Best of both worlds? Norway is in two minds about EU ties

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* Norway has been cited as model for Britain if it leaves the EU

* Many Norwegians ambivalent about their arrangement with the bloc

* Nordic nation voted "No" to membership in 1972 and 1994

* Critics says Norway lacks clout in relations with EU

By Alister Doyle and Stine Jacobsen

OSLO, March 16 (Reuters) - It (Other OTC: ITGL - news) sounds like the best of both worlds: Norway sells fresh and frozen salmon worth billions of dollars to the European Union almost tariff-free, while curbing EU food imports to protect local farmers.

The fish and agriculture deals are among those that Norway, which twice rejected European Union membership in referendums in 1972 and 1994, has negotiated with the EU in order to access the bloc's 500 million consumers.

It is an arrangement many eurosceptics say is an inspiration for Britain if it leaves the EU after a June 23 referendum. Both countries have their own currency. Norway, unlike Britain, has joined the passport-free Schengen area facilitating worker and traveller mobility.

Yet many Norwegians say the compromise, under which Norway has stayed outside EU fish and agriculture policies and subsidises for example farmers to keep dairy cows in heated barns in the Arctic, is not as good as it looks.

Norway's 5.2 million people pay hundreds of millions of euros to the EU to take part in its internal market, and have 5,000 laws based on EU directives. Norway has a theoretical right to veto directives but has never once said "No", fearing it would jeopardise the whole relationship, officials say.

And the Oslo government has no real say in the bloc's governance. "The Norwegian model is integration without representation," said Ulf Sverdrup, director of the Norwegian Institute of International Affairs.

Sverdrup oversaw a 900-page official review of two decades of ties to the EU in 2012 that likened the relationship to a "download democracy" of instructions sent by email from Brussels.

As Britain debates the extent of its future in Europe, Norway's situation is emblematic of the irreversible integration of Europe, despite this continent's faltering efforts to become a true political bloc.

The reason Norway has to accept EU rules is to ensure its businesses have equal conditions for competition with EU peers. That counts in areas from international postal services to telecoms. It's important because 80 percent of Norway's exports go to the EU.

"You go to the office and find that Microsoft (NasdaqGS: MSFT - news) has upgraded your computer overnight without you knowing. Do you accept or not?" Sverdrup said, noting that most people unthinkingly press "Yes", just as, he said, many Norwegians feel forced to accept EU directives.

BIG BENEFITS

Whether or not the nation should have full EU membership has been one of the most dominant and divisive issues in modern Norwegian political debate.

The Conservative Party, led by Prime Minister Erna Solberg, would have liked Norway to have full membership.

"Norway would have been better off inside the EU," she told Reuters, adding that it would give Oslo a voice in shaping continent-wide policies.

Yet many believe Norway, which has grown rich thanks to oil and gas before the recent price fall, is better off outside the EU. The Oslo government has built a vast $835 billion sovereign wealth fund, the world's biggest. It holds about $160,000 for each of Norway's 5.2 million people.

"It would be a great inspiration if Britain leaves," said Kathrine Kleveland, head of Norway's "No to the EU" group.

Still, the issue is on the back burner for now because of the two "No" votes. And no poll since 2005 has shown a majority in favour of EU membership.

Beyond the debate, the Scandinavian country has made big gains from access to the EU market as a member of the European Economic Area (EEA) since 1992 - with fellow outsiders Iceland and Liechtenstein. In addition to the bulk of Norway's exports going to the EU, 60 percent of Norway's imports come from the EU.

The 31-nation EEA, comprising the three outsiders and 28 EU states, aims to ensure freedom of movement for goods, capital, people and services. The three small non-members are consulted on rule-making but lack a vote when decisions are taken.

"Norwegian industry and business would have struggled without the EEA," said Elisabeth Aspaker, Norway's EEA and EU Affairs Minister. Still, she said there is a "democratic deficit" because Oslo has no say in making laws that ultimately affect the country.

PERFECT SCORE

Norway was best of all EEA nations in implementing EU directives into law, with a perfect score of zero delays in a 2015 official EEA scorecard. On average, EU nations lagged in implementing 0.7 percent of directives, with Italy worst at 1.6 percent.

Solberg and Aspaker's Conservatives, who supported membership in 1972 and 1994, bemoan a lack of say over EU policy-making even in areas such as oil and gas, where Norway is the number two energy exporter to the EU after Russia.

The Conservatives are now resigned to the EEA as a compromise for a NATO member where voters rejected EU membership, fearing loss of sovereignty. Asked if Norway should pull out of the EEA, 61 percent said "No" in a poll in January, with 23 percent saying "Yes".

The size of payments to the EU in both Norway and Britain, and how to gauge benefits and costs, is hotly debated. Both nations have a long and independent, sea-faring and trading history but now have to weigh that against the benefits of belonging to a bloc given the nature of world trade.

Norway's Foreign Ministry says Norway's main annual contributions are 388 million euros ($430.29 million) for core EEA access from 2014-21, and 472 million euros, mainly to take part in EU programmes for scientific research and innovation.

Taken together, that gives a total of 860 million euros, or about 165 euros for each Norwegian every year. Norway also pays some smaller amounts, for instance to take part in Schengen.

By contrast, a UK parliamentary report in January estimated that Britain paid a net 8.5 billion pounds ($11.99 billion) to the EU last year - about 170 euros each for a population of 64.6 million. It forecast the amount would fluctuate between 11.1 billion and 7.9 billion pounds until 2020.

Many campaigners for Britain to leave the EU say they will be able to avoid the drawbacks of the "Norway option".

Britain's "Vote Leave" campaign says Britain would negotiate a free trade deal with the EU but, unlike Norway, "we (will) end the supremacy of EU law. We regain control." Campaigners say Britain's far bigger economy would have far more clout.

By contrast, Prime Minister David Cameron, who wants Britain to stay in the EU, has explicitly said Norway pays too much and lacks influence.

SMOKING SALMON IN POLAND

The world's biggest producer of farmed salmon, Norway exported fish worth $4.12 billion to the EU in 2015.

According to a deal with the EU, Norway pays a 2 percent duty to sell fresh and frozen salmon to the bloc. Oslo pays a higher price, of 13 percent, on smoked and other processed salmon.

Norway has found a way to circumvent this higher tax on processed fish. Many Norwegian firms have bought processing plants in the EU, mainly in Poland, to smoke salmon. Aspaker says Norway has created 12,000 jobs in the EU, mainly to process the fish.

At the same time, as Norway is not tied by the EU farms and fisheries regimes, Oslo is allowed to protect its farmers.

Norway's farmers received 58 percent of their income from government subsidies in 2014, the highest of any rich nation, according to the Paris-based OECD.

Norwegian farmers are protected by import barriers and by government guarantees of minimum prices for their food. Norwegian consumers help to pay for farmers' steep production costs both through taxes and by paying high prices in shops for everything from beef and lamb to potatoes and carrots.

Many Norwegians dislike the high prices and visit neighbouring EU member Sweden, where their weekly shop is cheaper.

Gunn Nilsen is the manager of Fromagerie, a shop in Oslo selling foreign cheeses, including Camembert from France, Stilton from Britain and Gouda from the Netherlands. Import tariffs start at 27 crowns ($3.15) per kilo, which makes her cheeses a luxury.

"The Norwegian system makes no sense," she says.

(Reporting By Alister Doyle, Guy Faulconbridge in London and Barbara Lewis in Brussels. Editing by Alistair Scrutton and Peter Millership)