of the interim period itself into two: (a) the first 21 months and (b) a yet to be agreed extension, necessary to bridge the remaining gap until such time as a new long-term agreement is operative. There would likely be a further price for the UK to pay for the extension and the closest, identifiable benchmark appears to be around £10 billion per annum (the sort of payment that the draft WA indicates has been agreed for its 21 month transition period, although things are not put that way in that document).

There is an underlying three-dimensional trade-off between depth, speed and cost at work here. Mrs May opted at the outset for a “deep and special relationship” and that aspiration remains UK policy. The interim period could be shortened by giving up on depth and opting for a shallower, simpler agreement, but that would entail a major shift in government policy and the likely benefits of the agreement would be lower.

A more basic Canada-style agreement, without pluses, might shorten the interim period, but even then it is not just a case of replicating an existing FTA template. The value of UK-EU trade is many times the value of Canada-EU trade and the goods and services mixes involved are rather different. A UK-EU agreement would be a significantly bigger thing than Canada-EU from the outset.

Then there are the customs issues to consider. The operation of even a basic agreement would require a major upgrade in systems and businesses throughout the land would have adjust to rules-of-origin reporting. These adaptations are perfectly feasible, but there is another trade-off to consider: the faster things need to be done, the higher will be the costs, including costs arising from operational failures.

The UK cannot unilaterally determine the length of time things will take. EU systems will need to be adjusted too and there is an obvious question to ask about the incentives of EU Member States regarding speed of progress. The transitional arrangements contemplated in the WA are very comfortable for the EU: the longer the interim period the larger the financial contributions of the UK are likely to be. A UK request for greater speed could be expected to elicit a request for higher financial contributions to cover the EU’s own incremental adjustment costs that a greater pace would entail. There is also the issue that 28 counterparties with differing interests will have influence in the negotiations, each of whom will be unlikely to stay silent on matters that touch on its own, economic and political sensitivities.

In the case of the Chequers proposal there is a very real question as to whether it is realistically feasible at all. By and of itself the first sentence of the list of Chequers proposals raises enough difficult operational questions to indicate that this would be an administrative snake pit. For the EU and the other EEA contracting parties, the UK discretions (rights) sought in the proposal would serve as an ever-present risk to the well-functioning of the Single Market rule-books (which work as systems of rules – the addition or subtraction of a rule can affect the way the other rules function). The detail here can be left aside for current purposes: the only point that matters is that the interim period entailed by a negotiation based on Chequers could be expected to be particularly protracted.

The problem in all this is obvious. It can be reasonably be expected that it will take four years or more, possibly several more years in the case of Chequers, to settle long-term future trading and commercial arrangements. The UK will face four or more years in a sort of fee-paying Limbo. The interim period could be expected to end in 2023 at the earliest, which lies at the far side of the next scheduled General Election.

A double, public stocktaking of how well things are going on the ‘take back control’ agenda can the be expected: the first around the time of the Brexit (29 March 2018), the second at a subsequent General Election. On both occasions the government of the day will likely have to acknowledge that, relative to where the UK stood when in the EU, the UK will have surrendered control, the opposite of the Leave injunction to take back control. No doubt the word ‘temporary’ would be used a lot in the Conservative Party campaign and better things would be promised soon, but, at a General Election in 2022, a record of nearly six years of promising benefits that had not yet arrived would likely pose something of a credibility problem.

Fortuitously, history has presented the UK with a potential solution to the ‘interim period problem’. Evaluated against the principles of best-practice policy making (which in their regulatory version are enshrined in domestic statute) it is pretty much a bull’s eye: it comprehensively deals with the problem by eliminating the interim period. Whilst, being precisely targeted on the ‘interim period problem’, it causes minimal collateral economic harm and has a minimally foreclosing effects on other paths of policy development. Since it rests on an extant international trade agreement, already ratified by all its contracting parties, it can be implemented immediately upon a consensual agreement. Its most accurate shorthand descriptive label is “Norway First”.

The opportunity arises because of the existence of the European Economic Area Agreement (EEAA) and seizing the opportunity is facilitated by the fact that the UK is itself an existing contracting party to that Agreement, and indeed was one of its founding parties. Although not heavily advertised, the draft WA signifies acceptance by both the UK and the EU that the EEA should continue operating for at least the first 21 months of the interim period.

