When reading about Brexit, and the possible future trading relationship of the UK with Europe, some people may be confused by the various terms often used in the Brexit debate, including:
- European Union (EU)
- European Economic Community (EEC)
- Single Market
- European Union Customs Union (EUCU)
- European Free Trade Association (EFTA)
- European Economic Area (EEA)
- The Swiss – EU Model
- Schengen Area
- Council of Europe (CoE)
- Common Travel Area (CTA)
- World Trade Organisation (WTO)
In order for companies to better assess what the future economic landscape may look like during and after the current Brexit negotiations, this guide aims to provide a simple and concise overview of the key International entities and functions, both past and present.
European Union (EU)
The European Union (EU) is a political and economic union of 28 member states. Each member state is party to the founding treaties of the union and thereby subject to the privileges and obligations of membership. Member states are subject to binding laws, in exchange for representation within the common legislative and judicial institutions.
In order to become an EU member, a state must fulfil the economic and political requirements known as the Copenhagen criteria, which require a candidate to have a democratic, free market government together with the corresponding freedoms and institutions, and respect for the rule of law. Enlargement of the Union is also contingent upon the consent of all existing members and the candidate’s adoption of the existing body of EU law, which covers a wide range of topics and industries.
The EU was formally established when the Maastricht Treaty became effective in November 1993. The Lisbon Treaty (December 2009) subsequently reformed many aspects of the EU and changed the legal structure of the European Union, merging the EU three pillars system into a single legal entity called the “EU”.
European Economic Community (EEC)
The EEC was originally created in 1957 when six countries (Belgium, France, Italy, Luxembourg, West Germany, and the Netherlands) signed the Treaty of Rome, and established the customs union in Europe. Two of the original core objectives of the European Economic Community were the development of a common market (subsequently becoming a single market), and a customs union between its member states.
Upon the formation of the European Union (EU) in 1993, the EEC was incorporated and renamed as the European Community (EC). In 2009 the EC’s institutions were absorbed into the EU’s wider framework and the EC ceased to exist.
The European Single Market (also known as the Internal Market or Common Market) is a single market that seeks to guarantee the free movement of goods, capital, services, and labour (the “four freedoms”) within the EU.
The market encompasses the EU’s 28 member states, and has been extended, with exceptions, to Iceland, Liechtenstein and Norway through the Agreement on the European Economic Area (EEA), and to Switzerland through bilateral treaties
The four freedoms are:
- Goods: The free movement of goods is secured through the elimination of customs duties and other trade barriers. It aims to create an area without internal borders in which goods can move freely as in a national market (See customs union)
- Labour: The free movement of people means that EU citizens can move freely between member states to live, work, study or retire in another country. The idea is that citizens from other member states should be treated equally with domestic ones, and should not be discriminated against. There are various legal EU ‘Articles’ that define what rights citizens are entitled to when moving between states.
- Services: This freedom allows EU companies to establish services in other EU countries and provide services in other countries. Financial firms that “passport” their services from London into the EU is a great example of this.
- Capital: Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries. It bans restrictions on capital movements and payments between member states.
The single market also strives to remove so-called “non-tariff barriers” and create a level playing field, by harmonising rules, regulations and standards across many industries and topic areas. The harmonisation approach helps to avoid a race-to-the-bottom in standards between states.
European Union Customs Union (EUCU)
The European Union Customs Union (EUCU) involves the application of a common external tariff on all goods entering the market. Once goods have been admitted into the market they cannot be subjected to customs duties, discriminatory taxes or import quotas, as they travel internally.
A precondition of the EUCU is that the European Commission negotiates for and on behalf of the Union as a whole in international trade deals such as the World Trade Organisation, rather than each member state negotiating individually.
The EUCU consists of all the member states of the EU, Monaco, and some territories of the United Kingdom which are not part of the EU (including: Akrotiri and Dhekelia, Bailiwick of Guernsey, Bailiwick of Jersey, and the Isle of Man). Besides the EUCU, the EU, through separate agreements, is also in a customs unions with Andorra, San Marino, and Turkey, with the exceptions of certain goods.
