6. Alternatives to EU membership do not offer greater advantages or influence for the UK

Chapter 6: Alternatives to EU membership do not offer greater advantages or influence for the UK

Any objective assessment of the UK’s relationship with the European Union as a component of its global future requires consideration of potential options for the UK as alternatives to membership. A number of alternative types of relationship with the EU have been proposed.

Some argue that the UK is best served by severing all formal links with the EU and going it alone, on the basis solely of membership of the World Trade Organisation (WTO), refocusing UK trade towards fast-growing markets and the Commonwealth. Advocates of halfway house options believe that the UK must leave the EU but remain closely intertwined, by joining the European Economic Area as Norway has done, by creating a framework of bilateral agreements as Switzerland has done, or by entering the customs union as Turkey has done. Others suggest a ‘UK–EU Free Trade Area option’ where the UK, on leaving the EU, negotiates its own relationship through a Free Trade Agreement with the EU.

None of the alternative options can combine all of the benefits of EU membership with none of the costs. Such solutions are simply unrealistic. Whatever the nature of the UK’s relationship with its major trading partner, there will be a trade-off between what the UK wants and what the price of the trade to get it is. For businesses, the important test should be how each alternative option impacts on the economic factors that boost competitiveness and productivity, and the UK’s ability to influence these factors in its interests.

Attempting to change the terms of the UK’s relationship with the EU and seeking to establish a new relationship would create risks. Assessing alternatives is by nature speculative because predicting the consequences of a changed relationship is difficult. A UK departure would be such a large and complex event, it is impossible to say with certainty what the impact would be. However, British businesses are used to relating to future uncertainties and risks are an inherent part of doing business: they cannot be avoided, but they can be identified and evaluated.

While the UK could undoubtedly survive outside the EU, exploring the details and inherent risks of some of the alternatives to EU membership shows that none of the alternatives offers a clear path to an improved balance of benefits or greater influence over the terms of UK interaction with its nearest neighbours. It also offers a challenge to those arguing the UK would be better off out of the EU: creating a credible alternative means providing not only a detailed description of how the alternative ensures the right conditions for the UK but also a detailed plan for how best to achieve it that takes into account the risks involved. Only then can there be a credible, open debate about alternative options for the UK’s relationship with the EU.

6.1 Leaving the EU is legally possible, but an assessment of alternatives must focus on how each would support British business in realising its global future

Exhibit 61: Leaving the EU – a break-up in four steps

The EU Treaty has an ‘exit clause’, first set out in Article 50 in the Treaty on European Union, which sets out the basic steps for a withdrawal.

  1. The member state wishing to leave informs the other member states of its intention.
  2. The other member states create guidelines for the negotiation between the EU and the leaving member state.
  3. The leaving member state and the EU begin negotiating a treaty framework, a so-called ‘withdrawal agreement,’ which will regulate the time frame and details of the ‘divorce’. The two parties have two years to finalise negotiations.
  4. If the two parties agree, the country is allowed to exit the EU on the terms of the withdrawal agreement. If there is no agreement, after a two-year notice period, the leaving member state will simply then no longer be bound by the Treaties, and the other member states will not be bound by their various Treaty obligations to the leaving member state.

It is practically possible for the UK to leave the EU but it is uncharted territory with no guarantees for a future relationship. A UK withdrawal from the EU is legally possible and would be effected through the ‘exit clause’ in the Lisbon Treaty, following the steps in Exhibit 61. Although might seem a straightforward process, leaving the EU would involve a number of uncertainties because the two parties would be dividing after a 40-year long relationship. No one can therefore describe with certainty how an exit would look and the impact it would have on the UK. The exit terms are up for negotiation, and there is no guarantee of securing a favourable future UK relationship with the EU.

Were negotiations with the EU over the withdrawal agreement to fail, there would be a risk that the UK could find itself outside the EU involuntarily with no access rights to its markets. The Treaties have an in-built notice period stipulating that the UK would no longer be bound by the Treaties from the date provided for in the withdrawal agreement or, failing that, two years after notification of its intention to withdraw. This provision is a safeguard for both the EU and the leaving member to make sure that no party holds up negotiations, but there is a risk: failure to reach an agreement would mean that the UK would be automatically ‘out’ within two years. Departure becomes automatic even if the question of the future relationship unresolved.