As things stand, the anticipated rollover of the EEAA will be on the basis that the UK continues to be treated as an EU Member State. If that remains the case the UK will fall within the EU governance pillar of the EEA Agreement. There it will be subject to decisions about EU and EEA legislation and about its operation that are taken on the UK’s behalf by the European Commission, supervised by the European Court of Justice, without any significant UK role in the making of that legislation or the taking of decisions.

The position would change, however, if the UK transitioned to the EFTA governance pillar of the EEA Agreement, in which sit Iceland, Liechtenstein and Norway. These sovereign nations do not share EEA competences with the EU as EU Member States do, nor are they subject to the authority of the ECJ. The EFTA States have their own supervisory arrangements.

This is the ‘Norway option’ in its full sense and, if the transition between pillars occurred simultaneously with Brexit (UK withdrawal from the Treaty of Lisbon), it would eliminate the interim period entirely, for trading and regulatory arrangements at least (there would still be need for transitional arrangements in other areas such as customs). If the transition to the EFTA pillar occurred at a later date (than 29/3/19), the interim period would end on that later date, for example three or six months after Brexit Day.

Adopting this pillar-switching approach, the question of the precise nature of the longer-term relationship would be a can that is kicked down the road until after Brexit Day, which is something that will likely happen anyway given the compressed timetable of the Article 50 process. What Norway First would add is UK empowerment during the interim period: in respect of trade-related matters, UK sovereignty would be increased, not diminished, relative to the EU benchmark.

It can be noted at this point that Norway First has a strong resonance with the strategy adopted by the Leave campaigns before the referendum: in a sense it can be viewed as the natural continuation of that strategy. As a matter of conscious choice, those campaigns did not try to specify a ‘plan’ for what should happen in the event of a Leave victory: that would be a matter for democratic determination in the post-referendum period. The electorate voted knowing that the basis of the choice was ‘Leave First and let Government and Parliament determine the future EU relationships later’ vs Remain (although I suspect that few of us expected such hapless governance to follow).  Nothing about the strategy was concealed: the can labelled ‘what next?’ was, transparently, to be kicked down the road.

Given that, the only mandate that properly needs to be met by 29 March 2019 is withdrawal from the Treaty of Lisbon. There is no mandate to leave the EEA: it was one of the matters that was put in the kicked can at the time of the referendum. Norway First is therefore a full and complete response to referendum vote: it would deliver the Leave First result that the majority voted for.

A Prime Minister speaking on the day after Brexit could then truthfully say “We have delivered the Brexit mandate to withdraw from the EU and have already achieved the greater part the implied injunction to take back control. We have done that in these areas: [insert list of areas here].” The list of areas would include free movement of workers, which may come as a surprise to many, but is no less true for that: the EU Treaties themselves allow for limitations to be placed on freedom of movement and the EEA Agreement provides greater scope to do that than do the EU Treaties (Lisbon and TFEU), but the really big point is that Norway First would transfer the competences to make the relevant decisions from the EU to the UK. This transfer of competences can be most easily seen at the final sentence of Article 113(3) EEAA, but it runs through the entirety of the EEA Agreement’s provisions.

At the time of writing, Norway First is receiving attention because of interest in a NorwaythenCanada Brexit strategy that has been advocated by the Conservative MP Nick Boles. The strategy comprises an aspiration for a long-term Canada+ agreement, but with the earlier, interim period problem resolved by Norway First. It has very obvious attractions for a significant group of parliamentarians who favour Canada+ or some shallower type of FTA for the longer term, but its key aspect should command a wider support. That key aspect is the elimination of the interim period, i.e. the avoidance of a potentially protracted period of Limbo.

Norway First is directed solely at the interim period problem and can be combined with any of several alternative approaches to the operational long-term agreement period. These include, in increasing order of depth and scope: a bare bones FTA, Canada, Canada+, EFTA, EFTA v2.0, Chequers, Norway (EEA only), Norway (EEA+EFTA), and return to the EU.

The can labelled ‘long-term arrangements’ should, advisedly then, be kicked down the road, and in all probability it will be anyway. It is a can that has given rise to lots of noise, game-playing, and bitter personal rivalries, all of which have distracted attention from the second can in play, which carries the label ‘the interim period’. The contents of the latter can should be dealt with immediately, because the opening of the interim period is getting very close now. The most important question the can contains is: Empowerment or Limbo?

