UK Labour Party victory: Edging closer to the EU?

After a resounding victory at the ballot box, Sir Keir Starmer’s Labour Party immediately signalled its intention to pursue a more collaborative relationship with the European Union (EU).

The new government has been quick to hint at a potential new deal that would remove some of the trade barriers established after Brexit. It is also keen to enhance cooperation in areas like defence and security. 

This all marks a significant shift in tone from the previous Conservative administration’s sometimes antagonistically anti-European stance. But while the sentiment is more positive, turning words into action won’t be easy. Labour has pledged to not reopen negotiations on core areas of the post-Brexit deal, even as polls show that a majority of the UK public now view leaving the EU as a mistake.  

So what might a government led by Sir Keir Starmer mean for trade and economic cooperation with the EU? One thing already seems certain. Edging closer to Europe without reopening old Brexit wounds will be a tricky balancing act for the fledgling administration.

The UK economic recovery is real but fragile

The background to any resetting of the EU-UK relationship is slow growth and a stuttering economic recovery. We’ve recently upgraded our forecast for UK GDP growth in 2024 to 0.9% from 0.6%, with a hop to 2% in 2025. Growth in EZ also remains tepid (but similarly improving) with 0.8% growth in 2024 and 1.7% in 2025 (0.6% in 2023).

That cautious optimism is based primarily on the prospect of higher consumer spending, with inflation easing, wages rising and household confidence edging upwards. Surveys show that manufacturing managers also believe the UK recovery is now firmly established. Labour has said that it intends to boost growth by tackling late payments to SMEs and reforming business rates, among other pro-business policies.

But while recovery is real, it is also weak. Sticky service sector inflation made the Bank of England leave interest rates unchanged at 5.25% in June. BoE cut rates by 25bps yesterday for first time since 2020. Inflation now steady at 2% target for two months but sticky services inflation persists. While rates are likely to fall further this year, they will remain high by pre-pandemic standards.

Sir Keir Starmer’s government has now inherited these limitations, alongside calls for heavier investment in public services. Against a difficult economic background, it isn’t surprising that creating a more seamless trading relationship with Europe is a priority for the new administration.

The dividends of cooperation

At the moment, the focus is on a new food and veterinary agreement to simplify border checks on animal products. But a more positive relationship with Europe might pave the way for easier trade in a number of areas, with renegotiated deals reducing trade barriers and cutting administrative complexity.

That could have considerable benefits on both sides of the Channel. Simplifying trade would streamline supply chains. A more positive relationship could see increased EU investment into the UK, as businesses identify easier cross-border opportunities.

The longer-term result could be accelerated economic growth across the continent, with an emphasis on cooperation and shared solutions creating a more favourable environment for organisations in many business sectors.

Manufacturing: Simplified customs formalities and rules of origin requirements could significantly reduce the administrative burden on businesses, making it easier for UK manufacturers to trade with the continent.

Agriculture and food: The new government is already looking forward to a deal that would reduce border checks on animal products, giving UK producers easier access to European markets. “Food producers have been among the hardest hit by UK-EU trade barriers,” says Atradius. “The industry will be crossing its fingers that this proposal becomes reality.”

Financial services: Closer ties might lead to more aligned financial regulations, benefitting UK financial institutions that operate in Europe. But any deal might also limit the UK’s ability to set financial regulations independently, considered a key benefit of Brexit.

Technology and digital services: Closer alignment on digital trade and intellectual property rights could make it easier for tech companies to trade and innovate across borders.

Logistics and transport: Simplifying customs checks would reduce delays and lower costs for transport companies operating between the UK and EU.

A sense of realism

While the benefits of a warmer cross-channel relationship are clear, the path to getting there is not. Brexit supporters have been quick to criticise the possibility of a new food and veterinary agreement, because it would mean accepting oversight from the European Court of Justice (ECJ).

For its part, the EU is wary of deals that “cherry pick” the advantages of closer ties with the bloc while minimising obligations to its rules. The bloc cannot be seen to be giving preferential treatment to a country that has rejected it.

And even with goodwill on both sides, there are no quick wins here beyond the mood music of warmer sentiment. Even technical modifications to current trade arrangements will take serious work at the negotiating table. Any changes to the post-Brexit Trade and Cooperation Agreement will have to carefully balance the interests of the UK and 27 EU member states, something that will not happen overnight.

The new government’s more pro-European stance may also be politically hazardous, though its large parliamentary majority will help in this regard. To get the EU to the negotiating table, Labour needs to offer clear incentives. But the Conservative opposition - with the vocal support of the small but noisy far right Reform UK party - will attack any hint that greater regulatory alignment or a more open attitude to free movement is undermining the Brexit ideal.

Warm words but work to be done

With the election just last month , it is far too early to judge Labour’s attempts to reset the UK’s relationship with Europe. Positive words will have to be matched - in time - with serious proposals.

In the meantime, the UK will continue in its efforts to forge new trade agreements with the rest of the world. Resuming negotiations with countries like India, South Korea, Turkey and Switzerland will be a priority for the new administration, even if the golden ticket - a bilateral trade deal with the US - seems improbable in the short term.

But trade with the EU is the bread and butter of the UK’s export economy. The share of trade (imports and exports) between the UK and the EU has now recovered back to 52%, same level as before Brexit 2019. This indicates a stabilization in trade dynamics post-Brexit, even though the specific figures for exports alone show some areas of fluctuactions. If Sir Keir Starmer’s government succeeds in edging this figure upwards again, its resetting of the relationship between the UK and EU will be considered a success.