As the exit clause has never been used, there are a number of uncertainties related to the process. The ‘withdrawal agreement’ would set out the process and the practical realities of an exit (the transitional measures that would wind down the UK’s EU obligations) and benefits. But the content of this agreement is not straightforward. It would, for instance, have to set out and solve the logistics of the UK’s budget contributions while phasing out EU funding to UK regions and UK participation in various EU programmes, remove the UK as a signatory from free trade agreements, and determine under which rules UK airlines could operate flights to and from EU destinations. As a former UK judge at the European Court of Justice, Sir David Edward, has noted, there would likely be a long negotiation period as the UK went about the “unravelling of a highly complex skein of budgetary, legal, political, financial, commercial and personal relationships, liabilities and obligations”.[1]

Moreover, it is not clear whether negotiations would include all necessary details about a future UK–EU relationship. The Treaty states only that the agreement has to ‘take account of the framework for the future relationship the country will have with the Union’, but it has been argued that it is not in itself a renegotiation agreement for a new relationship. Instead, the UK might have to negotiate a separate agreement to set out its new relationship after the exit was completed, with details depending on the chosen alternative.

But it is what might happen next that would be important as the UK tried to redesign its relationship with the EU, and what that would mean for its global future. Businesses care about how any alternative would impact on the economic factors that boost UK competitiveness and productivity and the UK’s ability to shape these factors in its interests. Only by looking at these details and answering the questions posed can the credibility of an alternative for British business be determined.

All alternatives must be measured on the degree to which they:

1 Support openness and productivity by enabling businesses to trade with both Europe and the rest of the world, based on the six aspects of openness analysed in Chapter 3
2 Enable the UK to be an influential player setting the rules and standards British businesses must follow
3 Address the risks of leaving, including any up-front costs, the political and economic impacts of a period of dislocation, the likelihood of the alternative and its long-term sustainability.

It must also be considered how the EU might change upon a UK departure, as the grouping of member states in the EU Council which supports liberal free trade policies loses a powerful member and the balance may shift away from the free trade end of the spectrum.

Exhibit 64: The UK’s financial services sector would be damaged if the UK left the EU, hampering business growth

Businesses right across the EU have benefitted from having a world-class financial centre inside the Union. While the City of London would survive in some form were the UK to leave, remaining in the EU – while using UK influence to impact its future, focus its policy approach to financial services and ensure Eurozone integration does not hit the UK’s financial sector disproportionately – remains the best option for the British financial services sector to flourish.

Although it is difficult to make conclusive judgements on the impact of UK withdrawal on the UK’s financial services, it is possible to outline some of the potential impacts.

A number of companies would be likely to relocate parts or all of their operations

A number of foreign financial services companies are located in the UK to get the benefits of being part of a world-class financial centre combined with the benefits of the EU’s Single Market. After a UK withdrawal, the UK would lose aspects of its attraction as a financial centre.

While far from every firm would leave, companies for which the benefits of the EU are crucial for their investments in the UK would move operations, in part or in full, to a financial centre within the EU. In a City UK report, decision-makers specifically cited access to markets in the EU as a core reason for choosing the UK over other financial centres in over 40% of the UK-positive investment cases considered. European banks, currently holding 17% of total assets of banks in the UK (nearly £1.4 trillion), would have a particular incentive to move back home. [57]

Leaving the EU could force some firms to relocate to the continent: in particular, European firms could relocate ‘back home’, as could foreign firms which depend on the deep access to the EU that membership provides.  As Goldman Sachs said in the Evening Standard, it could leave its trading desk in London but most of its employees would move to the Continent to secure the benefits.[58]

The sector could lose certain types of financial activities

In the medium to long term, with the UK outside the European Union, particular areas of trade would be likely to move from London, some potentially to other financial centres such as New York or Singapore and others within the Eurozone as rival capital markets inside the currency area could emerge.

