EFTA: a compromise everyone can live with

At the moment, EFTA is a group of wealthy but not very important nations. But if Britain joins, it could be a major economic force, says Matthew Lynn.


EFTA, which includes Norway and Iceland, plus Switzerland and Liechtenstein could be a major economic force

The easy work is done. The UK has voted to leave the European Union (EU). Over the next two years, Britain will gradually negotiate an exit from the EU. The only question is how graceful that will be. So what happens now? The Leave campaign didn't make that clear, and in fairness that was not their job. The ballot was simply about whether we wanted to stay or go, not about what leaving would look like. Yet as the dust settles, that is the question that needs to be answered.

The quickest and easiest solution is to go for the Norwegian model. Like all members of the European Free Trade Association (EFTA) Switzerland, Norway, Liechtenstein and Iceland Norway has full access to the single market, the one bit of the EU that certainly benefits the UK. In return, we'd have to accept a lot, although not all, of the legislation from Brussels, and we would have to make a contribution to its budget, although less than we do now.

Many people view this as a temporary step, to maintain access to the single market while we negotiate trade deals with other major countries. Sooner or later, we would extricate ourselves, and be completely free of the EU. But that doesn't make much sense once the British are on board, EFTA could become a real alternative to the EU.

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Right now, EFTA is a group of wealthy but not very important nations, with a combined population of 13 million. GDP per head is $58,000, but combined GDP is just $1.1trn, hardly a world player. But add in the UK, and it would have a population of more than 80 million and a GDP of more than $4trn. That doesn't match the EU, with 500 million people and a GDP of $16trn, but it is a sizeable economic bloc.

EFTA would co-operate with the EU on economic matters: on single-market issues, such as trade deals, competition policy, and product standards, EFTA could take on board EU regulations, although it could ask for input into the decision-making process in exchange. Members could also contribute to the EU budget, although inevitably at a more modest level than full members pay. But they would all be opted out permanently from the euro, the European Parliament, and from moves towards political union. That would preserve most of what the UK wants out of Europe, and much of what Europe wants out of the UK, which is basically an amicable trading relationship.

But EFTA could soon be a major force in its own right, and an alternative for other European countries fed up with Brussels. The Danes would almost certainly join they opt out of everything, just as we do. So, probably, would the Swedes. They are obliged to join the euro one day under current rules, but show no inclination to do so. It might well be an alternative for much of eastern Europe too. None of them are keen to join a German-French dominated super-state. But they do value the access to markets that both the EU and EFTA guarantee.

In effect, you end up with a twin-speed Europe, which has already been discussed for years. The Germans could lead the core political union, intent on creating what is in effect a single country, with a common budget, fiscal policy, and harmonised taxes. Britain could lead the re-named outer group a loose economic federation working alongside the EU. That should be a compromise that everyone can live with and it might work well for many other countries too.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.