A redemptive moment for EU-UK relations

Good afternoon and happy Europe Day! Welcome to the last-ever edition of Britain After Brexit — by my count I’ve written about 250,000 words since April 2020 chronicling the UK’s efforts to adjust to life outside the EU single market, but it’s now time to broaden the purview. More details next week.

But to finish on a fully Brexity note, it seemed this week as if there was a sudden shaft of light piercing the somewhat foggy picture of how EU-UK relations might unfold under a Labour government.

First, Friedrich Merz, the leader of Germany’s centre-right Christian Democrats (CDU), gave an interview to my colleague in Berlin Guy Chazan in which he hinted at some regret at the implacable and binary way Angela Merkel had handled the Brexit process.

Looking to the future, Merz then echoed Labour’s desire for a deeper strategic partnership expressed by shadow foreign secretary David Lammy at this year’s Munich Security Conference:

“We have a plethora of opportunities, at least in foreign and defence policy, that we should explore together. We Germans have a huge strategic interest in keeping the UK closely engaged in Europe,” Merz said.

And then David Miliband, the former Labour foreign secretary, doubled the dose of optimism when he delivered the Henry Grattan lecture in London on Wednesday night, looking at how to deepen post-Brexit EU-UK relations in a fractured world of common threats.

Miliband painted a picture in broad strokes, setting out three tiers of action of varying ambition in which the EU and the UK could “co-ordinate”, “collaborate” and “contribute” to each other’s security, broadly conceived.

It was mostly warm air that wafted over diplomats and dignitaries assembled at the Irish embassy, but the “ask” came at the end of Miliband’s speech when he said:

“A more immediate step, and I think therefore more attractive, would be to agree a high level Political Declaration between a new British PM and the new president of the European Commission and chair of the European Council, setting objectives for a future agreement on foreign and security policy. While not binding, it would create momentum, and set the stage both for action in different policy spheres, and negotiations of a fully fledged set of mutual commitments.” 

Allow yourself to picture the scene in early 2025 — as some Labour advisers and British securocrats do — where prime minister Sir Keir Starmer attends a European Council dinner under the Polish presidency of the European Council, with Prime Minister Donald Tusk in attendance, to cement that early declaration.

Recalling Tusk’s laments about Brexit (and his emotional speech to mark the 60th anniversary of the Treaty of Rome) it could be the redemption moment where both sides (see Merz, above) repent of their Brexit sins and commit to a new era of co-operation.

If all that happens, it’ll no doubt make everyone feel warm inside (important for Starmer managing his pro-EU electorate) but the more pressing question is whether, when both sides confront the most important issues, it translates into concrete action.

Past experience says it will be tough. In his terrific account of the Brexit negotiations No Way Out, Tim Shipman recounts Theresa May’s bearding of Donald Trump at the G7 in Quebec in June 2018.

He reports that this exchange led to a moment of epiphany when EU leaders suddenly questioned the wisdom of driving the British too far away at a time when — to quote Martin Selmayr — Europe was the “last bastion of the international rules-based system”.

The then commission president Jean-Claude Juncker even secretly offered the British a five-year “pause” in the Brexit process, conveyed to Sir David Lidington (then deputy prime minister) by Selmayr over lunch. Of course, the offer came far too late, and of course, it didn’t stop the resultant pip-squeaking squeeze of the Brits in the ensuing negotiation. 

Would it be different this time around? As a senior former UK diplomat observed of Merz’s intervention: “Will Germany really — really — resist much more French positions in strategic autonomy in areas like defence and financial services? It never really has when push comes to shove.” Indeed.

(On financial services this paper for the Conservative European Forum by William Wright of New Financial sets out the challenges. As Wright concludes, given Labour’s red lines on single market membership, “no amount of improved mood music” will reverse the mechanical impact of Brexit on the City.)

Lidington, who confirmed Shipman’s account of the Juncker gambit, is slightly less pessimistic about the possibilities, but also alive to the fact that — mechanically — dealing with the EU at the level of a 27-member negotiation is just plain hard.

“The process of any ‘third country’ association agreement requires the member states to give the commission a mandate, and that’s the point at which member states bring their ‘asks’ to the table — the Spanish on Gibraltar, the French on fish or audiovisual. It is never going to be easy,” he said.

As discussed a couple of weeks ago, the commission’s rather cloth-eared recent proposal for an expansive EU-UK youth mobility scheme — swiftly rejected by a Labour leadership on election alert — speaks precisely to this point, and provided a reminder that it’s not just British politicians that fail to understand Europe. That’s a problem that cuts both ways.