It is not the most difficult question a government has ever faced, but for some reason I cannot suppress a picture in my mind of a UK Prime Minister returning from Brussels with a document that says “Successful Agreement” on the cover, but whose content implies “Limbo in our time”.

The bespoke agreement option

This is an extract from a submission to the Scottish Parliament made on 15 August 2016.
One argument in circulation at the moment is that the UK should withdraw from the EEAA in order to negotiate a better, bespoke agreement with the EU. There are two points that I would make about this policy position.

First, there is the timing issue already raised. Bespoke arrangements may take a long time to be negotiated and hence might be expected to contribute to a protracted period of political and economic uncertainty. Added uncertainty can be expected to have adverse effects on investment. Such negotiations also tend to absorb significant administrative resources.

Second, whilst it is highly likely that there are arrangements that would be better for the UK/Scotland than the existing terms of the EEAA Agreement – the Agreement was, after all, negotiated and drafted a quarter of a century ago and I think that would fair to say that it is not one of the finest pieces of legal draftsmanship in existence – it should always be borne in mind that the possibility of achieving something better is accompanied by the possibility that something worse could be negotiated. One of the maxims I have used in my working life in public policy is “never underestimate the capacity of well-intentioned government to make matters worse” (and governments are not necessarily always well intentioned).

In current circumstances there are also some severe doubts about the availability of negotiating skills on the UK side. This is not just a matter of a dearth of experienced trade negotiators: the number of old-fashioned trade unionists (brought up in a culture of hard bargaining on behalf of their members) now to be found in front line politics, and who might in other circumstances have served, is much diminished.

A concrete example illustrates the possibility of ending up with something worse. In a referendum the Swiss rejected membership of the EEA at its outset and subsequently negotiated a series of bespoke agreements with the EU (reported to total over 120), including in relation to the free movement of persons. Much more recently, in referendum on 9 February 2014, the Swiss have voted to impose stricter immigration controls, but, under the terms of the relevant agreement, this has to be negotiated with the EU. Two and a half years’ later the negotiations are still ongoing. In contrast, as a Contracting Party to the EEAA, the relevant actions could have been taken unilaterally and without significant delay.

Negotiating bespoke arrangements could pose particular issues for Scotland. For example, I understand that Scottish fishermen have already expressed anxieties that the potentially beneficial effects of repatriation of fisheries policy powers will be bargained away in Brexit negotiations. My general view is that the Scottish Government and Parliament will have an easier task in monitoring developments and influencing outcomes in the context of a negotiation based on making “necessary amendments” to a relatively simple, existing Agreement than in staying abreast of the more complex, more protracted negotiations that starting from scratch would likely entail.

This last point is reinforced by the fact that the ‘off-the-shelf EEAA’ has been previously scrutinised by the Parliaments of Iceland and Norway, countries whose interests have a more than average degree of alignment with Scottish interests in some major policy areas.

Brexit strategy in one diagram

This is another golden oldie, from the beginning of 2017, before Article 50 notification.  It recommended a three-track approach to the Brexit process (a) not getting entangled in discussions of longer term trade arrangements in the Article 50 process itself, (b) sticking with the EEA throughout, and (c) making an immediate start on the reform of immigration/residency policy.

No formalised transition period was proposed in relation to EEA matters, since Art 127 allows for a simple, unilateral withdrawal with 12 months notice.  Withdrawal might be triggered in the event that some better, longer-term arrangement could be negotiated or if no accommodation could be found on free movement of workers issues.  These were matters that would be determined post-Brexit.

Less sensitive issues — customs arrangements, agricultural and fisheries policies, VAT — would, on the other hand, have required transitional arrangements.  Contrary to conventional assertions, an EEA Brexit alone would have been too hard for practical purposes.

In the event, (a) the government sought to make long-term arrangements a priority in the Art 50 negotiations, (b) closed off the EEA track from the outset, and (c) has not made any significant steps forward on immigration/residency policy.  That was pretty much the opposite of what was proposed.

Brexit in one diagram

 

The Day after Brexit: the EEA Option

This is an old piece from October 2016, posted on the second anniversary of the Brexit referendum. It stills seems relevant.

