Over eight years since the referendum, the effects of Brexit are, finally, becoming clearer. Yet rather than putting the issue to bed, this leaves the new government facing a set of difficult decisions which could short-circuit its attempt at a reset in EU relations.
For a long time, the economic effects of Brexit have been hard to distill, thanks in large part to the disruption of the pandemic and global energy crisis. Yet we are now finally starting to get the data allowing us to look at the empirical – as opposed to projected – impacts. The obvious point is that UK trade has suffered.
The Office for Budget Responsibility has concluded that trade openness (trade as a proportion of GDP) has fallen significantly. This means we are trading less than we used to – and trade with non-EU countries has fallen most sharply. Equally, Brexit has negatively impacted business investment, which is around 10 per cent lower than it otherwise would have been. Imports are set to be further affected once the government fully implements the required border controls on agricultural products from the European Union – due in October.
The root of the problem is that the UK is less integrated into the EU’s single market, which affects not only trade with the EU but also the rest of the world – as global supply chains rely heavily on the EU too. Labour has promised to work on tearing down’ these barriers. In truth, it looks more likely to end up gently poking at a couple. But nevertheless, seeking a closer economic relationship is going to pose some tough questions for Keir Starmer.
Take the promised negotiation of a veterinary agreement with the European Union. A light touch New Zealand deal is simpler but removes fewer trade barriers, while the full fat Swiss model requires ongoing alignment with EU regulations. This will immediately force some reflection in London as to how far it is willing to go on alignment, and in permitting a role for the European Court of Justice in enforcing it.
And though Starmer’s practical proposals for closer relations are relatively modest, they will still prove difficult to negotiate with a European Union that is not willing to do any favours even for a new British government. We are talking about processes which will take months, and more likely years, to bear fruit. Is Starmer willing to expend significant administrative and political capital (given the inevitable attacks of diluting UK sovereignty) on measures which will not make a meaningful dent in the macroeconomic impact of Brexit?
Or might, alternatively, the government be willing to go further than it indicated during an election campaign where Labour had a vested interest in not talking about Brexit? Particularly if growth proves elusive, might it consider looking to align more closely with the EU than it has previously suggested?
And, of course, what the UK does is only half of the question. The government will also have to grapple with the strategic challenge of how it intends to react to changes in EU rules and regulations. Given the rhetoric of many Conservative Brexiters about Brexit freedoms – using our newfound sovereignty to remake UK rules and regulations better suited to our own interests – it was logical to assume that regulatory divergence was something that would be aggressively pursued by the previous government. Reality, as it turned out, was very different. Confronted with the manifold costs of divergence – businesses want harmonised standards and predictable regulation – Rishi Sunak abandoned the Johnson era plan (which he had committed to in his leadership campaign) for every piece of inherited EU law to expire by default at the end of last year.
Yet our work has repeatedly revealed that divergence is largely driven not by an ideologically motivated UK but by a European Union that continues to legislate at pace. And as the EU acts, the UK needs to decide how to react. Divergence implies costs for businesses that have to comply with two different regulatory regimes. It might also – for instance in the case of the EU’s Carbon Border Adjustment Mechanism – imply additional costs in the form of tariffs.
The UK government will need not only to be well informed about what is happening in Brussels (which will necessitate an increase in resources for the task) but also decide on a strategy for alignment/divergence. Where might it suit us? Where might the costs be prohibitive? If we don’t diverge, what is the point of being outside?
For the previous Conservative governments, no active alignment with EU regulations was a shibboleth they could not break. Yet there is already a sense that Labour has a more pragmatic view, with its proposed Product Safety and Metrology Bill quietly granting the government powers to recognise EU product safety rules (which are undergoing significant reform).
Starmer’s government appears to be hoping it can bore the public to sleep on Brexit, such is the technicality of the bill’s title and proposals. But it may also sense that public opinion has shifted quite noticeably on the question of Europe, with qualified support for closer trade with the EU. Moreover, given that the Labour membership is overwhelmingly pro-European, and given the weakness of the Conservatives, there is some political space for Starmer to exploit.
But this might be getting ahead of ourselves. In the immediate term, there are all sorts of issues looming for the government. There is still no deal on Gibraltar. UK controls on EU goods imports are set to come into full force this autumn, potentially complicating trade. The new EU entry-exit border system should come into force this November, with the risk of growing queues for travellers. And in 2025 and 2026, important decisions and agreements on data sharing, energy and fisheries will need revisiting, or else they will expire. The previous government chose to duck many of these difficult issues – but the price you pay is EU reluctance to discuss any deeper cooperation.
Brexit will be forever. Being perched twenty miles from a continental-scale economy condemns us to being forever affected by what is decided in Brussels. That is a given. Whether the new government will be more active than its predecessor in facing up to that issue is, however, another question entirely.
Related