Of course, the strategic context is different from the 2016-20 period. Whether or not Trump is in the White House, the US is disengaging from Europe and, as Miliband noted, on a much more confrontational track when it comes to dealing with China. 

But as Lidington notes, while the strategic context is different, things won’t turn out that differently on EU-UK relations unless and until the EU “really sits down and considers what its optimal strategic relationship with the UK should be”.

Is that realistic? That process will need Germany and France at its heart, but both countries have general elections in the first two years of a new commission. That, again, won’t help the hoped-for momentum.

There is much to play for. If the war in Ukraine and the strategic challenge of China leads towards a large-scale common EU industrial and defence procurement policy, the UK and the EU will be presented with difficult questions about how the UK interfaces with that.

Starmer’s preset red lines on rejoining the single market or a customs union have the effect of limiting the potential gains of any EU renegotiation which — if the recent youth mobility scheme debate is any guide — will also trigger painful memories for all sides.

Put another way: will a newly elected Starmer, an incrementalist by instinct, want to spend his early political capital taking the UK back to the Brexit future? And if he does, will the prizes on offer be worth it?

Anton Spisak, the former UK government official and Center for European Reform associate fellow who Miliband credited at the end of his speech, isn’t certain where Labour ends up on that question, but he is clear that nothing can really change without a political paradigm shift at the top of the British government and the EU.

“A necessary condition for the renewed partnership is a mutual understanding at the very top political level between PM and commission president that, in the new geopolitical and geoeconomic moment today, the UK and the EU need each other,” he said. “But to think that the momentum for this will come from within Whitehall or the Berlaymont is a mistake.”

Brexit in numbers

This week’s chart comes from the consultancy EY which has released its latest tracker of foreign direct investment into the UK, which comes with a superficially comforting headline that the UK (up 6 per cent on 2022) is beating the EU (down 4 per cent).

France remains Europe’s top recipient of FDI, with the UK second, but the annual ups and downs mask a more fundamental and worrying trend shared by both the UK and EU — the numbers of new projects for both are still lower than pre-pandemic levels.

We can argue the counterfactuals as to whether the UK numbers would have been better, absent Brexit, but as the report says:

“UK project numbers have remained below 1,000 since 2019 and there were 220 fewer projects recorded in 2023 than at the UK’s high point of the decade in 2017, when 1,205 projects were recorded.”

EY tracks FDI projects that result in the creation of new facilities and jobs by companies outside the region for the purposes of its report. It excludes portfolio investments, license agreements as well as mergers and acquisitions and investments that do not result in new employment.

The government knows this (it’s why ministers tend to talk about the “stock” of FDI in the UK, not the flows) and it’s why chancellor Jeremy Hunt asked Lord Richard Harrington to produce a report into how to improve investment inflows. It’s a good piece of work. 

The UK’s relatively strong performance was driven by a resurgence in tech investment and strong growth in sectors such as financial and business services, where the UK has a comparative advantage. This is helped by a weak pound that makes the UK relatively cheap for US companies. Investment in renewables remains strong.

The less good news is a decline in other high-value activities such as manufacturing, research and development projects — the lowest number since 2016 — and a 34 per cent drop in the establishment of corporate headquarters in the UK, although European HQ projects are holding up.

Part of the overall picture for Europe in manufacturing projects is coloured by the impact of the US Inflation Reduction Act sucking investment into the US and high energy costs caused by the war in Ukraine.

Sentiment on the UK has also weakened, with the number of global investors ranking the country as one of Europe’s three most attractive destinations falling from 32 per cent to 25 per cent, according to EY’s survey. By comparison, 34 per cent named France and 29 per cent said Germany. 

Overall, Peter Arnold, EY’s UK chief economist, said the trendlines pointed to the UK now coming through the post-Brexit uncertainty period, and settling into a new post-Brexit equilibrium:

“The UK does well in attracting investments into sectors where it has comparative advantage — digital, financial services, business services, utilities etc — but while the UK remains a leading European destination for FDI, it is no longer the automatic ‘first choice’ for more general investment from non-EU businesses, and is less attractive for EU investors looking to integrate or expand a UK element of a pan-European supply chain.”

Labour’s challenge, given its relatively limited ambitions in fixing the current EU-UK economic relationship, will be to shift the dial within those parameters.

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.