The European Central Bank would be likely to push through rules securing that clearing of euros happened only within the EU (see Exhibit 62 in Chapter 5), undoubtedly harming the City. euro trading in the UK has increased nearly fourfold over the past decade with twice as many euros traded in London today than in all the euro-area countries combined, while average daily turnover in the UK in euro-denominated over-the-counter (OTC) interest rate derivatives totalled 8bn in April 2011, accounting for 62% of all such trading worldwide and representing a sixfold increase over the past decade.[59]

The UK would lose its regulatory influence and reduce its ability to be a place to do global business

London’s place as a global financial centre rests partly on its position at the crossroads of the competing regulatory regimes of the US and EU, which allows it to be the place where global business can take place. The importance of the UK’s regulatory influence in financial services is twofold. First, it allows the UK to shape EU rules to keep the UK (and Europe) competitive in the face of global competition from East and West. But perhaps more importantly – over the past 20 years but especially in the aftermath of the financial crisis – the UK’s position in the EU and subsequent regulatory influence has helped avoid regulatory divergence with other important regulatory regimes, most notably the US. This keeps regulation broadly ‘global’, minimises the expensive regulatory duplication that occurs with divergent regimes, and has allowed the UK to emerge as the modern economy’s global financial centre. Maintaining this position is therefore based in part on retaining the UK’s ability to develop market-leading regulatory standards that are globally competitive. Outside the EU, the UK would lose its influence on EU policymaking on financial services issues, which would potentially reduce the importance of London as a global financial centre.

Withdrawal from the EU would hit UK financial services, broader business and the wider economy

The impact of UK withdrawal would harm the financial services sector; London would still be a financial centre but would have to make substantial changes to retain its global role and European footprint. It would also hit the wider UK economy: around 40% of the tax take from UK financial services is from international businesses operating in the UK, and their exit would also reduce sources of finance for the broader business community.

The issues would not be addressed by an FTA

A UK–EU FTA could attempt to offset some of these disadvantages by including market access for financial services as a key element in negotiations. However, market access – in particular the type of access that passport regimes provide – is unlikely to come without obligations on the regulatory side, including the likely adoption of EU rules without any ability to influence these.

The EU could be willing to deem the UK’s regulatory regime ‘equivalent’ to its own but, following the financial crisis, the distrust in the UK as a suitable regulator for financial services could lead to EU demands for full UK compliance with EU rules, for instance on bankers’ bonuses or capital requirements. Moreover, future EU rules would no longer be developed with UK participation, potentially making them less liberal and favouring the ‘continental’ model.

The lack of free movement of people would hamper business

In a UK–EU FTA scenario, there would no longer be free movement of people across borders. Businesses would lose the ability to plug skills gaps and draw talent from across the European labour market. The only provisions related to the movement of persons in a conventional FTA would be for temperately movements of staff, whereby the UK and EU would agree to the amount of time that intra-corporate transferees, seasonal workers and business visitors can spend in another country in the context of providing a service in another country.

The UK government would have more control on migration numbers from the EU in this scenario, although it should be noted that, if any new work permit or visa requirements were applied by the UK government on EU nationals, then they are also likely to be applied as a reciprocal measure by the EU to the detriment of any UK citizens seeking to work in, or UK companies seeking to post employees to, the EU.

Even the best-case UK–EU Free Trade Agreement fails to deliver for British business in supporting its global ambitions

The ‘UK option’ is the most difficult to evaluate since it has no existing ‘model’ to assist the analysis. Its composition is highly uncertain because a deal with the EU depends on what the remaining member states would be willing to negotiate with a withdrawing UK.

The analysis nevertheless shows that the likely outcome is not one of costless benefits. The quality of the FTA depends on negotiations with the EU and, although the UK would undoubtedly have some clout, the UK’s negotiating hand is less than that of the EU because of the relative dependence of each on the other. Any rights of access granted would come at a price, with  considerable regulatory compliance being required in return for market access. The inability to shape these rules given the loss of representation in EU institutions that would occur is a significant downside to any deal for business. This is not least because the UK’s complex modern economy relies on setting the rules of the game if it is to pursue a global future – from rules governing financial services, through intellectual property and patent law, to regulations designed to take on the common challenge of climate change.