The UK will formally withdraw from the EU Treaty on Brexit Day (BD) and an obvious question to ask is: what realistically possible circumstances does the UK wish to find itself in the day after Brexit (BD+1)?

Most discussion has focused on the UK’s longer term aspirations, as if it were possible to pick from a menu of future end states of the world, to the relative neglect of what are called ‘policy sequencing’ issues. Major policy adjustments are typically protracted processes entailing the development of strategies, with each step along the way best taken with an eye on what that step will imply for subsequent movement. Will it, for example, foreclose future options, or will it open up future options?

In thinking about sequencing it is highly relevant to recognise that the EEA Agreement is distinct from the EU Treaty. The UK is a Contracting Party to the EEA Agreement, which it signed and ratified in its own name in the early 1990s. Withdrawal from the EU Treaty does not entail withdrawal from the EEA Agreement and, contrary to an increasingly asserted falsehood that seeks to conflate the two, the contents of the two documents differ in a number of very major respects, as can be confirmed even by a cursory reading of them.

The only withdrawal mechanism specified in the EAA Agreement is voluntary, unilateral, simple and quick: it requires 12 months’ written notice. Given this it can be asked: is there any obvious benefit to UK withdrawal from the EEA Agreement on or before (or even shortly after) BD? I can see no clear basis for an affirmative answer to that question.

Continued UK membership of the EEA would see a substantial repatriation of powers on BD, across a wide range of areas that includes immigration as well as agriculture, fisheries, trade policy, the customs union, foreign and security policy, justice and home affairs, and taxation. These policy areas would no longer fall within the remit of the European Commission and the European Court of Justice (ECJ) and nor would supervision of the enactment (in national law) and enforcement of Single Market legislation.

Repatriation of control over immigration might appear a surprising inclusion in this list, but the text of the Agreement is clear enough for anyone who would read it. The particular aspects of the concept of free movement that are potentially problematic for the UK are stated to be “… subject to limitations justified on grounds of public policy …” (see Article 28(3)). A clear immigration or residency policy would provide just such grounds in the EEA context.

Given these points, it might be asked why there is so much contention surrounding the free movement issues. The problem lies, I think, in a failure to link the words ‘free movement’ to the specific context in which they are used and hence to link them to the particular features of the context that should govern their appropriate interpretation and meaning. To illustrate, it is obvious that the words ‘free movement’ are to be interpreted differently as between (a) the Universal Declaration of Human Rights (UDHR) and (b) the EU Treaty, because these are two different documents developed to serve two different sets of purposes. What is less immediately obvious, but, as already noted, is simply the case, is that the EEA Agreement and the EU Treaty are two different documents developed to serve two different, sets of purposes.

The differences in purposes is particularly significant because the European Court of Justice inclines toward what is referred to as teleological interpretation, i.e. interpreting the law according to intended purpose(s). The linkage between purpose and interpretation is therefore well established in EU law and policy.

To see the implications of the differences in purposes, consider the EU Treaty’s creation of a common citizenship, which puts Member States closer to being part of the same ‘State’ (a shared citizenship being one, albeit not the only, typical characteristic of a ‘State’). According to Article 13(1) of the UDHR: “Everyone has the right to freedom of movement and residence within the borders of each State”. In contrast, non-EU Contracting Parties to the EEA Agreement do not share a common citizenship, and Article 13(2) of the UDHR says only that “Anyone has the right to leave any country, including his own, and to return to his country.”

The EEA Agreement obviously implies rather more rights in relation to cross-border movements than does the UDHR, but the question of what those increments amount to is, under a teleological approach to interpretation, to be settled by references to the purposes of the EEAAgreement, not the purposes of the EU Treaty. Given that the purposes of the Agreement are considerably narrower than those of the Treaty, the interpretive gap is potentially quite large, particularly in relation to the compatibility of non-discriminatory residency policies with the Agreement’s stated aims/purposes.

In practical terms, what these comments suggest is that it would be feasible for the UK to revisit the existing EU free movement directive (Directive 2004/38/EC) and transpose it into national law in way that is consistent with both the provisions of EEA Agreement and its own, newly formulated residency policy (replacing the existing Immigration (European Economic Area) Regulations 2006, which were drawn up in a context in which the UK was part of the EU and therefore subject to the common citizenship provisions of the EU Treaty, i.e. drawn up when the policy purposes were different).