European Free Trade Association (EFTA)
The European Free Trade Association (EFTA) is a regional trade organisation and Free trade area consisting of four European states: Iceland, Liechtenstein, Norway, and Switzerland. The organisation operates in parallel with the EU, and all four member states participate in the EU’s single market. Except for Switzerland, the EFTA members are also members of the European Economic Area (EEA)
Whilst the EFTA is not a customs union, and member states have full rights to enter into bilateral third-country trade arrangements, it does have a co-ordinated trade policy. As a result, the EFTA has several free trade agreements with non-EU countries as well as declarations on cooperation and joint workgroups to improve trade. Currently, the EFTA States have established preferential trade relations with 24 states and territories, in addition to the 28 member states of the European Union.
The United Kingdom was a co-founder of EFTA in 1960, but ceased to be a member upon joining the European Economic Community.
European Economic Area (EEA)
The EEA was established on 1 January 1994 when the “EEA Agreement” came into force. This agreement specifies that membership is open to member states of either the EU or EFTA. The EFTA states which are party to the EEA Agreement participate in the EU’s internal market without being full members of the EU.
Currently the EEA comprises the 28 EU member states plus 3 members of the EFTA (Iceland, Liechtenstein and Norway). These three countries operate what is known as the “Norway Model”. The EEA Agreement also applies provisionally to Croatia, the most recent EU member state pending ratification of its accession to the EEA by all other EEA states.
The EEA is based on the same “four freedoms” as the European Union. EEA Member countries have to adopt part of the law of the European Union: most importantly they must contribute to the EU Budget and allow free movement of people to obtain access to the internal (single) market The EEA Agreement does not cover Common Agriculture and Fisheries Policies, Customs Union, Common Trade Policy, Common Foreign and Security Policy, direct and indirect taxation, and Police and Judicial Co-operation in Criminal Matters (leaving EFTA members free to set their own policies in these areas).
Britain is currently a member of the EEA as a member of the European Union. Questions have been raised as to whether a state that withdraws from the EU automatically withdraws from the EEA or whether such a withdrawal requires notice under Article 127 of the EEA Agreement, and, if the courts so decide, whether such notice given by the UK would require an act of parliament.
The Swiss – EU Model
The relations between Switzerland and the EU are framed by a series of bilateral treaties whereby the Swiss Confederation has adopted various provisions of European Union law in order to participate in the EU’s single market.
Switzerland is a member of the EFTA, and took part in negotiating the EEA agreement with the EU. Switzerland also submitted an application for accession to the EU on 20 May 1992. However, after a Swiss referendum held on 6 December 1992, Swiss citizens rejected EEA membership by 50.3% to 49.7%, and the Swiss government decided to suspend negotiations for EU membership until further notice. However, its application to become a full EU member was not formally withdrawn until 2016.
In 1994, Switzerland and the EU started negotiations about a special relationship outside the EEA. Switzerland wanted to safeguard the economic integration with the EU that the EEA treaty would have permitted, while purging the relationship of the points of contention that had led to the people rejecting the referendum. Swiss politicians stressed the bilateral nature of these negotiations, where negotiations were conducted between two equal partners and not between 16, 26, 28 or 29, as is the case for EU treaty negotiations.
These negotiations resulted in a total of ten treaties, negotiated in two phases, the sum of which makes a large share of EU law applicable to Switzerland. These treaties are split into two categories.
- Bilateral I: Free movement of people; Air traffic; Road traffic; Agriculture; Technical trade barriers; Public procurement; Science;
- Bilateral II: Security and asylum and Schengen membership; Cooperation in fraud pursuits
The Bilateral I agreements are referred to as the “Guillotine clause”, meaning they are mutually dependent, such that if any one of them is denounced or not renewed, they all cease to apply. While the bilateral approach theoretically safeguards the right to refuse application of new EU rules to Switzerland, in practice the scope to do so is limited by the clause. (the wider agreement on the EEA contains a similar clause).
From the perspective of the EU, the Swiss bilateral treaties largely contain the same content as the EEA treaties, making Switzerland a virtual member of the EEA. This mean that most EU law applies universally throughout the EU, the EEA and Switzerland, including the “four freedoms”.
Switzerland pays into the EU budget and has extended the bilateral treaties to the new EU member states, although each extension requires the approval of Swiss voters in a referendum.
By 2010, Switzerland had amassed around 210 trade treaties with the EU.
In December 2012, the Council of the European Union declared that there will be no further treaties on single market issues unless Switzerland and EU agree on a new legal framework similar to the EEA that, among others, would bind Switzerland more closely to the evolving EU legislation. However, a second referendum on Swiss EEA membership isn’t expected, and the Swiss public remains opposed to joining.
