Stephen Castle: High cost of being out of the EU, but locked in

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There could be few quicker ways of reducing Britain's global status, creating economic uncertainty and reducing its real sovereignty than quitting the EU.

There could be few quicker ways of reducing Britain's global status, creating economic uncertainty and reducing its real sovereignty than quitting the EU.

So vast and important is the EU's single market of 450 million people that those who live in its shadow have to meet its many requirements to gain access to its lucrative benefits. Not only do they implement much European legislation line for line, they generally pay into the EU's coffers too.

For nations such as Switzerland, Norway or Iceland, agreements with the EU have been developed over the years. But Britain would be going cold turkey, something that would involve renegotiating virtually every aspect of its economic relationship, not just with the other 24 members of the EU, but with other trading blocs too.

One of the EU's four big powers, the UK is a player in Brussels which usually gets its way and which has shaped initiatives such as European defence co-operation. Outside the EU, it would remain a nuclear power with a global reach as a permanent member of the United Nations Security Council, but Britain would be excluding itself from one of its main spheres of interest, making it a less important ally for the US.

Taking itself out of co-operation on justice and home affairs would be risky too, as the UK enjoys a special hybrid status. It opts into much co-operation but keeps control of its own borders.

But it is the economic sphere where withdrawal would really hurt. With an estimated 3.5 million jobs dependent on trade with Europe, the EU's single market is fundamental for British business.

Quitting the EU would mean negotiating trade agreements with the EU governing goods and services and also the sale of meat, dairy products, fruit and vegetables. No one would want to cause a crisis which would destabilise trade, but by virtue of its size the larger trading bloc would hold the upper hand.

One diplomat said: "Would other countries really accept a nation of 60 million on their doorstep taking part in all the bits of the single market they like, ignoring the rest, and undercutting them in areas like employment and social standards?"

A look at the countries outside the EU illustrates the disadvantages. Norway, Iceland and Liechtenstein are members of the European Economic Area (EEA) free trade area, which is bound by most of the obligations of EU membership but provides none of its influence. Together the three nations will contribute €1bn (£665,000) over five years to the EU's cohesion funds to help Europe's poorer countries to develop, plus payments to foreign policy spending. They were unable to refuse.

Worse, from a Eurosceptic point of view, the Norwegians are also obliged to implement EU laws on social policy, consumer protection, company law and the environment. These are some of the pieces of European legislation most fiercely opposed by the sceptics, the stuff of myths about bent bananas and standardised condom sizes.

Meanwhile, were Britain to try to join this bloc, it would face another massive problem. The UK's trade deals with non-European players such as the US, China or the Mercosur group in South America are handled by the EU and would need to be renegotiated. With large economic blocs increasingly dictating the terms of global trade, in going in the opposite direction the UK would be weakening its hand.

Some Eurosceptics point to the Swiss model as a possible template for an arm's-length British relationship with the EU. Switzerland stayed aloof from the EEA, preferring instead membership of the European Free Trade Association, which, in theory, places fewer obligations upon it. Yet, in return for granting access to Europe's single market in goods (but not services) - the co-operation the Swiss need to trade with their neighbours - the EU frequently deploys its negotiating muscle, forcing Swiss acceptance of many Europe-wide standards.

Like the Norwegians, the Swiss do not get access to EU markets for nothing, paying some €130m a year to help poorer EU countries to develop. And each time the EU develops a new piece of legislation, it will make new demands on the Swiss to comply.

One prime example of the EU's power over the Swiss is the EU directive on savings tax - a piece of legislation designed to stop investors avoiding tax on interest held in foreign accounts.

This measure (anathema to the big financial institutions in London, Luxembourg and Zurich) was the subject of years of negotiations within the EU and was, at one point, blocked by Britain. Using the country's clout, the Chancellor of the Exchequer modified the plan to take account of British objections, and the EU's finance ministers have now agreed the measure.

Last month the Swiss, who had no role in the negotiations, agreed to implement it, even though it will surely hit the profits of several Swiss banks.

The reason? A demand from the EU. So much for national sovereignty.

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