Security can be the starting point for deepening the post-Brexit UK-EU relationship

Good afternoon. Another busy week in Brexitland, a world that I often describe through the incremental irritations faced by industry and investors as a consequence of Brexit and leaving the EU single market.

There were fresh examples of that this week, but actually for once the big Brexit news was non-granular: a big-picture pitch for a deeper EU-UK relationship from the shadow foreign secretary David Lammy at last weekend’s Munich Security Conference.

We’ve long known that Labour, if elected, wants a security pact with the EU (something that Theresa May originally envisaged, but Boris Johnson junked) but Lammy used the Munich stage to land the point that a Starmer government is committed to the European neighbourhood.

“It’s absolutely fundamental that the United Kingdom and Europe have the closest of relationships and the Brexit era is over, the situation is settled,” Lammy said, noting that France and the UK have half of Europe’s security capabilities combined.

Rebuilding the UK-EU relationship

The war in Ukraine is the obvious driver for such a pact. But given that post-Brexit Conservative governments (for all their domestic volatility) have been steadfast in their support for Kyiv, the interesting question is how a Labour vision might be different?

Part of it is about the touchy-feelies of people politics rather than hard policy substance. I was at an event recently with several senior EU diplomats who lamented the fact that too often the EU-UK conversation (and this includes with Labour) was so narrowly transactional: “we want a vet deal . . . we want a mobility agreement . . . we want . . . ”

Which is why any deeper rebuilding of the UK-EU relationship after the Johnson-Frost era (now stabilised by Rishi Sunak) must start with a much broader, deeper commitment to the European neighbourhood and addressing the common challenges we face. Lammy alluded to this, I think.

Security is the obvious and uncontentious place to start, but the argument doing the rounds is that there are structural forces that can take the discussion much deeper, including areas of industrial and commercial policy that are not traditionally considered as security.

As Mujtaba Rahman, managing director for Europe at Eurasia Group, told me after returning from Munich, the Labour team were keen to define security very broadly, encompassing migration, climate, energy, and even trade and supply chain de-risking. 

“This will allow Labour to use security as the reset and vehicle through which to also improve the wider UK-EU economic relationship,” argues Rahman.

This is an optimistic view of the future.

Recall last year that it took nine months for the EU and the UK to agree on a mutual fix to the EU-UK Trade and Cooperation Agreement that avoided 10 per cent tariffs being imposed on the export of electric vehicles in both directions across the Channel.

This, despite the fact that the EU and UK had an obvious common strategic interest in avoiding imposing tariffs that would have only handed further advantage to the same Chinese manufacturers on which they are trying to become less reliant.

The thinking is that in a world where the UK and the EU are in a less zero-sum relationship, that kind of decision should become easier — and logically, so should others, for example on aligning carbon border taxes and managing common threats in the digital sphere.

The challenge for the west

The long history of petty EU-UK squabbles (both pre- and post-Brexit) militates against such a deeper strategic rapprochement, but equally, there is a countervailing force created by the need for greater solidarity in the face of the challenges posed by Putin and Xi’s China.

That is part of the argument made by Jonathan Black, the UK deputy national security adviser and G7 sherpa, who recently returned from a sabbatical year spent thinking deep thoughts at the Blavatnik School of Government on the Heywood Fellowship (named in memory of the late cabinet secretary, Sir Jeremy).

The result is a paper which, as the title says, examines the “intersection of security and economic interests” in a more uncertain world where traditionally economic issues — supply chain de-risking, critical minerals, digital hygiene — are now intertwined with security issues.

The challenge for the west — and this is a problem seen in miniature in the EU — is achieving the kind of international collaboration on economic issues that has traditionally been the preserve of national security questions.

As Black concedes, this isn’t easy, for democratic systems built on openness and competition but challenges are emerging that are forcing a rethink, and that includes the broader relationship between business and the state.

As he writes in his foreword: 

As someone who grew up where “step back” was the presumption, it has been fascinating to see not so much a call for government to “step in” (although there has been some of that), but more to “step alongside” as governments and business navigate these challenges together.

After the era of “fuck business” this is, at the very least, a different prism through which to view both domestic business engagement but also the wider possibilities of Lammy’s big-picture offer to the EU.

(If you want the reality check on why nothing much will change in the EU-UK relationship if Labour wins the next election and how political gravity will drag both sides down, Anand Menon of the UK in a Changing Europe sets it out here.)

My own book speaks to much of this idea of inevitable incrementalism, but big events can drive commensurately big shifts in approach. Past performance does not necessarily have to define what happens next. 

The alternative is a more optimistic vision that was conjured by Paul Drechsler, the former CBI chair, when speaking at the Independent Commission for Europe event last week.

He urged Labour to set out “a positive and compelling narrative” about the UK’s position alongside the EU underpinned by common agendas on digital, defence, net zero but also (to the European diplomat’s point above) a shared cultural outlook built on better mobility.

The history of the UK’s relationship with the postwar European integration project suggests this will be an uphill battle, but as Black’s paper implies, there are structural shifts afoot in the global environment that make it not inconceivable either.

Brexit in numbers

This week’s chart is from an analysis by Goldman Sachs into the effects of leaving the EU single market, entitled “The Structural and Cyclical Costs of Brexit,” which estimates that Brexit has lopped five per cent off UK gross domestic product.

The Wall Street bank’s analysis uses a counterfactual model that pits the UK’s actual economic performance against a synthetic version of “what might have been” had the UK remained in the EU and which is based on the performance of other comparable economies.

The hit to GDP, Goldman’s economists calculated, is caused by a combination of reduced trade, lower immigration from the EU and overall weaker business investment (see chart).

Such analyses always cause controversy. The economist Julian Jessop in the Telegraph, who often argues negative Brexit effects are overstated, finds the idea that Brexit has caused a five per cent hit “simply implausible”. He writes:

“Business uncertainty and trade frictions have surely had some negative impacts, but do not appear to be anywhere near enough to add up to a 5 per cent hit to GDP.”

Economics prof Jonathan Portes at King’s College, London agrees, putting the current Brexit hit at close to 2-3 per cent of GDP, while citing his own analysis, which finds the hit could ultimately reach as much as 6 per cent, but over time. A slow puncture, not a car crash.

However, John Springford at the Centre for European Reform — best-known for his own work with “doppelgänger” analysis on the impacts of Brexit — finds Goldman’s analysis to be persuasive. 

His view is that most of the negative Brexit effects have come through, driven by the sterling fall in 2016 hitting real incomes in 2017 and 2018; business investment stagnating from 2016, and then a 10-15 per cent hit to trade after 2021, which is proving to be enduring.

Springford’s view is arguably the more cheering. He doesn’t rule out ongoing, deeper Brexit impacts but given that UK trade performance appears not to be deteriorating further (either against EU or doppelgänger) he reckons we may now have hit the Brexit bottom.

If that’s right then, as he tells me, things might be about to get better.

In combination with inflation (and hopefully interest rates) coming down, energy prices falling, and high net immigration, growth should therefore pick up unless another shock comes along.

Could there be light at the end of the tunnel?

Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.

Source: Economy - ft.com