Turning to the other (than immigration) two, commonly expressed objections to the EEA option, budget contributions, it can be noted that the Agreement as it stands requires no such contributions from the UK (and the specific ‘Norway payments’ are themselves an historical idiosyncrasy). If the EU seeks such payments, contributions would need to be ‘negotiated in’ and, if agreed, the UK could reasonably expect a proportionate quid pro quo.

In relation to the second, frequently made objection to the EEA Agreement, a lack of influence over market rule-making, it can be noted that (a) non-EU Contracting Parties to the Agreement have co-determination rights in the preparation of Single Market legislation: it is only at the voting stage that rights are absent, and (b) this voting stage is itself followed by processes of transposition and enforcement where a national government is in the driver’s seat. As an EEA member the UK could therefore expect to continue to enjoy a significant, albeit diminished, influence on Single Market rule-making. Such influence would, of course, be more substantially diminished by withdrawal from the EEA.

It might also be remembered that the original Delors vision for the EEA contemplated full participation at all legislative stages, including voting, by non-EU members: only in the high politics of the period after the fall of the Berlin Wall did this principle get set aside. It would, therefore, not be novel for the UK to argue for the principle, which has manifest rationales in terms of both equity and effectiveness (of market governance), and one possibility is that it be part of the quid pro quo associated with any UK budget contributions.

Finally, to make the EEA Agreement workable in the new circumstances it would be necessary for the UK to accede to the administrative pillar established to supervise the operation of the EEA Agreement as it applies to non-EU members. This would not necessarily entail membership of EFTA (although that might be a Good Thing to Seek anyway), but it would require the consent of the governments of Iceland, Liechtenstein and Norway for the UK to become a participant in their inter-governmental Surveillance and Court Agreement. Early discussions with these governments would therefore be advisable.

In summary, the EEA option would potentially allow for a relatively straightforward process of exit from the EU Treaty, over which the UK would retain a substantial degree of influence throughout, followed by good faith efforts to make the EEA Agreement work and to improve it over time, including in relation to rule-making processes. If those efforts failed, that would then be the time to consider leaving the EEA, but that moment, if it does come, can be expected to arrive significantly later than BD+1.

George Yarrow, 15 October 2016

The nature of markets: a primer.

Markets have the following characteristics or elements:

A.  Like all social institutions they are shared sets of rules governing or guiding aspects of human conduct.

B.  The relevant conduct is the exchange of goods and services.

C.  Unlike many social institutions, markets serve a relatively tightly defined function or purpose:  to facilitate (or to reduce the costs of) exchange transactions between buyers and sellers. Markets are not necessary for the existence exchange transactions, which can occur, for example, via ad hoc barter between economic agents.

Historically, buyers and sellers may have ‘gone to market’ to meet many sellers and many buyers conveniently gathered together in one place and in one time window.  Today, ‘going to market’ may simply entail going online.  Markets have developed because in many circumstances the shared rules have the effect of reducing the costs of transactional behaviour . In this they are like a second, fundamental institution of commercial society (i.e. a society characterised by an extensive division of labour), ‘money’.

The three characteristics/elements raise questions and issues concerning:  market governance, market transactions, and market purposes.

The first element engages social or collective action; the second is individualistic, at least at the level of the transacting agents (the buyers and sellers).  Markets are therefore ‘dualistic’ in nature, involving a collective acceptance of shared constraints or set of expectations which have the purpose of expanding an individual’s economic freedom.

The rules tend to be a varying mix of the formal (laws and regulations) and informal (conventions, social norms, shared understandings and expectations, etc. — which together can be summarised as the market ‘culture’).

A particular market is defined by (1) its rules and (2) the transactional activities that those rules govern (such as goods and services of various types, labour, capital, land, etc.), usually including the geographical scope of those transactions.

Rules necessarily exhibit a significant degree of stability over time (otherwise they are not ‘rules’ and their economic/social co-ordinating effects are lost).  They are not, however, immutable:  they change and adapt in response to changing circumstances.

