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Special EU-UK trade deal may be inevitable even if years in making

BRUSSELS (Reuters) - With no suitable ready-made deal, the European Union and Britain could face years of negotiations to find a settlement that balances London’s wish to maximise access to EU markets with its demand to regain sovereignty and limit migration.

A Union Jack flag flutters next to European Union flags ahead of a visit from Britain's Prime Minister David Cameron at the EU Commission headquarters in Brussels, Belgium February 16, 2016. REUTERS/Yves Herman

The EU’s off-the-shelf model, the European Economic Area, extending EU markets to Norway, Iceland and Liechtenstein, ticks the box of securing market access, although excludes agriculture and fisheries.

The City of London, the country’s financial hub, is in talks with government officials to secure a trade deal similar to Norway’s that would allow it to sell financial services across the EU single market of 27 countries.

“Clearly, one of the options is the Norway model, but whether that is acceptable to people who wanted Britain to leave is another matter,” said Mark Boleat, City of London head of policy, adding trade bodies and others have been in “non-stop meetings” since late last week when Britain voted in a referendum to leave the EU.

However, the model gets a sizeable cross because it would mean accepting rules set by Brussels, free movement of people and payment. Many backers of the campaign to leave the bloc complained the EU had eroded Britain’s sovereignty and allowed uncontrolled numbers of migrants to arrive from eastern Europe.

Liechtenstein has some control on migration, its tiny size limiting the right to reside there, although around half of its workforce still commute from neighbouring countries.

Norway pays an annual 400 million euros (£331.2 million) mainly to support eastern EU members and another 400 million euros into EU programmes, such as the Galileo satellite navigation project, some of which it gets back.

Norway’s Prime Minister Erna Solberg has said she doubts a Norway-style relationship with the EU would work for a much larger country such as Britain, with its history.

“We accept a lot of the rules and regulations that are part of the internal market decided by roundtables that we don’t participate in,” Solberg said.

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“Norway is a small country with a different history. We can accept it because it gives market access, job security, it makes it possible to secure economic growth,” she said.

The EU-Swiss approach has been a patchwork of agreements, but the two have stopped short of an agreement covering financial services. Swiss banks are not allowed to directly sell products in the bloc.

The deals include free movement of people, although the parties are wrestling with a 2014 referendum at which the Swiss expressed their desire to curb migration.

The Swiss also have to pay for access, although at around half the rate related to gross domestic product as Norway.

FAILURE NOT AN OPTION

A failure to reach an agreement is not an option for either side. Britain is in the top six world economies and a trade war would damage both sides, with threats to German car sales or Belgian ports if tariffs curbed trade.

“If you look at it rationally, there is good case to be made for the EU to become more flexible,” Pieter Cleppe of think tank Open Europe said. “At the end of the day, reason will prevail though there will be a lot of screaming and shouting before then.”

A number of Brexit supporters - including former London mayor Boris Johnson, a likely contender for prime minister - have pointed to the free trade deal (CETA) struck between the European Union and Canada as a way forward. Agreed in 2014, it has yet to enter force.

Under such a system, Britain would avoid having to accept migrants from elsewhere in the bloc or contributing to the budget, but would only secure partial access to the EU’s internal market, particularly for services, which make up nearly 80 percent of Britain’s economy.

For banks, in particular, Canadian companies have to establish a presence in the EU and comply with EU regulations. Under this model, UK-based financial services firms could find it more difficult to sell into the EU.

New EU rules set to enter force in 2018 may allow firms outside the EU to sell investment services inside the bloc. However, it does not apply to all financial services and relies on the European Commission recognising the third countries’ rules.

Hosuk Lee-Makiyama, director of think tank European Centre for International Political Economy (ECIPE), says that a planned EU-U.S. trade deal (TTIP), the most ambitious each side has undertaken, could serve as a template for future EU-UK ties.

“CETA is basically a tariff agreement, which makes sense because Canada and the EU are mainly trading goods. The UK and EU are much more integrated so it would need to cover services and investment,” Lee-Makiyama said.

CETA is the EU’s most ambitious trade deal to date. TTIP, still being negotiated by the European Union and the United States, is designed to go beyond traditional tariff reduction, including cooperation over regulation.

“If you take the European stance in TTIP, Britain has already agreed to this and it covers regulatory cooperation, there’s already a template, but no money or migration,” Lee-Makiyama said.

Still, TTIP talks have lasted almost three years, CETA has yet to enter force nearly seven years after negotiations began.

Under EU law, a nation would leave the EU within two years of its request to go unless the other member states agree to an extension.

“It’s unlikely any country would veto such an extension,” said Cleppe. “It’s conceivable that it could take seven to 10 years.”

Reporting by Philip Blenkinsop; editing by Susan Thomas

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