Questions for Starmer and his approach to the EU

Good afternoon. It’s been a fascinating week in Brexitland during which we’ve seen some clear blue (or, rather, red) water suddenly opening up between Labour and Tories on both Brexit and net zero. 

On the Brexit front it all started with Sir Keir Starmer telling my colleague George Parker that he wanted a “much better” deal for the UK, before going to Paris to hold talks with the French president Emmanuel Macron.

Attentive readers will have noted that Starmer hasn’t changed any of his ‘red lines’ on membership of the EU single market and customs union — and we’ll come to that — but the political signal on the direction of travel was clear and deliberate.

It says two things. Firstly, Starmer thinks he’s going to win the election and is now daring to present himself as a prime minister in waiting. In interviews in Paris it was notable that he didn’t really bother with bashfulness and spoke plainly about the prospects of him winning.

Secondly, that Labour will have a clearly different, and closer relationship with Europe than the Tories, and he’s prepared to say this openly, knowing full well that he’ll garner Daily Mail front pages accusing him of “betraying” Brexit, which of course he did.

Both of these things are a sign of confidence from Starmer and a clear point of difference with Sunak ahead of the political party conferences, where we can expect more detail on Labour’s plans for Brexit, the economy and a green tech revolution.

For pro-Europeans, and this includes most of the recently reshuffled members of Starmer’s cabinet, this is the strongest, most public expression of Labour’s intent on improving EU-UK relations, and is a step forward.

The challenge is going to be in translating intention into action because — even though Labour politicians say they understand there can be ‘no cherry picking’ — it’s hard to escape the sense that they haven’t really internalised what that actually means.

The coverage of Starmer’s trip to Paris provided a reminder of the longstanding tradition (indeed pre-Brexit, just think of David Cameron’s renegotiation) of the UK preferring to listen to itself when it comes to EU affairs.

EU enlargement and the UK

A Franco-German paper setting out ideas for dealing with EU enlargement that talked about ‘associate membership’ of the EU was rapidly appropriated by sections of the UK press as being “aimed” at the UK — a signal and an overture of what is to come.

It wasn’t anything of the kind — as the German ambassador to the UK Miguel Berger took to Twitter/X to point out. The EU has been talking about “concentric circles” of membership, with differing levels of obligation, since Mitterrand’s day — here’s an LSE blog on the subject from 2013 — but it suited the news agenda to conflate the two things.

The kernel of truth is that, looking into the much more distant future, if the EU is going to grant membership to countries like Ukraine, there may be new institutional footholds for countries on the periphery, like the UK. But that is very much a medium-to-long term proposition.

In the short term, when it comes to actually negotiating progress with Europe, Starmer’s options are much more limited than his expansive declarations suggest, and that’s where the challenge will come if he does make it to Downing Street. 

As this week’s sobering report from the UK in a Changing Europe spells out in some detail the negotiation with Brussels will be grinding and iterative and will not deliver change on the scale Starmer is intimating. 

Over the next few months, perhaps even at party conference, we can expect Labour to put some meat on the bones of its Brexit offer, which logically will revolve around alignment in key sectors, including accepting some oversight the European Court of Justice where necessary. (As Sky News reported today, Starmer came close to saying as much on his recent trip to Canada, when discussing UK approach to environmental and other standards.)

I say logically, because if you’re going to do a veterinary agreement that actually makes a significant difference, by removing things like export health certificates, you’re going to need Swiss levels of alignment. And if you’re doing that on food products, why not chemicals?

‘Alignment doesn’t get you access’

But this quickly begs further questions. Starmer won’t join a customs union (too close, too much institutional contact) and yet promises an industrial strategy and an economy where the UK makes more and trades more. (Reminder: 50 per cent of UK exports are manufactured goods).

It will not be long, I suspect, before Starmer — who wants a productive relationship with business — will find himself locked in the same kind of heated conversations that have characterised interactions with Tory governments.

They will explain that ‘alignment doesn’t get you access’ and that being outside the single market means the UK loses the ‘presumption of compliance’ — all of which means you still need to show up at the border with paperwork proving you adhere to this or that regulation, even if they’re identical domestically.

