EU-UK relations are low on Rishi Sunak‘s pre-budget agenda – though change would benefit both sides

Rishi Sunak’s November budget will reveal the priorities of a leader whose deeper beliefs and long-term strategic vision are relatively unknown even at home. Yet while a rapprochement with the EU would be conducive both to Europe’s role in global affairs and the UK’s urgent economic growth priorities, the political agenda in the UK dictates more pressing matters for now.

As the EU defines its direction of travel amidst geopolitical unrest and a sense that the balance of power in international politics is being renegotiated, it is easy to forget the significance of securing ties with post-Brexit UK.

Domestic political developments in Westminster ever since the referendum result of 2016 may have provoked a mixture of dismay and bewilderment among international observers, as both the country’s reputation as a pragmatic liberal force and its unwritten constitution are tested by populist forces.

But the UK’s status as the second largest European economy (with leadership roles in financial services and technological and social innovation), and that of a weighty European actor in military, security and intelligence terms, speaks for itself.

Indeed, the UK’s early strategic clarity on dealing with autocratic regimes in Russia or China – which continue to bedevil leading EU countries like Germany – is arguably a much-need European asset in the current international climate. And this is before even mentioning the deep, long-standing civil society ties and the UK’s cultural soft power in the eyes of continental Europe and beyond.

European advocates for cohesion at home and economic and political sovereignty in the world will agree that solid relations with the UK are a prize worth pursuing in the long run.

The UK domestic focus is on stability

Yet as of now, a collective sense of post-Brexit exhaustion prevails on both sides of the channel. And domestic politics in the UK certainly dictate very different short-to-medium-term priorities to those on the continent.

For while the new Sunak government is easily credited with restoring competence, the end of Trussonomics does not mean an end to the UK’s most urgent economic challenge: a combination of lower growth and high inflation while both interest rates and unemployment are rising.

Public coffers display a fiscal gap – that is, the difference between spending commitments and revenues whilst keeping to the government’s fiscal rules –  of £40bn (or €46bn), while the Bank of England warns that a recession is inevitable.

Among fears of a return to 2010-levels of austerity – this time in a tougher macroeconomic climate – Sunak’s budget announcement on 17 November is widely expected to contain both further tax increases as well as spending cuts.

Open questions are limited largely to the balance between the two (this is where Truss-onomics, Hunt-onomics, as per the current chancellor, and Rishi-nomics diverge) and to the size of cuts to public investment. The latter would invariably occur at the expense of both much sought-after growth effects in general, and of the UK’s aims of “levelling-up.” that is, reducing regional inequalities, in particular.

San Francisco on Thames

The budget will offer a sense of Sunak’s vision for the UK, of which relatively little is known given his rapid ascent in British politics.

Indeed, his image as a slick, business-friendly and economically savvy politician renders his early support for Brexit a puzzle, given that the case for leaving the EU was always more persuasive on political rather than economic grounds.

A speech delivered to Bayes business school in February this year is the closest he has come to setting out the tenets of his thinking. The speech flew under the radar as it was delivered on the same day Russia launched its attack on Ukraine.

Centered around “capital, people, ideas,” and a rejection of a government that is “a permanently bigger presence in the market and in our lives,” Sunak’s vision is that of a “future economy built on a new culture of enterprise.” Indeed, education and particularly skills – a deep-seated problem in the UK, which lags behind OECD benchmarks in vocational training – is expected to feature large in Sunak’s government.

Acting on this priority, a strong new ministerial team has been installed in the relevant department, headed up for the first time by a former apprentice, Gillian Keegan. This focus on lifelong learning can be interpreted as an acknowledgment of the deeper drivers of economic growth, as opposed to the sugar-rush tactics employed by his predecessor.

Contours of tweaking exercises may be gradually emerging

So what could this mean for Britain’s ties to Europe? Resetting relations with the EU certainly crops up from time to time as numbers are crunched by think tanks and government departments in search of growth stimulants for the UK economy. At the same time, opinion polls show stronger support for “Remain” than ever before.