Informal rules tend to change over time via diffuse, evolutionary processes, as do informal ‘enforcement’ methods.  Formal rules, on other hand, tend to be enforced and changed by governance processes that are themselves specified or recognised within the market rule-book itself.

‘Participation in a market’ can be at one or both of two levels.  The lower level is engagement in the transactional processes that are governed by the rules, taking those rules, their enforcement and their adaption over time as givens (transactional participation).  The higher level is participation in the formal (legislative/regulatory) market governance processes that concern themselves with rule-making and enforcement (governance participation).

This binary division is, however, a simplification: groups of individuals may adopt their own conventions or develop their own sub-cultures when trading with one another and those conventions may evolve to become an accepted market norm.

The points can be illustrated by current Brexit issues.  Two distinct markets are involved, formally defined by the Lisbon Treaty and the EEA Agreement respectively.  These are two different rule-books, of very different lengths, with different objectives, and covering different product/service and geographic domains.  (In retrospect, the ‘single market’ terminology used in the course of Brexit debate has been highly misleading: the existence of two, albeit overlapping, markets sits uneasily with the ‘single market’ soundbite.)

The UK government position is complex.  It unambiguously wants to participate in the transactional processes of both markets (the buying and selling); wishes no longer to participate in the governance structure/processes of the EU Internal Market (governed by the EU Treaties); and, from evidence to date, doesn’t appear to want to think about the EEA issues at all.  It does, however, wish to change the rule-book of the EU Internal Market, via a process of barter (by seeking ‘bespoke’ arrangements), but it has been unclear as to exactly what it wants changed and in what ways.  In effect, it wants to be a participating non-participant in market governance.

The EU position is much more straightforward.  It is that, to have influence on major aspects of market rule-making and enforcement (whether for the Internal Market or the EEA), it is necessary to participate in a market’s own governance processes (in which rule-changes do occur over time, but according to well-defined and stable processes).  Bartering such major rule-changes with an outside party in a one-off ‘deal’ would serve to undermine the integrity/stability of the market rules themselves, particularly since they work together as a whole ‘system’ or ‘ecology’ (and, in technical terminology, markets are complex, adaptive systems).  In respect of market governance, therefore, the EU sees market governance in terms of in/out choices for the UK, whether in relation to the EEA or to the EU Internal Market.

The UK Government appears to have difficulty understanding Monsieur Barnier’s logic, but logical he is.  It is, in fact, a pro-market logic (see above, particularly in relation to a shared set of reasonably stable, shared rules), whereas, possibly for the first time in around a millennium, UK commercial policy has found its way to a position that is, in a very fundamental sense, anti-market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Brexit rule-taker myth

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 think 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.

 

A cap and trade system for residency?

Regulatory innovation tends to start with a new way of looking at a problem.  In that spirit what follows is a bare-bones heuristic, not a fully worked out policy design nor anything approximating such a design.  It is intended to stimulate some first thinking.

The issue is control of net migration of non-citizens (NCs) into a territory.  The economic problem to be addressed is that more people want to live and work in the territory than its citizens would, in some collective sense, wish to see, i.e. there is excess demand for residency rights.

Most (possibly all) nations address this type of excess demand problem via administrative methods of allocation: in colloquial terms, matters are handled bureaucratically.  An individual’s right to residency is established/created according to a mix of (i) complex sets of rules and (ii) discretionary decisions and judgments made by individual public officials who interpret and implement the rules.  Rights are afforded to identified individuals (e.g. Ms S. Jones) and are non- transferable.

Graduates of Economics 101 courses will tend to say immediately that this is an inefficient allocative mechanism.  Those at a higher level might note that the inefficiency comes from non-transferability, not from the initial method of allocation (though the latter does raise equity/fairness issues).  Further up the scale, and encompassing a wider range of human sciences, there will be matters to discuss which include:  bureaucratic dysfunctions, corruption, a variety of monitoring and enforcement problems, and the Kafkaesque sufferings of many of those who enter the labyrinth of rules and encounter arbitrariness in the discretionary decisions and judgments, including in the time taken to process applications.

Most, however, will simply note that the evidence indicates that administrative systems tend to lead to only weak government control over the management of the excess demand.  Net migration targets are set and are consistently missed, year after year, often by very large margins.  Politicians and public officials work hard, but it is a Sisyphean task:  they are trying to ‘buck the market’.  Among the public there tends to be a wide range of views as to what is the most advantageous number of NCs in the territory, but there is often much greater consolidation of opinion around the proposition that the public authorities should have ‘more control’.

