Switzerland and Norway are not good models for Britain to follow
In the debate about the UK’s membership of the European Union, some people look enviously at Switzerland and Norway. These are two countries which are not EU members but still have very close trading relationships with the rest of Europe.
They are the leading members of the European Free Trade Area (EFTA) which Britain was part of in the 1960s, before joining the EEC in 1973.
Switzerland and Norway are also very affluent countries. According to the IMF, Swiss GDP per head is 40pc higher than the UK and in Norway it is 64pc higher. If these other countries can sustain a high standard of living outside the EU, perhaps Britain can do the same.
However, when we look in more detail at the position of Switzerland and Norway, their example is less appealing. First of all, both are much smaller economies than the UK. Norway has a population of about five million and Switzerland just over eight million. This compares with the UK’s population of 65 million. The issues and challenges of managing a small economy are different from those of a large country like the UK. As anyone in business knows, smaller organisations tend to be simpler and less diverse – which makes them easier to manage.
In addition, Britain – along with Germany and France – is one of the three largest EU economies and can exert a genuine influence on the direction of the European Union, as we showed by promoting the single market in the late 1980s and early 1990s. Even if Switzerland and Norway were members of the EU, they would be the 16th and 21st respectively in terms of population size. So it makes less difference for them to be outside the EU – as their influence inside would be very limited.
Second, Norway and Switzerland are very highly integrated with the EU in terms of their trade relationships. They generally accept EU regulations in order to have access to the single market and trade freely with other European countries.
In the case of Norway, this is achieved by being part of the European Economic Area (EEA), a formal arrangement allowing EFTA members to be part of the single market. By being part of the EEA, Norway accepts European regulation but has no influence over it. It also pays a substantial contribution to the EU budget so it can participate in various European initiatives, including co-operation on research and science.
For the UK, following this Norwegian model would involve accepting all the EU rules and continuing to make substantial budget payments. In fact, our payments to the EU budget could increase, because we risk losing the benefit of past rebates negotiated by Margaret Thatcher and others while we have been an EU member. This model makes no sense for the British economy – accepting all the obligations of the EU with no influence. And it is certainly not consistent with the objectives of those who want to leave the EU.
The Swiss model is different, as Switzerland has negotiated its own trade deals to gain access to the single market and does not pay financial contributions. But these trade deals took a long time to negotiate and implement. The single market was launched in 1993 but the Swiss trade deal was not agreed until 1999 and did not come into effect until 2002 – nine years later. This also looks unattractive for the UK. We would suffer heightened economic uncertainty and lose investment and jobs if we were bogged down in protracted trade negotiations with our former European partners.
Third, both Switzerland and Norway are part of the Schengen area, including 26 countries, most of them EU members. Schengen has no internal border controls, allowing free movement of people without passport checks. This is another aspect of the Switzerland/Norway model the UK would not want to follow. Within the EU, the UK is outside the Schengen area, and we retain greater control over the movement of other EU citizens in and out of our country as a result.
Switzerland’s participation in Schengen, however, is now in doubt because of a recent referendum decision to impose immigration controls. This has raised questions about Switzerland’s future relationship with the EU in other areas including trade. Maintaining our current EU position – outside Schengen but inside the single market gives the UK better border control arrangements than Switzerland and Norway have been able to negotiate from the outside.
Switzerland and Norway do enjoy a higher standard of living than the UK but they have other specific advantages supporting their economies not available to us here in the UK. Norway has very large supplies of energy in relation to the size of their population and economy. In addition to substantial oil and gas production (which boosts GDP by 30pc), Norway meets around two thirds of its energy needs from hydroelectric power. These plentiful energy resources provide the country with a substantial economic benefit.
Switzerland’s great advantage is its location – at the heart of Europe and at the crossroads between the three biggest continental European economies: Germany, France, and Italy. The Swiss have sought to capitalise on this advantage by keeping government spending and hence tax rates relatively low – making it an attractive central European location for major international businesses and high value-added individuals.
The UK cannot replicate these advantages that Switzerland and Norway enjoy. We are a country on the edge of Europe and our energy reserves are much less plentiful in relation to the size of our economy than Norway’s.
In any case, despite these advantages neither Switzerland nor Norway is growing as strongly as the UK or the rest of Europe at present. Swiss GDP is up 0.7pc on a year ago and Norwegian growth has been 1.4pc. This compares with 1.8pc growth across the EU and 2pc growth in the UK.
Taking all these issues together, the models of Norway and Switzerland do not look like examples the UK could or should follow. For these small countries with advantages we do not have, their position outside the EU might make sense. But for a large economy which has thrived on trade and investment linked to being in the single market, leaving the EU makes no sense to me at all.
‘For a large economy which has thrived on trade linked to being in the single market, leaving the EU makes no sense’
Andrew Sentance is Senior Economic Adviser at PwC