Prof. Dr. iur. Dr. rer. pol. h.c. Carl Baudenbacher President of the EFTA Court University of St. Gallen,

The UK After Brexit: EEA +/-? Or EEP?

University of Edinburgh, Monday 30 January 2017

A. Introduction

If the UK leaves the EU, it leaves the customs union and the single market. It is no more subject to the surveillance of the Commission and the jurisdiction of the ECJ. However, the Scottish Government, the Welsh Government and large parts of the City of London and of industry want Britain to stay in the single market.

Is it possible to leave the EU but stay in the single market? Is it possible for a non- EU State to let its citizens and economic operators participate in the single market? Would this include “passporting rights” for financial operators?

Yes it is possible.

The UK may join the Agreement in the (EEA) on the EFTA side. The actors of the EEA/EFTA States have access to the single market.

As an EU Member State, the UK is currently a Contracting Party to the EEA Agreement on the EU side. The theory that Brexit means only exit from the EU, but not from the EEA is untenable. The EEA is based on a two-pillar structure. There is an EU pillar and there is an EFTA pillar. You have to be part of a pillar; you cannot float unmoored from one pillar to the other. Article 126 (1) EEA states:

“The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is applied and under the conditions laid down in that Treaty, and to the territories of , the Principality of and the Kingdom of .”

B. Re-negotiating the EEA Agreement

I. A single market is not the same as a customs union

The EEA is not a customs union: sovereignty in foreign trade (as with regard to agriculture, fisheries, taxation, currency) is held by the EEA/EFTA States. EEA/EFTA States have the right to conclude FTA’s with third countries. They may do that as part of EFTA (i.e. including Switzerland) or individually.

II. What are the bones of contention?

1. Voting right.

2. Free movement of persons.

3. Payments to the EU.

1

4. Institutions.

5. Other matters.

C. Voting right

I. Current situation

The EEA/EFTA States have a co-determination right when it comes to new legislation. The current EEA/EFTA States do not make sufficient use of this right. In particular, the Norwegians prefer to complain about the lack of a voting right. They underline this by using petulant language: “Faxocracy;” “No rule making, rule taking.”

Upon a close look, one discovers that they are doing rather well in this faxocracy. A lot of EU legislation is based on global regulation. And there are other advantages of EEA/EFTA membership. Still, for a country of the size of the UK the current situation is hardly acceptable.

II. Improvement

Delors I (1989): A “more structured partnership with common decision-making and administrative institutions.”

Delors II (1990): Pledge taken back.

Bruegel think tank 2016: Some sort of a voting right.

The EU’s own interest: input of the common law (ex: financial services law; competition law).

III. Input of the common law

Common law is a global legal system. Legal origins theory:

Institutions depend on political factors, in particular on the dominant beliefs in France and England on the roles of the King/Queen/Government, Parliament, Judges and individuals in the society.

English common law developed as it did because landed gentry and merchants wanted a system of law providing protection for property and contract rights and limit the Crown’s ability to interfere in markets.

French civil law developed as it did because the revolutionaries and Napoléon wished to disable judges from thwarting government economic policies. Civil law is more comfortable with a centralized and activist government than common law. (Paul G. Mahoney, 2000.)

Efficient financial markets have developed under the common law. There is a correlation between flexible labour law, diffuse ownership in corporations and

2 radical innovation - as opposed to incremental innovation (Massimiliano Vatiero). The top positions are currently held by anglo-saxon countries and by Switzerland.

Joseph Schumpeter: Radical innovations create major disruptive changes, incremental innovations continuously advance the process of change.

EEA +.

Former Czech Foreign Minister Karel von Schwarzenberg: What I fear most about Brexit is that we will end up by having a centrist EU acting with German thoroughness (“deutscher Gründlichkeit”).

What one must bear in mind when talking to Norwegian elites: They want to join the EU whereas Britain wants to leave. The Norwegian elites don’t sell the EEA Agreement. They overemphasize the downsides and underplay the advantages. For the Scots fisheries are important

D. Free Movement of Persons

EU: From free movement of workers to the right of residence to the concept of European citizenship.

EEA: Not as far reaching, but still quite far reaching.

Reasonable safeguard clause?

Can the EU uphold the dogma? Cf. the outcome of the American Presidential election.

 Brain drain.

 Migration leads to wage pressures; rise of far right parties.

 Aggravation of the situation on the eurozone.