In thinking about whether there is an alternative to the status quo or whether TINA (‘there is no alternative’) will always be with us, it is often useful to ask the question: have I seen a problem like this before?  And of course we have: markets routinely balance supply and demand.

At the public policy level the choice between administrative and ‘economic’ methods of allocating scarcity is familiar from the textbooks. For example,  environmental economics distinguishes between command & control policy instruments, e.g. maximum emissions allowable from a given source of a pollutant, and ‘economic’ instruments such as emissions taxes and emissions cap-and-trade systems.  The EU Emissions Trading Scheme for greenhouse gases is the most widely known of the latter systems.

Prima facie, there is no immediately obvious reason why similar economic thinking should not be applied to issues of immigration and residency.  A tax on immigration has been suggested by Prof Gary Becker of the University of Chicago and the UK government is edging towards that sort of thinking with its new Immigration Skills Charge.  A major difficulty with tax approaches, however, is that they necessarily give rise to discriminatory treatment of workers in the labour market.  Some workers (new immigrants) are, in effect, taxed, others who have more or less identical skills and qualities are not.  A tax on a migration flow is also problematic in that one immigrant might pay the tax and be resident in the territory for only a year, while another paying the same tax might be resident for ten or twenty years.

The discrimination problem would, however, be largely resolved by the alternative, cap-and-trade approach.  In broad terms it might operate as follows.

  • Residency rights are created which entitle the holder to live and work in the territory.
  • A fixed number of rights, determined by government, is made available at any given time.
  • The rights are transferable: they can be bought and sold.
  • Monitoring is via digital identification that links the holder to datasets that record ‘entitlements’, including, but not necessarily restricted to, residency rights.

When implemented by card technologies, such an identification system has come to be associated with old concerns about Identity Cards and about threats to civil liberties.  But card based identification systems are now routine in electronic banking and payment systems.  Identification serves to establish a right to transfer money between accounts or to withdraw cash from an ATM.  It tells the system provider that an individual has a right to access a particular account or accounts when seeking to engage in transactions.  In a literal sense, the relevant card is an ‘entitlement card’, familiar and regularly used by most people.  And today technology is taking things on to mass market utilisation of biometric recognition/identification:  eye recognition, thumbprint recognition, and so on.

In the digital world, acquisition of a right amounts to establishing a linkage between two pieces of data:  a signifier of a particular right and an individual, digital identity, each stored in an easily and quickly addressable databank.  The purchase of a right is recorded by the creation of a new data linkage, the sale of a right by the removal of an existing linkage.

If an aggregate fixed number of rights (the available stock of linkages) is specified, every new resident of the territory acquiring her/his right to live and work in the territory will do so in consequence of the surrender of a right by someone else.  The net migration of non-citizens associated with acquisitions and disposals of rights/entitlements will therefore be zero:  it is a case of one in, one out.

More generally, the flow of new rights becoming available for intending immigrants in a given period will, if the government policy of the time is to hold the aggregate stock of rights constant, derive from three sources:

  • emigration of NCs,
  • deaths of NCs, and
  • NCs becoming citizens (at which point the residency right becomes redundant for the individual and the linkage is broken).

At any given time a government could of course determine that a positive or negative net migration flow is desirable for economic and/or social policy reasons, and it could choose either to augment the stock of available rights or to step into the market and buy-back rights that have been previously created.  The government has control over the matter.

The balancing mechanism in all this is the ‘price of a residency rights’.  To clear the market in the presence of excess demand the price will rise, in the presence of excess supply the price will fall.

One of the attractive feature of such a system is that the migration decision is, at the level of the individual concerned, unconstrained by any intervention of a public authority (although see later for some qualifications to this point).  Ms Jones does not have to engage with a bureaucratic apparatus to acquire the residency right:  she can simply buy the right.  This does not of course mean that she will, in practice, be able to acquire the right: it may be beyond her means.  However, in the normal meaning of the notion of economic freedom, she is ‘free’ (from state interference) to migrate to the territory.

