The Lugano Convention and the EU’s identity crisis

The EU should unite Europe rather than try to be Europe

Make no mistake: if EU countries – as appears likely – vote against the UK’s accession to the Lugano Convention, it will be another body blow to the UK’s professional services sector. On top of the existing difficulties facing services providers, it will be a slap in the face to our services economy and, indeed, to any individual, family or business that wants to enforce a judgment in the EU.

The issue is notable, though, as much for what it says about the EU as about the travails of UK legal eagles. The EU’s reasoning makes its problem clear. It has has no conceptual model for a country on the European continent that is not part of an established European institutional structure. For the UK, this means that an EFTA-like deal – part of a multilateral institutional structure – will always be better than a bespoke deal. For the EU, inconsistencies and internal disagreements reflect a wider need to re-examine its approach to its “neighbourhood”.

Legal Risk

There is no substantive reason why the UK should not accede to the Lugano Convention. The EU has no valid grounds to dispute the quality of the UK legal system. If UK judgments were to apply across Europe, it would not put EU nations at risk from faulty law. The European Commission, though, thinks that the Lugano Convention is for members of the EU and EFTA. Many EU member states disagree.

This is clearly a fundamental question for the EU. What economic benefits should it agree to share with its neighbours, in return for what? Only in the case of the European Economic Area (EEA) agreement with the three EFTA-EEA countries – Norway, Iceland, and Liechtenstein – is this even imperfectly settled.

British exceptionalism…

The UK got a unique deal with the Trade & Cooperation Agreement (TCA) signed on Christmas Eve. No neighbouring country with deep trading relations with the EU has the same level of regulatory autonomy. Judged by the ability of UK firms to trade with the EU, though, it was a uniquely bad deal. Of course, the UK lost the normal facilitations that go with regulatory alignment. But it also failed to secure many facilitations that distant countries – which also have regulatory autonomy but are less important to the EU as an export market than the UK is – have secured in their trade agreements with the EU.

Negotiator Michel Barnier made the reasoning clear last year when discussing Rules Of Origin. Too many facilitations – even if other countries have them – and the UK, with its unique regulatory autonomy, can be a deregulated export hub for the EU market on the EU’s doorstep.

Rules of Origin apply for manufactured goods, but the principle is universal. Any UK-specific deal will cut the UK out of benefits that other neighbouring countries with regulatory alignment enjoy. Plus, the undercutting of EU firms is more of a threat on the doorstep than from thousands of miles away. Hence, it will even cut the UK out of benefits that distant countries with regulatory autonomy enjoy.

We can’t be on our own. Being a neighbour outside an established structure and with regulatory autonomy is costing the UK. Lugano is just another example. That’s why we need to join a multilateral structure like EFTA.

…or continental drift?

For the EU, though, the internal divisions on Lugano – combined with the doubts surrounding neighbours’ participation in Horizon Europe – raise questions. The EU is failing to rethink long-held but outdated assumptions about its relationship with its neighbours. An increase in strongarm tactics to force neighbours to acquiesce is ultimately not going to be a viable strategy on the diverse European continent.

The framework agreement with Switzerland – which is in EFTA, but not the EEA – is in deep trouble. The Swiss previously agreed to the “Ukraine clause”. In the EU’s association agreement with Ukraine, the Court of Justice of the European Union (CJEU) settles disputes. That’s right: the EU’s internal court arbitrates the treaty. Ukraine’s ultimate goal is EU accession, but Switzerland’s is not. Many Swiss voices are now questioning the clause.

Beyond EFTA and the UK, the EU sees the rest of Europe – to the east – as future EU member states. But “enlargement” is in trouble. In the Balkans, seasoned EU observers dismiss the “accession process” as a technocratic ghost ship with no political destination. It is Putin and Xi who compete for Serbia’s affections. Turkey has long forgotten about accession: Erdogan chips away at democracy with nothing to lose.

In the east, the carrot of eventual accession does not hold the spell it once did. In the west, the EU peppers with inconsistencies its relations with friendly neighbours. It rewards regulatory alignment with seamless market access, but is prone to performative displays of the exclusive benefits of EU membership even when participation by western neighbours would benefit it. It shuts the UK out of some benefits that it extends to countries that are nowhere near as important to the EU as an export market and of others – like Lugano – to which its accession would do no harm.