This is the marginal frictional disadvantage that is squeezing UK companies reliant on integrated EU supply chains — as this Resolution Foundation report eloquently explains — and what Starmer is talking about won’t make it go away. 

That, in turn, is a barrier to attracting the foreign direct investment Labour wants to see which — as this paper by economist Nicolò Tamberi demonstrates — has been hit by Brexit because the UK is no longer an English-speaking gateway to the EU single market.

Starmer is more stubborn on this subject than many of his senior shadow cabinet colleagues, but in office it will get increasingly hard for Labour to reconcile its ambitions on growth and investment with its positions on Europe.

This could play out in one of two ways: after a burst of initial optimism, Labour finds itself in the same sulky relationship with business as the Tories did. The “Sunak 2.0” world which is the view in parts of Whitehall, and which Starmer will have to challenge.

Or it becomes apparent that if you do want to move the dial, you will need to do some really quite deep agreements with Europe — like linking your carbon markets or automatically accepting EU phytosanitary rules.

How long before pressure grows for the UK to seek some kind of seat at the table and Starmer comes under pressure to pink those red lines on things like customs union membership?

I don’t pretend to know how this plays out. The forces of bureaucratic inertia are strong (on both sides of the Channel) but they will be challenged by the push factors of a pro-EU cabinet and party membership and the need to deliver improved economic performance.

Brexit in numbers

And if Labour needed food for thought about the serious institutional challenges the UK faces in rebuilding after Brexit it could do worse than read this report into the effects of the UK’s departure from the European Investment Bank.

It’s the source of this week’s chart, taken from research by Stephen Hunsaker and Peter Jurkovic of the UK in a Changing Europe research organisation that speaks about the much broader challenge the UK faces constructing its own alternatives to EU finance institutions and regulators.

The headline number — that since Brexit the UK alternatives replaced only one-third of EIB investment levels — tells a deeply instructive story about the UK’s struggles to turn the theoretical promise of Brexit into reality.

In theory the UK alternatives — the UK Infrastructure Bank (UKIB) and the British Business Bank alongside two Welsh and Scottish infrastructure banks — were supposed to be able to deliver better-targeted investments, particularly in poorer areas of the UK, thereby driving the levelling-up agenda.

In practice, both the quantity and the quality of investment have fallen far short of those promises, with little short-term prospect that this deficiency is going to be addressed.

On the quantity: all four UK development banks invested a total of £2.4bn in 2022 — that’s the highest figure since losing access to EIB investment, but still less than half of the EIB annual average from 2009 to 2016 and only one-third of the 2016 peak.

On the quality: the point of development banks is that they finance projects that the market views as too risky, but Hunsaker and Jurkovic find that post-Brexit investments have often skewed towards things like broadband infrastructure, which the market would have funded anyway. 

So while it’s true the EIB funded some safer projects — like monopoly water companies — their portfolio was sufficiently large and diverse that it could afford to fund many other riskier ones.

In a week where the UK government dialled back on its net zero transition commitments, it’s perhaps telling that the biggest casualty of this change has been the riskier, longer term green infrastructure investments in which the EIB specialised.

In 2022, the UKIB made £800mn of climate-related investment, which is well below the nearly £2bn received for climate projects from the Green Investment Bank and the EIB in 2016 — and a fraction of the £5.1bn in France and £3.9bn in Germany that the EIB provided for climate projects. 

And since the UK had the same EIB share sizes as Germany and France, the report argues that the UK could reasonably have expected to have received something similar.

Hunsaker and Jurkovic identify two major underlying factors for the UKIB’s travails: its lack of staff and expertise and its much smaller pool of capital. 

The shareholders of the EIB provide the bank with £249bn of capital, while in comparison, the UKIB is backed with £22bn which is not all readily available since much of that funding will only become accessible to the bank over the next few years.

And while the EIB has a staff of 4,000, the UKIB is still far short of its target of 320 recruits, with only 90 of its 207 employees in permanent positions.  

These two factors — scale and scalability — are common to a lot of the challenges faced by other post-Brexit regulators in the UK which are trying to make good on the theoretical “opportunities of Brexit”. 

As their report shows, and Labour will discover, when it comes to life after Brexit, saying is much easier than doing.

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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.