The option would enable the UK to pursue an independent trade agenda, but that is no guarantee of increasing on-the-ground market access for business around the world, in either developed or emerging markets. Missing out on the benefits of potential upcoming deals with developed markets such as the US and Japan would be a blow. Moreover, the coverage of any bilateral UK FTAs is likely to be narrower in scope than if the UK were negotiating within the EU, severely limiting the ability of the UK to break down those non-tariff barriers that are, in reality, the practical obstacles for UK businesses to harnessing global trends and seizing new market opportunities around the world.

With the high risks and uncertainty relating to this model – as well as very little evidence of advantageous outcomes compared to the existing model – the UK should look to improve the existing package it holds as an EU member rather than embark on trying to draft an alternative UK–EU agreement.

"

Market access is unlikely to come without obligations on the regulatory side, including the likely adoption of EU rules without any ability to influence them.

6.2 Irrespective of which type of alternative relationship is chosen, a UK withdrawal risks creating a more inward-looking EU

Withdrawal from the EU means the UK leaving the table where the future of Europe is decided. The UK would lose most of the tools for influencing the policies of the EU and its path of integration. This matters because, as outlined in Chapter 1, economic fundamentals dictate that the British economy will need a trading relationship with its European neighbours regardless of UK membership status. Co-operation with the EU is necessary in most areas and, at the very least, British exporters are dependent on sales to EU markets for which they must meet EU regulatory conditions.

It is therefore important for the UK that the EU continues to remain an open market for goods and services from third countries, that it pushes for new trade deals and that it creates effective and efficient rules. In many ways a result of UK influence, the EU today is a liberal market economy with the Single Market at its heart.

"

Were the UK to leave, the EU may potentially move towards a more inward looking posture, to the detriment of its openness to the world – with the result that EU trade deals would likely be less ambitious.

Were the UK to leave, the EU may potentially move towards a more inward-looking posture, protecting its own industries to the detriment of openness to the world – with the result that EU trade deals would likely be less ambitious. At the moment, both the ‘northern bloc’(Germany, the UK, the Netherlands, the Czech Republic, Sweden, Denmark, Finland, Ireland, Latvia and Estonia) and the Mediterranean block (France, Italy, Spain, Greece, Portugal and Cyprus) have a permanent blocking minority in the Council of Ministers. If the UK left, however, the northern bloc would lose its blocking minority, with a far greater risk of it being outvoted on trade and EU budget issues (see Exhibit 65).

Exhibit 65: The ‘northern bloc’ of liberal market economies would lose their majority were the UK to leave the EU[60]

A more inward-looking EU could reverse progress made on the Single Market and introduce new tariff barriers for third countries. This is why representatives from other member states have emphasised the importance of having the liberal-minded UK in the club. In a Policy Network report for the CBI, a senior Swedish official said that “it is difficult to see how the EU could be open and dynamic without the UK”.[61]

6.3 No alternative form of relationship with the EU offers a better global future for UK business than full membership

The UK would undoubtedly survive outside the EU, but the assessment of five potential alternatives to full UK membership has shown that none of them is able to improve the overall balance of advantages and disadvantages to EU membership.

All alternatives mean a significant period of dislocation while the UK renegotiates with not only the EU but every existing partner in a Free Trade Agreement. All options except the EEA option offer unsatisfactory access to European markets. They would involve one or more barriers to trade – such as higher tariffs, burdensome rules of origin, border controls or other regulatory barriers – which would hit UK goods trade with the EU for both exporters and importers, and undermine the UK’s services sector’s ability to continue its increasingly important contribution to UK export performance.

"

Full membership of the EU is a better vehicle for harnessing the global trends reshaping the world economy than all the alternative options put forward.

This reduction in market access would not necessarily offer a substantial reduction in the rules the UK would have to apply. Most of the major regulations currently viewed as burdensome would continue to apply were the UK to leave. Most crucially, the UK would also lose its influence over the creation of these rules and over the global standards that the EU, as the world’s largest Single Market, helps to shape. UK global competitiveness rests, in part, on ensuring that businesses from around the world are playing by the same rules, and the loss of influence felt on exit would affect the ability of UK business to take advantage of its strengths on the world stage.

