Edited by Stefano Fugazzi * (ABC Economics) – Having previously described the legal framework around Brexit, we now turn our attention to two other possible alternatives to EU membership: the European Free Trade Area (EFTA) and the European Economic Area (EEA).
European Free Trade Area (EFTA)
EFTA was founded by the Stockholm Convention in 1960. The immediate aim of the Association was to provide a framework for the liberalisation of trade in goods amongst its Member States. At the same time, EFTA was established as an economic counterbalance to the more politically driven European Economic Community (EEC). Relations with the EEC, later the European Community (EC) and the European Union (EU), have been at the core of EFTA activities from the beginning. In the 1970s, the EFTA States concluded free trade agreements with the EC; in 1994 the EEA Agreement entered into force. Since the beginning of the 1990s, EFTA has actively pursued trade relations with third countries in and beyond Europe. The first partners were the Central and Eastern European countries, followed by the countries in the Mediterranean area. In recent years, EFTA’s network of free trade agreements has reached across the Atlantic as well as into Asia.
EFTA was founded by the following seven countries: Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom. Finland joined in 1961, Iceland in 1970 and Liechtenstein in 1991. In 1973, the United Kingdom and Denmark left EFTA to join the EC. They were followed by Portugal in 1986 and by Austria, Finland and Sweden in 1995. Today the EFTA Member States are Iceland, Liechtenstein, Norway and Switzerland.
The Association is responsible for the management of:
- The EFTA Convention, which forms the legal basis of the organisation and governs free trade relations between the EFTA States;
- EFTA’s worldwide network of free trade and partnership agreements; and
- The European Economic Area (EEA) Agreement, which enables three of the four EFTA Member States (Iceland, Liechtenstein and Norway) to participate in the EU’s Internal Market.
European Economic Area (EEA)
Signed in 1992 and operational from 1994, the Agreement on the European Economic Area (EEA), which entered into force on 1 January 1994, brings together the EU Member States and the three EEA EFTA States — Iceland, Liechtenstein and Norway — in a single market, referred to as the “Internal Market”.
The EEA Agreement states that when a country becomes a member of the European Union, it shall also apply to become party to the EEA Agreement (Article 128), thus leading to an enlargement of the EEA.
The EEA Agreement provides for the inclusion of EU legislation covering the four freedoms — the free movement of goods, services, persons and capital — throughout the 31 EEA States. In addition, the Agreement covers cooperation in other important areas such as research and development, education, social policy, the environment, consumer protection, tourism and culture, collectively known as “flanking and horizontal” policies. The Agreement guarantees equal rights and obligations within the Internal Market for citizens and economic operators in the EEA.
What is the EEA Not?
The EEA Agreement does not cover the following EU policies:
- Common Agriculture and Fisheries Policies (although the Agreement contains provisions on various aspects of trade in agricultural and fish products);
- Customs Union;
- Common Trade Policy;
- Common Foreign and Security Policy;
- Justice and Home Affairs (even though the EFTA countries are part of the Schengen area); or
- Monetary Union (EMU).
Switzerland is not part of the EEA Agreement, but has a bilateral agreement with the EU.
Advantages and disdavantages of joining EFTA
A study by René Schwok and Cenni Najy, respectively a Professor and a researcher at the University of Geneva, identified some of the advantages arising from the UK joining EFTA:
- a far lower UK financial contribution, which would exclude the CAP;
- the UK Government would be free to set its VAT level;
- capacity to ratify free-trade agreements faster and with more partners than the EU and greater freedom of manoeuvre to sign free trade agreements worldwide;
- UK bilateral agreements with the EU would better protect British sovereignty, notwithstanding a loss of influence
In addition to a number of potential side-effects, namely:
- Joining EFTA could entail a difficult application process with possibility of veto from existing Member(s)
- EFTA a homogenous bloc in terms of countries’ size, economic development and trade preferences. UK might not fit in or might change the dynamic of the group to the disadvantage of existing members.
The reader should note that it is not possible to become a party to the EEA Agreement without being a member of either the EU or EFTA, so the UK would have to rejoin EFTA if it left the EU in order to remain in the EEA. Three has also been a suggestion that Article 127 of the EEA Agreement might allow continued free trade and movement between a withdrawing state and the EEA for 12 months after a Member State signals its withdrawal.
* The above text was largely from third party sources including material originally published on the EFTA website (http://www.efta.int/).