In May 2022, the Office for Budget Responsibility – the UK’s fiscal watchdog – found that “the new trading relationship between the UK and EU, as set out in the ‘Trade and Cooperation Agreement’ (TCA)… will reduce long-run productivity by 4 per cent relative to remaining in the EU.”  This, according to the OBR, is largely due to the increase in non-tariff barriers, which acts as an “additional impediment to the exploitation of comparative advantage.”

Interestingly, analysis by the Resolution Foundation on the impact of Brexit on trade, using data gathered since the conclusion of the TCA in 2021, points – contrary to expectations – to negligible change in trade volume. UK companies, in particular, appear to be resorting to short-term “coping mechanisms” to continue “sticky” – that is, long-standing – trade relations with the continent.

However, a key change that can be identified is the UK’s level of trade openness, which is measured as total trade as a share of GDP. According to the Resolution Foundation, this measure is “expected to decline significantly, by 3.6 percentage points as a result of the new barriers erected under the TCA, and a further 3 percentage points relative to a situation in which the UK remained in the EU which itself continues to integrate”.  

Beyond the prospect of renegotiating elements of the TCA, where rules on exporting sanitary and phytosanitary goods (relating to human, animal and plant health) account for the bulk of trade friction, open questions on EU-UK relations remain. These relate to mutual recognition of qualifications, revisiting decisions on ID cards for travel, mobility packages for UK service providers in the UK – especially in regulated sectors – and resolving the UK’s role in Horizon, the EU’s flagship R&D program.

… but the necessary political climate is not yet in sight

Yet the political climate required to shift gears beyond resolving smaller technical challenges to reduce trade friction is still in the distance.

The UK government’s decision to push forward with the Northern Ireland protocol bill, which would enable the UK government to unilaterally override the TCA, a Treaty governed by international law, is arguably and understandably (from an EU perspective) the key bone of contention, rendering the political climate deeply unpalatable.

While amendments can be expected from its current passage through the House of Lords, Sunak appears intent to push the bill through, largely in an effort to maintain unity in the Conservative party, where the hard-Brexit wing – the European Research Group (ERG) – remains influential. The political stakes are high, since passing the bill will be considered a provocation by the EU and triggering it could result in a trade war.

The obvious solution is to resolve the problems of the actual protocol – that is, the set of arrangements governing cross-border trade between the UK and Northern Ireland, which remains a de-facto part of the Single Market.

This could involve the UK giving grounds on ECJ oversight – for instance, by means of a pre-court resolution mechanism – in return for the EU giving ground on the need for physical checks on goods that are quite obviously not destined for continental Europe.

Sceptics of any short-term resolution point to the continued pressure of the ERG and its tendency to skillfully frame practical problems as larger issues of sovereignty. Optimists see a window of opportunity before the Stormont elections in Northern Ireland, which have just been delayed but must legally take place before January 2023.

From an EU perspective, there is arguably little incentive to make any major concessions in the short term, given a UK election is not too far away. If Sunak decides to avoid a battle with ERG, the can will simply be kicked down the road.

In the meantime, the passing of time could allow the UK to seize upon some of the aspirations put forward by Brexiters, based on what they deem to be public opinion. These include delivering on a desire for a change in the UK’s migration regime and the possibility of pursuing new trade deals – even if these are unlikely to offset the drawbacks of leaving the single market.

More broadly, the Brexit turmoil can be said to have triggered a range of much-needed public debates in the UK, notably one on regional and income inequality, putting political decision-makers – with more flexibility to determine UK policy alone – on the spot.

So despite a change in management in the UK and legitimate hopes for a calmer and competence-focused shift in UK politics – Sunak’s talks last week with Macron to solve small boat immigration to the UK facilitated a new arrangement announced yesterday –  the tricky issue of broader EU-rapprochement is unlikely to materialize in the short-term.

Yet as the scorched earth left behind from the divorce proceedings begins to heal, new – and indeed old – areas for potential cooperation will (re-)emerge, such as tackling the joint challenges of the green transition. Identifying and pursuing them is a desirable goal for advocates of European unity in the face of geopolitical unrest.

About the author

Jake Benford is a member of Bertelsmann Stiftung’s Europe Programme, where he currently focusses on economic cohesion in the EU as well as more broadly on relations with the UK. He previously developed the foundation’s work on impact investing.

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