Rachel Sylvester criticized Prime Minister May’s Brexit speech at Lancaster House in The Times of 17 January 2017: Brexit is not a still photograph, it is a moving picture.

In Switzerland with its direct democracy, the first referendum concerning immigration was already held back in 1970.

The Brussels-based Bruegel think tank’s paper of 1 September 2016 discusses whether the EU should make a concession to the UK on this point. Unlike the other freedoms, free movement of persons is in the view of the authors not economically but politically determined. One of the five authors is the former German Federal Minister and now Chairman of the Bundestag’s Committee on Foreign Affairs Norbert Röttgen.

EEA -.

3

E. Payments to the EU

Bruegel paper: UK payments into the EU budget are vital.

That a Non EU-State which participates in the Single Market pays is reasonable (even Switzerland pays). The goal is to enable less developed regions to be able to purchase goods and services from wealthier regions and to guarantee political stability.

EEA/EFTA States pay too, but not into the EU budget. They have their own organisation and their own projects. The UK would have to make roughly 50% of its current payments. “Norway Grants” are voluntary payments.

F. Why the EFTA Court?

I. Access for Non-EU-States only with a surveillance and court mechanism

EU Council conclusions regarding the EFTA States in 2008, 2010, 2012, 2014: Market access only with surveillance and Court.

Directed against Switzerland which is linked to the EU by a network of bilateral sectoral agreements without a surveillance mechanism and without a court.

Since 2008, no new agreement has been concluded between Switzerland and EU.

Will the surveillance and court requirement also apply to the UK after Brexit?

II. Aversion to the ECJ in the UK

PM May’s Lancaster House Brexit speech.

Absurd debate about “foreign judges.” Notion seems to be imported from Switzerland. There, the historic rejection of foreign judges (1291) simply set out the plaintiff’s obligation to bring its lawsuit before the court of the defendant’s domicile and not before a “foreign” court.

But aversion is a fact.

However: Single market does not necessarily mean ECJ. In that regard, the PM’s speech was based on a wrong assumption.

There is the independent EFTA Court.

III. Initial question

Why should Britain accept ESA and the EFTA Court if it dislikes the Commission and the ECJ?

EEA homogeneity rules: EFTA Court shall follow or take into account ECJ case law; securing a level playing field.

4

But: Even under the one-sided current homogeneity rules and as a court of three small countries, the EFTA Court has managed to uphold classical EFTA values.

IV. Own institutions are an advantage

Britain (as Norway, Iceland, Liechtenstein) would always have an own actor (due to the size of the EFTA institutions).

ESA has not been overly active in the past 23 years. For 21 ½ years ESA has been headed by a Norwegian diplomat. Aftenposten of 8th December 2016: “Norge har dominert.”

V. EFTA pillar is less onerous than EU pillar

Leaves the EFTA States and their courts more sovereignty.

 No direct effect and no primacy; only after implementation in the domestic legal order.

 “Obligation of result” (difficult to enforce).

 State liability

 No penalty payments in case of non-compliance with an infringement judgment.

 No written obligation of courts of last resort to refer (“more partner-like relationship”).

 Preliminary rulings not formally binding.

 But duty of loyalty and principle of reciprocity.

 Right to a fair trial (Article 6 ECHR).

On balance: More flexibility. Knut Almestad: The EEA Agreement is tilted in favour of the EFTA States.

VI. EFTA Court going first

In the majority of the cases (“first mover advantage”).

Reasons: Our economies are highly developed and we are fast.

Over 160 references by ECJ, AGs, GC to case law; systematic judicial dialogue.

VII. If there is ECJ case law

Judging is no exact science.

The EFTA Court is not a court of lower instance. 5

Homogeneity is important, but it is no snapshot in time.

A mature court has more self-confidence.

We must be convinced.

Homogeneity rules, but independence (E-28/15 Yankuba Jabbi).

Triangle ECJ – EFTA Court – ECtHR.

Vassilios Skouris in 2014: Symbiotic relationship marked by mutual respect and dialogue which has allowed the flow of information in both directions.

Former Commission DG and WTO AB Chairman Claus-Dieter Ehlermann: Healthy (regulatory) competition.

Procedural homogeneity.

Creative homogeneity (Christiaan Timmermans).