L’Europe, c’est nous…

The EU’s approach to its neighbourhood is incoherent, because it always assumed that ultimately every European country would join it. It assumed that it would come to be synonymous with “Europe”. The EU cannot decide what benefits good neighbours should have because it has never seriously considered the concept of “neighbour”. It saw every European country as a current or future EU member. To the extent that it has to confront the reality, it is loathe to show neighbours a viable alternative.

The only institutionalised arrangements for European countries outside the EU are the now-troubled EU-Swiss “bilaterals” and the European Economic Area Agreement (EEA) with Norway, Iceland, and Liechtenstein. Either would be better for the UK than the TCA, but even we appreciate – overblown though they may be – their faults, which arise from the EU’s assumption that the EFTA countries would eventually decide to accede to the EU instead.

Looking east, the EU’s conference on the future of “Europe” has a workstream – under “EU in the world” (now using “EU” and “Europe” interchangeably) – on “neighbourhood policy and enlarging the European Union” as if one is inseparable from the other.

…To a new paradigm

The EU needs a new conceptual model for relations with neighbours.

It may be painful for the EU to confront this. Given its origins as a project for continental peace – a goal with which it is impossible to disagree – and the religious zeal with which many Brussels lifers perceive a dichotomy between continued widening and deepening, on the one hand, and regression to the divided continent of past eras on the other, it is understandable that many inside its bubble see membership as the ultimate goal for every outward-looking, modern, democratic European country. Many of them cannot understand why any European country would not want to join. Yet many countries will not join. In some cases, it is better for the EU if they do not. Can anyone imagine Serbia holding a veto over collective EU action on Putin’s aggression?

The EU has difficulties with its neighbours in both the east and west. But could such a “crisis” point to an opportunity?

Towards a new neighbourhood policy

It is now becoming clearer to some in the EU that not every European country will join. It is in the EU’s interests, though, to keep these neighbours close. A Serbia that could participate in the economic elements of the EU would be incentivised to return to the democratic west. Switzerland and the UK combined would be the EU’s largest export market. Switzerland is a vital transit country.

For the UK, the TCA is clearly insufficient, for both goods and services. An EFTA-type option – outside “ever-closer union” – would be more palatable if it were to come with votes on the common regulations that enable the removal of regulatory borders. The UK cannot push for concessions just for the UK. It can use the opportunity for reflection that the conference on the future of “Europe” presents to propose a win-win-win: an institutional structure that helps the UK, the EU, and other allies by keeping many neighbouring countries close.

Other neighbours are looking for a viable option other than accession. The UK should join forces with them to bring a coherent neighbourhood policy onto the agenda. There are already ideas from not too long ago to kickstart the discussions. It can reboot, for example, Norbert Roettgen’s “continental partnership” idea and Emmanuel Macron’s “3 circle Europe“.

The Swiss would surely be interested if this grand bargain could eliminate the “Ukraine clause”. The EFTA-EEA countries may wish to improve the deficiencies of the EEA agreement. Balkan countries may welcome the opportunity to extend the four freedoms to their citizens while all sides re-evaluate the viability of EU accession.

What’s in it for the EU?

For the EU, there would be three big carrots. It would keep its “near-abroad” within its orbit. It would also resolve the strategic confusion that now seems to arise every time neighbours’ participation in some programme or agreement – like Lugano or Horizon – is on the agenda. Finally, and most importantly, with tensions on trade and borders resolved, the EU and its European neighbours can finally concentrate on the important long-term global issues, presenting a united front against authoritarianism and moving on as allies.

A grand bargain on neighbourhood policy would need humility from all sides. The EU would need to admit that it is not “Europe”. “Europe” exists within and beyond the EU’s borders. The UK would need to stop pretending that the TCA replicates the benefits of the single market.

Uniting Europe for all

The UK has always been the prime example of the fact that “uniting Europe” means different things to different people. If both the EU and the UK can show some leadership, they could, though, make a giant contribution to uniting the continent.

Is that not what the EU was always for?