Full membership of the EU is a better vehicle for harnessing the global trends reshaping the world economy than all the alternative options put forward. If the form the UK’s current relationship takes is the best option, then working to improve this – changing the details rather than the type of relationship – through co-ordinated reform with other member states in the EU must be the priority to help the UK realise its global future. The UK business community’s priorities for reform are set out in the conclusion to the report.


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[1] House of Commons Library, Leaving the EU, Research Paper, 1 July 2013

[2] House of Commons Library, ‘The economic impact of EU membership on the UK’, September 2013

[3] ONS Pink Book 2013. Export values are converted to constant prices using the UK GDP exports deflator (ONS).

[4]House of Commons Library, Leaving the EU, Research Paper, 1 July 2013

[5]TheCityUK, Key Facts about UK Financial and Professional Services, 2013

[6] EY 2013 attractiveness survey, No room for complacency, 2013, available at:

[7] House of Commons Library, The economic impact of EU membership on the UK, September 2013

[8] House of Commons Library, ‘The economic impact of EU membership on the UK’, September 2013

[9] House of Commons Library, Leaving the EU, Research Paper, 1 July 2013

[10] Official Norwegian Reports, NOU 2012: 2, Outside and Inside Norway’s agreements with the European Union, 7 January 2012

[11] Innovasjon Norge, Fritt varebytte, webpage accessed on 18 October 2013

[12] Kommerskollegium, Swedish National Board of Trade, Sveriges handel med Norge – grannhandel med förhinder, March 2013

[13] Official Norwegian Reports, NOU 2012: 2, Outside and Inside Norway’s agreements with the European Union, 7 January 2012

[14] Official Norwegian Reports, NOU 2012: 2, Outside and Inside Norway’s agreements with the European Union, 7 January 2012

[15] EFTA webpage, ‘Free Trade Agreements’, available at:

[16] Utenriks Departementet [Norway Minsitry of Foreign Affairs], Utenfor og innenfor [Inside or Outside]?, 2012

[17] Forsætisráðherra [Iceland Prime Minister’s Office], ‘Tengsl Íslands og Evrópusambandsins [Relations with the European Union]’, 2007

[18] Eiríkur Bergmann, ‘Iceland and the EEA, 1994-2011’, 2011

[19] Eiríkur Bergmann, ‘Iceland and the EEA, 1994-2011’, 2011

[20] Henk Kox & Arjan Lejour, ‘Liberalisation of the European services market and its impact on Switzerland - Assessing the potential impacts of following the EU's 2004 Services Directive, 2005

[21] Swiss Directorate for European Affairs, Economic importance, 6 May 2013

[22] Economisuisse, ‘40th Anniversary of the free trade agreement between Switzerland and the EU’, 2004

[23] Pascal Sciarini, Cédric Dupont and Omar Serrano, Which future for Switzerland's bilateral strategy towards the European Union? A qualitative comparative analysis of agenda-setting, The Graduate Institute of Geneva, Centre for Trade and Economic Integration, Working Papers, 2010

[24] Clive Church, Dr Paolo Dardanelli and Sean Mueller, Implications for the UK Financial Sector of a ‘Swiss Model’ of relations with the European Union, Centre for Swiss Politics, University of Kent, January 2013

[25] Marius Vahl & Nina Grolimund, Integration without membership. Switzerland’s bilateral agreements with the European Union, 2006

[26] European Commission, ‘Trade Issues: Switzerland’, 2009, available at

[27] Economiesuisse, Switzerland and the EU: bilateralism in mutual interest, 2010

[28] KPMG, ‘Is the China – Switzerland Free Trade Agreement for you?’, 2013

[29] Swiss Directorate for European Affairs, Economic importance, 06 May 2013

[30] European Voice, Switzerland seeks to limit number of EU workers, 27 March 2013; and Manon Malhere, Free movement of persons: Swiss victims of own success, Europolitics special issue on Switzerland, 20 April 2012 

[31] European Commission, METRIS - Monitoring European Trends in Social Sciences and Humanities – Switzerland Funding system European and international funding, 10 October 2013.