Recent examples of EFTA Court giving input: Legal situation of a trust (GA Kokott C-646/15 Panayi); Access to the case file (GA Bobek C-213/15 P Commission v. Breyer); Website as a durable medium (ECJ C-375/15 BAWAG).

Parallel: Relationship between the ITLOS and the ICJ.

VIII. Cases

 E-4/97 Husbanken (scope of judicial review: full review).

 E-15/10 Norway Post (standard of proof and scope of judicial review: full review).

 E-14/11 DB Schenker I (public access to documents; plaintiff as a private attorney general).

 E-8/00 LO and E-14/15 Holship (collective bargaining and competition law; negative freedom of association, fact-based approach).

 E-8/13 Abelia (right of audience of in-house counsel must be assessed on a case by case basis).

 E-16/11 Icesave I: (Liability of banks and not of the taxpayers, avoiding moral hazard).

 E-4/09 Inconsult (in the internet age, consumers can be expected to download or print out a document from the website of a financial services provider).

6

 E-5/15 Matja Kumba (fact-based interpretation of the Working Time Directive).

 Order of the President in E-18/14 Wow Air (accelerated preliminary reference procedure with the goal of fostering competition between air carriers, special market structure).

 E-15/15 and 16/15 Vienna Life and Swiss Life (trade in used [“second-hand”] life assurance policies not subject to normal consumer protection rules, fact- based approach, against ESA and the Commission).

 E-29/15 Sorpa (municipal body capable of abuse of dominance, companies in the group of the dominant company may be trading partners).

 E-3/16 Ski Taxi (only conduct whose harmful nature is easily identifiable in the light of experience and economics should be regarded as a restriction by object).

 E-4/97 Husbanken (scope of judicial review).

 E-15/10 Norway Post (standard of proof and scope of judicial review).

 E-14/11 DB Schenker I (public access to documents).

 E-8/00 LO and E-14/15 Holship (collective bargaining and competition law; negative freedom of association).

 E-8/13 Abelia (right of audience of in-house counsel must be assessed on a case by case basis).

 E-16/11 Icesave I: (Liability of banks and not of the taxpayers, avoiding moral hazard).

 E-4/09 Inconsult (in the internet age, consumers can be expected to download or print out a document from the website of a financial services provider).

 E-5/15 Matja Kumba (fact-based interpretation of the Working Time Directive).

 Order of the President in E-18/14 Wow Air (accelerated preliminary reference procedure with the goal of fostering competition between air carriers).

 E-15/15 and 16/15 Vienna Life and Swiss Life (trade in used [“second-hand”] life assurance policies not subject to normal consumer protection rules).

 E-29/15 Sorpa (municipal body capable of abuse of dominance, companies in the group of the dominant company may be trading partners).

 E-3/16 Ski Taxi (only conduct whose harmful nature is easily identifiable in the light of experience and economics should be regarded as a restriction by object).

7

IX. The EFTA Court’s social model (image of man)

Traditional EFTA values: Liberalism; market orientation.

Relevance of economics.

“In general one has the clear impression that the EFTA Court deals more readily with economic issues than either the General Court or the European Court of Justice.” (John Temple Lang.)

Fact-based approach instead of presumptions and fictions.

The “man on the Clapham omnibus.”

This thinking would become even more relevant in case of British membership.

X. The EFTA Court’s judicial style

Comprehensive, but succinct reasoning; no decreeing.

No AG.

Small court must justify judgments; create acceptance.

G. Other issues

Homogeneity rules would have to be adjusted.

Rules on the assignment of competition cases to ESA and the Commission would have to be adjusted.

UK as the jurisdiction of choice for damage claims.

UK would have to join the Lugano Convention.

Docking solution? Proposal of the EU to Switzerland in 2013.

EEA -.

H. How to get there?

UK would first have to join EFTA, then the EEA.

EFTA States are reluctant to take the initiative.

Passporting is important; whether equivalence will work is doubtful

As regards industry, gateway function of the UK for the US, Canada, China, Japan.

8

I. Conclusions: EEP?

There is room for a second structure in Europe. Single market would be the common denominator. Turkey must not be overlooked.

Hard Brexit would be hard for everybody.

UK must find reasonable interlocutors on the EU side.

If UK wants an amended EEA, it must grab the bull by the horns.

And it must alleviate the fears of the current EEA/EFTA States.

EFTA States including Switzerland may follow, would benefit.

It could be wise to give the baby a new name: European Economic Partnership Agreement (EEP).

9