Here we go again – UK in a changing Europe

Anand Menon argues that while the UK government speaks more freely about the economic impact of Brexit and its ambitions for closer ties to the EU, its red lines will limit what it is able to achieve.

Something is changing in the politics of Brexit. Not that long ago, open discussion of the economic impact of leaving the EU was frowned upon. More recently, the government has been significantly more forthright. Rachel Reeves has repeatedly emphasised the costs of Brexit. And now, rumours abound that she’s going to double down on that theme in her forthcoming Mais lecture.

Let’s be clear. Having a government that is willing to be honest about the impact of such a significant policy decision marks real progress. Whatever you think about Brexit, self-delusion over its implications is not what the country needs from its political leaders.

Equally, however, there is a curious disjuncture in government thinking on this. Simply put, their current position seems to consist of emphasising the significant costs that have been incurred thanks to our decision to leave the EU, whilst being equally forceful in ruling out the steps that would be needed to reduce these.

By this I of course mean the continued insistence by Ministers that their red lines – on the customs union, the single market and on freedom of movement – remain as fixed as they were when they were added to the Labour manifesto two years ago.

Let me place this in context. The OBR continues to argue that the medium-term impact of Brexit will be in the order of 4% of GDP, while a number of other economists propose a significantly higher figure. By way of contrast, John Springford of the Centre for European Reform has estimated the value of the deals currently being negotiated at around 0.1% of GDP. The government’s own figures suggest it might be of the order of 0.3%.

Putting two and two together, then, the government thinks it has found a way of doing something far more ambitious than the current reset while respecting its own red lines.

The chosen mechanism seems to be ‘alignment’. As Joël Reland expertly outlines, the tone with which this government has begun to discuss the prospect of dynamic alignment with EU rules marks a striking departure from anything we have heard post-Brexit. Keir Starmer’s government, it would seem, prioritises economic gain over the potential pitfalls inherent in being a rule taker.

The problem is that the EU is not as enthusiastic. Not because there is any principled objection to selective alignment. Supposed EU resistance to what it dubs ‘cherry picking’ was always something of a myth. Indeed, the UK-EU summit last May was a cherry picker’s dream. The EU agreed to start negotiations on selective UK participation in those bits of the single market relating to agriculture, emissions trading and electricity.

Selective alignment, in other words, is fine – as long as it suits the EU. And one crucial reason why these three areas are being prioritised is that they all help in addressing some of the thorny issues created by Northern Ireland’s unique status under the Protocol.

Beyond these sectors, however, things become far trickier. Of course the UK wants carve outs. Squaring the circle of the need for growth and the existence of those pesky red lines demands them. But on the EU side there is genuine concern about the UK enjoying too many of the benefits of the single market without accepting the obligations that come with membership. Equally, there is no shortage of EU firms that rather enjoy their UK competitors struggling to trade in the single market.

Over and above all this there is the politics. There is simply no incentive for EU leaders to help a country that has left the club flourish economically. Not least given that many of them face populist opponents who, whilst they may no longer call for exit from the EU, would certainly prefer it to be less intrusive. A Britain that serves as a salutary warning of the economic cost of being outside is no bad thing in this regard.

And a final issue is conjunctural. We’re negotiating with the EU at the very moment when the member states are embarking on what promise to be rather bad-tempered negotiations over the EU’s seven-year budget. If the fate of the negotiations over SAFE are anything to go by, one side-effect of this will be to encourage them to see the UK as a potential cash cow that might help smooth those internal discussions.

So, the problem the government faces is that the EU might not be too keen to give them what they want. One obvious solution would be to offer in return something the EU is keen to have. At the moment, however, it is hard to see what this might be (I can’t see Starmer and co offering freedom of movement any time soon). Trading security cooperation for economic concessions is a non-starter, not least because the member states know as well as we do that such cooperation is in our interest too.

So as Rachel Reeves stands up to speak, she should be wary of the danger of over promising and under delivering. Yes, Brexit has had a significant impact on our economy. But it is precisely those aspects of it that are causing the most harm to which the government is determined to cling that have exerted the largest impact. Some honesty is better than none. But there is a way to go.

By Anand Menon, Director, UK in a Changing Europe.