In a referendum in February 2014, the Swiss voters narrowly approved a proposal to limit the freedom of movement of foreign citizens to Switzerland. The European Commission said it would have to examine the implications of the result on EU–Swiss relations since literal implementation of the referendum result would invoke the guillotine clause.
On 22 December 2016, Switzerland and the EU concluded an agreement whereby a new Swiss law (in response to the referendum) may require Swiss employers to give priority to Swiss-based job seekers (Swiss nationals and foreigners registered in Swiss job agencies) but does not limit the free movement of EU workers to Switzerland.
In 1997 the Amsterdam Treaty abolished physical barriers across the internal market by incorporating the Schengen Area within the competences of the EU. The Schengen Agreement implements the abolition of border controls between most member states, common rules on visas, and police and judicial cooperation. In 2015, limited controls were temporarily re-imposed at some internal borders in response to the recent migrant crisis.
Council of Europe (CoE)
The Council of Europe (CoE) is an international organisation whose stated aim is to uphold human rights, democracy, rule of law in Europe and promote European culture. Founded in 1949, it has 47 member states, covers approximately 820 million people and operates with an annual budget of approximately half a billion euros.
The organisation is distinct from the EU, although it is sometimes confused with it, partly because the EU has adopted the original European Flag which was created by the Council of Europe in 1955, as well as the European Anthem, as they both work for European integration. The Council of Europe is an entirely separate body from the European Union, and is not controlled by it. No country has ever joined the EU without first belonging to the Council of Europe. Council of Europe is an official United Nations Observer.
Unlike the EU, the Council of Europe cannot make binding laws, but it does have the power to enforce select international agreements reached by European states on various topics. The best known body of the Council of Europe is the European Court of Human Rights, which enforces the European Convention on Human Rights.
Cooperation between the European Union and the Council of Europe has recently been reinforced, notably on culture and education as well as on the international enforcement of justice and Human Rights.
The Eurozone (or Euro Area) is a monetary union of 19 of the 28 EU member states which have adopted the Euro (€) as their common currency and sole legal tender. The Eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
The other nine members of the EU continue to use their own national currencies, although most of them are obliged to adopt the Euro in future. Other EU states (except for the UK and Denmark) are obliged to join once they meet the criteria to do so. No state has left, and there are no provisions to do so or to be expelled.
Andorra, Monaco, San Marino, and Vatican City have formal agreements with the EU to use the Euro as their official currency and issue their own coins. Kosovo and Montenegro have adopted the Euro unilaterally, but these countries do not officially form part of the Eurozone and do not have representation in the European Central Bank (ECB) or in the Eurogroup.
The ECB, which is governed by a president and a board of the heads of national central banks, sets the monetary policy of the zone. The principal task of the ECB is to keep inflation under control. Though there is no common representation, governance or fiscal policy for the currency union, some co-operation does take place through the Eurogroup, which makes political decisions regarding the Eurozone and the Euro. The Eurogroup is composed of the finance ministers of Eurozone states, but in emergencies, national leaders also form the Eurogroup.
Since the financial crisis of 2007–08, the Eurozone has established and used provisions for granting emergency loans to member states in return for the enactment of economic reforms. The Eurozone has also enacted some limited fiscal integration, for example in peer review of each other’s national budgets. The issue is political and in a state of flux in terms of what further provisions will be agreed for Eurozone change.
Although not part of the Europe, the Common Travel Area (CTA), and the World Trade Organisation (WTO) are also worth highlighting…
Common Travel Area (CTA)
The Common Travel Area (CTA) is an open borders area comprising Ireland, the United Kingdom of Great Britain and Northern Ireland, the Isle of Man, and the Channel Islands. British Overseas Territories are not included. Based on agreements that are not legally binding, the internal borders of the CTA are subject to minimal controls if at all, and can normally be crossed by British and Irish citizens with minimal identity documents, with certain exceptions. The maintenance of the CTA involves considerable co-operation on immigration matters between the British and Irish authorities.
World Trade Organisation (WTO)
The World Trade Organization (WTO) is an intergovernmental organization that regulates international trade. The WTO officially commenced in January 1995 under the Marrakesh Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which was created in 1948. The WTO deals with regulation of trade between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements. These agreements are signed by representatives of member governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations.
The main functions of the WTO are:
- To oversee the implementation, administration and operation of the covered agreements
- To provide a forum for negotiations and for settling disputes
- To review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making
- To assist in helping the least-developed and low-income countries in transition, to adjust to WTO rules and disciplines through technical cooperation and training
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