‘Norwegian’ solution could solve UK’s budget conundrum

First published on the MLex Brexit Service 25 August 2016. By Matthew Holehouse.

The UK’s multibillion-pound annual net contribution to the European Union’s budget was the centerpiece of the successful Leave campaign ahead of the Brexit referendum.

Taxpayers’ money earmarked for wasteful EU projects would be better spent on doctors and nurses at home — or so the argument went.

But now that UK voters have chosen to leave the bloc, those tasked with negotiating the country’s future relationship with Europe are recognizing that cutting the cash flow to Brussels is easier said than done. EU leaders will be demanding an entrance fee if Britain is to continue enjoying the benefits of the single market. Yet continuing to send money to the bloc won’t wash with many Leave voters. Which is where Norway comes in.

The Scandinavian country, which isn’t an EU member, keeps the doors of the single market open by handing over cash for EU projects that Norway has signed up to, or which go to initiatives where Oslo can oversee the spending.

It’s a workable compromise, and it may be enough to reassure the UK’s pro-Brexit majority and marginalize those demanding that every penny of the UK’s annual transfer to Brussels be spent at home.

A Norwegian solution for the UK does present a domestic challenge. Mandatory budget contributions to the EU will be seen by many as betraying the referendum outcome. Yet the alternative — a Canadian-style bilateral trade deal — would entail a high degree of disruption to the UK economy.

Going Norwegian

During the referendum campaign, former Prime Minister David Cameron warned that going Norwegian and joining the European Economic Area — a grouping that allows Norway and two other non-EU countries to participate in the single market — would be a bad outcome.

An EEA model, the government argued in an official assessment, would entail a “significant contribution to EU spending” without giving the UK input on the rules of the single market.

But the budget arrangements of Norway deserve further investigation. The model could be a compromise that addresses a key message of the Leave campaign — the need to “take control” — without halting cash flows to other EU states.

Although the UK might be little better off financially.

Norway contributes 869 million euros ($980 million) a year to funds tied to its EEA membership. Although it’s difficult to extrapolate, analysts say the sum, on a per-capita basis, is just short of the net contribution British taxpayers currently made to the EU.

Still, the appeal of the Norwegian model lies not in the numbers, but in how the money is administered.

Oversight bonus

Under current arrangements, the size of Britain’s payments to the EU’s general budget are determined every seven years by national leaders. Allocations to individual spending programs are determined jointly each year by the European Commission, national governments and the European Parliament during lengthy negotiations.

Programs are supervised by the commission, with much of the spending administered by recipient governments. Auditing is conducted by an independent body in Luxembourg, which often issues strongly worded reports but has no powers to intervene.

This complex system has spawned stories of mismanagement, often centered on botched infrastructure projects and pampered Brussels officials. These stories provide fodder for Eurosceptic media outlets.

Norway’s model, by contrast, offers a higher degree of direct oversight.

A little over half its contribution — 453 million euros a year — are payments tied directly to the country’s participation in specific EU projects. These include Horizon 2020, the scientific research program; Erasmus Plus, the academic exchange program; Galileo and Copernicus, the EU’s space satellite programs; and membership of the Schengen free-movement area.

A further 25 million euros is paid to Interreg, an EU program to foster cross-border cooperation in fields such as the environment.

The rest of Norway’s contribution, 391 million euros a year, is paid in the form of direct grants to the EU’s 15 poorer states.

In control

These payments grant Norway access to the single market and they mirror much of the development work administered by the European Commission in new EU states.

But Norway, Iceland and Liechtenstein — the three non-EU members of the EEA — are granted greater control than EU national governments. Operating through a joint committee, the trio of donor countries get to vet and approve individual projects, and to disburse funding directly to recipient governments. They can deploy their own auditors to inspect questionable arrangements.

Under a treaty dating back to 1994, the EEA members agree with the EU every five years on the sum total of their contributions — and on the broad areas where they money will be spent. Other than that, the European Commission takes a hands-off approach.

If presented to the British public the right way, such an arrangement could allow leaders to tell voters that they would no longer be funding the Brussels fat cats demonized by the Leave campaign.

A Norwegian solution could also strengthen bilateral ties between the UK and East European states, some of which are alert to how poorly designed and ineffective EU structural spending can be.

Whether such an option would be open to the UK depends on the tone of the negotiations that are to follow.

Britain’s departure threatens to open a gaping hole in the EU budget, and much of the discussions will focus on how it settles outstanding liabilities, such as European officials’ pensions and long-term spending commitments.

	Eliot Gao