Richard North, 01/07/2016  

A key part of Theresa May's leadership pitch is her insistence that, "as we conduct our negotiations, it must be a priority to allow British companies to trade with the Single Market in goods and services".

While she is championing trade with the Single Market, she also notes that there is "clearly no mandate for a deal that involves accepting the free movement of people as it has worked hitherto". She thus argues that we must "regain more control of the numbers of people who come here from Europe".

Ostensibly, this is looking as if May is confronting the inherent conflict between Single Market participation and free movement of people, the very thing EU officials are highlighting as problematical. To get the one, we must have the other, they say.

The plot thickens with trade commissioner Cecilia Malmstrom telling BBC Newsnight that the UK cannot even begin negotiating a trade deal with the EU until it has left. Under EU law, she says, "the bloc cannot negotiate a separate trade deal with one of its own members", which apparently explains why the commissioner is insisting that the UK must first leave.

However, Article 50(2) clearly states that the Union "shall negotiate and conclude an agreement" with the departing State, "setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union".

The "framework for its future relationship with the Union" clearly takes on board the prospect of a trade agreement, with is self-evidently part of the future relationship. Malmstrom is completely wrong on this. There is nothing in EU law that prevents negotiations on trade with a withdrawing state. 

But there is another reason why she might be wrong, a point that emerges as we further explore the UK's relationship with the EEA after leaving the EU. Up to press, we've taken our advice from the Efta Secretariat, set out in Flexcit, to the effect that the transitional arrangements are nowhere set out in the EEA Agreement, and will thus have to be settled politically.

One possibility we have to deal with is that, in leaving the EU, the UK also leaves the EEA and thus, after joining Efta (if we are allowed in), has to apply to rejoin the EEA – this requiring the unanimous agreement of all Parties.

But, on the basis of previous experience, there is an argument for suggesting that the UK can move from the EU to Efta while remaining in the EEA. The evidence for this rests with the initial EEA Agreement of 1992 (The Final Act), when Austria, Finland, Sweden and Switzerland become members of the EEA by virtue of their Efta membership.

Then, in 1995, the three countries left Efta to join the EU but, according to this source, they were not removed from the list of Efta states in the EEA Agreement until 2004. There was, therefore, no issue to deal with on transition. Switching the names from one pillar to the other was treated as a minor administrative adjustment.

For the UK and the Article 50 talks, this has huge implications. It would appear, on the face of it, that membership of the EEA can continue as long as we join Efta. If affirmation of this principle is required, this can probably be secured by agreement not with the EU but with the EEA Council by consensus, which does not even require a formal vote.

Contrary to Malmstrom's assertions, therefore – but in a different way to what might generally be expected, - we are able to drop out of the political construct of the EU yet retain a trading relationship. What we would then need to do is agree, again via the EEA Council, UK-specific amendments to the EEA Agreement, to take effect when the UK formally leaves the EU.

This then leaves the vexed issue of free movement of persons but, as French finance minister Michel Sapin is saying everything will be on the table in the future talks with the UK. The initial instrument for change, though, could be what we've been calling the Liechtenstein Solution, triggered by Article 112 of the EEA Agreement.

That this is seen to apply only to Liechtenstein, however, is regarded as a weakness, given the very special circumstances of the principality. The Article, however, was also used by Iceland to deal with the 2008 financial crisis – and even then, that is not the full extent of it.

By reference to the Final Act, one can see that, back in 1992 (before the Agreement had been ratified), the Safeguard Measures under Article 112 were invoked by Iceland, Switzerland and Austria. 

Interestingly, Switzerland used Article 112 "to take measures to limit the immigration from EEA countries in cases of imbalances of a demographic, social or ecological nature resulting from migratory movements of EEA nationals". Had the Swiss people agreed to ratify the Agreement, they would perhaps have been better off than they are now, confronting the same issue, but in breach of their bilateral agreements which have no safeguard measures.

Variously, though, Article 112 has been invoked by four separate Efta States, making it a routine tool rather than an exception. The UK should have no inhibitions in applying it to its own situation. And the point to remember here is that Article 112 is invoked unilaterally. It does not require the permission of any of the other Contracting Parties. We thus acquire the power to apply a quota cap, if we so desire.

The next crucial point is that the bulk of any subsequent negotiations are not conducted within the framework of the Article 50, but via the EEA Council. This will require some deft legal footwork if its actions are integrated with the UK exit settlement. But, all in all, the possibility of a managed compromise on trade and free movement of people looks stronger by the day, especially as the EEA Council is a lot more flexible than the EU institutions, and European Parliamentary approval is not required.

A common reservation, though, rests on the concern that leaving the EU for the EEA will trap us in a less satisfactory construct, leaving us stranded in this halfway house. It should be noted, though, that to leave the EEA requires no more formalities than one year's notice of intent. It is as simple as that.

Should the then four Efta states simultaneously withdraw, that would collapse the EEA, as there would be no counter-parties to the EU Members. We could, therefore, with very little formality, precipitate negotiations for its replacement, simply by using the threat of withdrawal as leverage.

Bringing us back to the near future, if Theresa May assumes the UK premiership, she will be in a much stronger position than we ever envisaged. With skill and a little creativity, there is scope to produce an acceptable interim resolution, while laying the foundations for a longer-term solution.

What is particularly encouraging here is that May herself is talking of negotiating an "initial deal", with the expectation that "it is going to take a period lasting several years to disentangle our laws, rules and processes from the Brussels machinery". 

That unusual realism is bolstered by her intention to create a new government department responsible for conducting Britain's negotiation with the EU and for supporting the rest of Whitehall in its European work. That department, she says, will be led by a senior Secretary of State – the position taken by a Member of Parliament who campaigned for Britain to leave the EU. 

If we can get the right person in place, there will be room for cautious optimism.

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