[32] Switzerland Department of Economic Affairs website, ‘Research’, available at

[33] Swiss Confederation, Federal Department of Home Affairs and State Secretariat for Education and Research, Effects of Swiss participation in EU Research Framework Programmes Interim report, 2009, 2010

[34] Marius Vahl & Nina Grolimund, Integration without membership. Switzerland’s bilateral agreements with the European Union, 2006

[35] Christa Tobler, Jeroen Hardenbol & Balázs Mellár, ‘Internal Market beyond the EU: EEA and Switzerland’, 2010

[36] Marius Vahl & Nina Grolimund, Integration without membership. Switzerland’s bilateral agreements with the European Union, 2006

[37] The Ankara Agreement of 12 September1963 (OJ L 217, 29.12.1964) and its Additional Protocol of 23.11.1970 (OJ L 293, 29.12.1972) define the scope and content of the association relationship, while the final phase of the customs union is defined in Decision 1/95 of the Association Council of 22 December 1995 (OJ L 35, 13.02.1996).

[38] Felicitas Nowak-Lehmann et al., The Impact of a Customs Union between Turkey and the EU on Turkey’s Exports to the EU, Journal of Common Market Studies, 2007, Volume 45.

[39] European Commission, Countries and Regions Turkey, accessed 16 October 2013

[40] European Commission, Turkey: Customs Unions and preferential arrangements, accessed 16 October 2013

[41] Sinan Ulgen & Yiannis Zaharaiadis, ‘The future of Turkish-EU trade relations. Deepening vs widening’, 2004

[42] Ulgen, Sinan and Yiannis Zaharaiadis, The future of Turkish-EU trade relations. Deepening vs widening, Turkish Policy Quarterly, Vol 3, number 4, 2004

[43] Ulgen, Sinan and Yiannis Zaharaiadis, The future of Turkish-EU trade relations. Deepening vs widening, Turkish Policy Quarterly, Vol 3, number 4, 2004

[44] Open Europe, Trading Places: Is EU membership still the best option for UK trade?, June 2012

[45] Erkan Erdogdu, Turkey and Europe: Undivided but not united, MPRA Paper No. 26928, posted 23. November 2010

[46] Sübidey Togan, The EU-Turkey Customs Union: A Model for Future Euro-Med Integration, MEDPRO Technical Report No. 9, 9 March 2012; Ercan Atak, Harmonisation of Turkish Legislation and Practice with that of The European Union, Presentation, Turkey-EU Joint Parliamentary Committee

[47] Ilgaz, D., Turkey Aims at Full Harmonisation with the EU Acquis Communautaire in Intellectual Property as a requirement of Membership, in Peter G. Xuereb (ed.), Euro-Mediterranean Integration: The Mediterranean's European Challenge – Vol. III, 2002

[48] Murat Yapici, DG for EU Affairs, Turkish Ministry of Economy, Turkish perspective on FTAs under the Turkey-EU CU (with a Special Emphasis to TTIP), 18 June 2013

[49] Dr. Mahmut Tekçe, FTA between Korea and Turkey: Challenges, Opportunities and Economic Cooperation, 1 July 2010

[50] Financial Times, Europe: Customs union adds stress to economy’s life on the edge, 9 May 2013, available at:

[51] European Commission, Countries and Regions Turkey, accessed 16 October 2013

[52] Ibid

[53] European Commission, Case law - Turkish workers, accessed on 16 October 2013. Judgment of the European Court of Justice in Case C-1/97 Birden (1998) ECR I-7747

[54] Radek Sikorski in The Times, Seven EU myths you should never believe, 25 September 2012, available at thetimes.co.uk

[55] In Euro terms. Haver Analytics EUDATA & G10 databases/Eurostat

[56] ONS Pink Book 2013; Eurostat balance of payments database.

[57] TheCityUK, UK and the EU: a mutually beneficial relationship, 2013.

[58] Evening Standard, EU pullout would spark a City exodus — Goldman, 2 September 2013.

[59] TheCityUK, UK and the EU: a mutually beneficial relationship, 2013.

[60] Source - openeurope.org.uk

[61] Policy Network, ‘The Single Market and Britain’s future in the EU: where our partners stand’, 2013