This is not substantively different to my right to re-locate to Sandbanks in my retirement.  I am free to move there, although on examination of the facts I might find that it is beyond my means, or (perhaps more realistically) that the square footage of living space within budgetary reach would not accommodate the mass of paper and junk that I would want to take along.  This is what ‘free movement’ looks like in an economic sense.

Unlike a tax on immigration, transferable residency rights do not entail any major discrimination between NCs and Citizens in labour markets.  NCs must acquire a right, and that is certainly a difference between the two groups, but it is not an economic difference that could be expected to have major, market-distorting effects.  A payment has to be made, but there is a quid pro quo in the form of a valuable marketable asset which Citizens do not possess.  The value of that asset can be realised when the time to depart the territory arrives (if by death, via the estate of the deceased).

The biggest challenge for an intending immigrant of modest means might be the amount of cash required to purchase what is, de facto, a capital asset, but there do exist such things as capital markets and the asset itself can potentially be used as partial collateral.  It may not be an attractive form of collateral to a high street bank, but employers who are keen to fill job vacancies with skilled labour that is in short supply in the relevant territory have incentives to step in to help, and specialist providers can reasonably be expected to develop over time (once a market process is initiated, an evolutionary process of institutional development typically follows).

Going beyond Economics 101 in the residency case, there are aspects of market processes which raise issues associated with the sorts of social problems that fill the broadcasting time and pages of the media. Markets allocate according to willingness to pay and willingness to pay has correlates:  those with particularly costly medical conditions, drug dealers and criminals of various types, terrorists, etc. may be willing to pay a lot.  They may displace the young worker wanting to bust a gut for a few years to build up savings and then return home, or a young family aiming to settle for the long-term to raise children in a social and economic environment that is significantly better than that prevailing in their home country.

This is a version of the ‘adverse selection’ problem.  The shared characteristic of the ‘undesirables’ is that their residency is likely to place an egregiously high cost burden on the existing citizens and residents of a territory.  It is why international agreements that provide for free movement of persons or workers, such as the EU Treaties and the EEA Agreement, invariably also provide for limitations or over-rides in the name of ‘public policy’, ‘public security’ or ‘public health’.

The upshot is that an effective residency system is highly unlikely to be “all market”:  administrative methods will be required to screen out those likely to be egregiously costly to society.  Not everyone can be allowed to buy: having acquired residency rights, Ms Jones cannot be allowed later to sell on her right to whomsoever she pleases, say Mr Brown, even if Mr Brown looks for all the world like a very decent sort of man.  A very substantial shift in sovereignty over individual residency decisions from bureaucrats to individuals is feasible, but a complete transfer of sovereignty is not:  the state still has some of its traditional, protective functions to perform.

At this point we move across into enforcement issues and that is an area that requires a book, not a post.  However, in concluding and in order to give a flavour of the sort of system design that might be considered, let me repeat a suggestion made in an earlier paper  http://www.rpieurope.org/Publications/Fabellia/pdf :

  • Those contemplating the possibility of seeking residency in the territory are required to apply for entry on a register of persons qualified to acquire residency rights.  A first stage screening out of ‘undesirables’ based on information from, say, security or criminal records could be done at this stage.
  • Bids/offers for acquisitions/disposals of rights are ‘matched’ by a Residency Agency (RA).  When a mutually beneficial exchange is identified — a bid price exceeding an offer price — the RA extinguishes the right of the seller and creates a new right that is allocated to the buyer.  Ms Jones does not, therefore, herself ‘sell’ to Mr Brown, but rather to the RA, and likewise Mr Brown buys from the RA, not from Ms Jones. A lapse of time between the extinguishing of the old right and the creation of the new one would afford an opportunity for a second stage screening of Mr Brown, to ensure that he is not a person who, with more and better information, would have failed the ‘qualified persons test’.

If this looks as if it would still be too much screening, it should be remembered that the function of the qualified persons task is simply to pick out a few bad apples from the pile, not to grade each apple.  Alternatively, there is an analogy here with facing a large stack of final examination scripts and being asked to identify (i) the very small number of manifest fails and (ii) grading every essay.  There is a large difference in the time and effort entailed by the two tasks and, precisely because it is so effortful and tedious, (ii) can come to be done less than assiduously and arbitrariness can come creeping, occasionally galloping, in.