Thinking Swiss on the EU-UK reset

Matthew Harries reflects on the different models the UK could pursue in shaping its relationship with the European Union. 

Is a customs union the best that the UK could hope for from Europe? That’s the question raised by last week’s symbolic 10-minute rule bill by the Liberal Democrats, and David Lammy’s call to recognise a customs union’s benefits. With the Prime Minister and Chancellor talking of the economic damage of Brexit, expectations that the EU reset will go further are rife – but if Labour aims higher, it should reject the notion that a customs union is the ‘only idea around’.

Navigating Brexit has always been about trade-offs, and if Labour is ready to move then it should be ready to fight for what delivers the most benefit for the longer term, not what appears easy in the short-term. That means doing some serious thinking to work out how much to ask of the EU, and critically what to offer in return.

The Liberal Democrats’ pitch for a customs union involves some sleight of hand.

They have claimed that a more ambitious deal with Europe ‘including a bespoke UK-EU customs union’ could raise up to £25 billion for the exchequer. But that £25 billion figure is in fact derived from a research paper that says ‘deep alignment in both goods and services’ – something quite different from a customs union – could increase GDP by 1.7%-2.2%.

You only get this payoff by not just negotiating a customs union but also persuading our neighbours that the UK aligning to EU regulations should be enough to give the UK access to the single market – something the EU is not offering. In fact EU states have already signalled that even piecemeal additional access to the single market will require the UK to make big financial payments, and the UK is also likely to be asked for more on mobility of people. Turkey, raised by David Lammy, has not just a customs union but varying degrees of regulatory alignment without freedom of movement – not a model that could be automatically applied to the UK, a larger and richer economy that recently negotiated to leave the EU.

A ‘pure’ customs union without any deeper alignment would have the advantage of removing rules-of-origin requirements, relieving businesses of an estimated 2-8% of product cost. But even this would have the downside of reversing the much-touted ‘Brexit benefit’ of negotiating independent trade deals (or at least trade deals that set tariffs lower than the EU’s). So the Lib Dem proposal would mean a fair amount of pain for only limited gain.

These challenges reflect the trade-offs of any option in between EU membership and the hard Brexit deal Boris Johnson signed. The more barriers to trade you want removed, the more you have to offer on alignment, money, and movement. Though a customs union might be no bad thing, the UK’s options are not as simple as some hope.

For those who want more ambition, answers could come not just from Turkey but Switzerland. Earlier this year, Switzerland – not in an EU customs union – signed an agreement to deepen and strengthen its patchwork of existing treaties with the EU. The result is a set of agreements which, in simple terms, will leave Switzerland with single market access in certain sectors, including industrial goods, agrifood, electricity, air and land transport, as well as participation in EU programmes such as Horizon, Erasmus+ and the satellite navigation systems Galileo and Egnos.

As part of this arrangement Switzerland accepts freedom of movement – with a ‘safeguard’ brake if deemed to be causing serious economic or social damage – and makes financial payments to the EU. This arrangement was built up ad hoc over many years and reflects the country’s unique interests. It has caused both sides much angst via repeated rounds of negotiations and referendums. But it is a precedent for larger scale access to parts of the single market in return for financial contributions and the movement of people.

For British pro-Europeans, this would mean more political pain but for much more economic gain. Economists John Springford and Andrew Sissons argue that this trade-off is exactly what the UK needs, as it cannot find enough productivity gains just through domestic reform. As a medium-sized open economy the UK needs trade, migration and investment in a way that others don’t. Our smaller cities and towns, they write, need manufacturing as an important source of exports and wages – and those manufacturing businesses need barrier-free integration into European supply chains and access to European markets.

Making arguments on freedom of movement may seem politically ‘brave’ but on the factual merits it is not quite as bold as it sounds. As Sissons and Springford point out, the UK is now relatively less rich, and parts of the EU less poor, than they were when freedom of movement permitted a big influx of EU migrants in the 2000s and 2010s. Neither would these individuals be able to claim asylum. Without radical restructuring, an ageing population and an open economy mean the UK will continue to rely on migration for growth.

There is something in a Swiss-style model to please and enrage pretty much everyone. Nigel Farage as recently as 2020 called Switzerland a source of inspiration for Brexit, and said it had managed to keep its sovereignty and independence while striking sectoral deals with Brussels.

After the referendum and before the UK decided to pursue the hardest of Brexits under Boris Johnson, there was space for more creative thinking on both sides than there is today. A 2016 paper by a group of European authors published by the think tank Bruegel, for example, called for a Continental Partnership under which the UK would participate in the single market for ‘goods, services, capital mobility and some temporary labour mobility’.

After years of bad blood, and with the EU preoccupied by bigger priorities, this is not a deal likely to be on offer from the European Commission now. But the EU might see value in a UK with greater buy-in to – and therefore less temptation to undermine – the single market, providing better conditions for EU exports, and partnership on areas such as critical minerals, batteries and green power supply chains.

Labour needs to make the case nationally – and it would need better branding than ‘Switzerland with nukes’. But any realistic conversations about a European promise in the next Labour manifesto should take the option seriously, and, without promising anything, Brits should be sounding out European counterparts now on what softening the government’s current red lines might put back on the table.

By Matthew Harries, Research and Campaigns Director at the Labour Movement for Europe, and former Director of Proliferation and Nuclear Policy, RUSI.