Merlin Weekly Macro: Is Starmer’s EU reset a good deal?

Keir Starmer’s EU summit at Lancaster House this week produced entirely predictable responses in the broadsheet and tabloid media. For the Rejoin-and-Labour-supporting Daily Mirror, its headline whooped “KEIR: DEAL IS WIN-WIN”; displaying similar enthusiasm, the Guardian’s banner hailed “EU deal puts Britain back on the World Stage, says Starmer”; at the other end of the scale the Tory-house-and-Brexit-supporting paper, accompanying a large photo of Starmer and EU Commission President Ursula von der Leyen embracing, the Daily Telegraph disported “Kiss goodbye to Brexit” while the Sun, never shy in coming forward when it comes to the EU (who can forget “UP YOURS, DELORS!”) clamoured “DONE UP LIKE A KIPPER”; that matched the Daily Mail’s wail of “STARMER’S SURRENDER” under a red flag top “Day the Brexit dream died”.

Red Lines washed in watercolour

Whether you were a Leaver or a Remainer nine years ago, whether you still hold trenchantly the same views today or have subsequently changed your mind, let’s set aside the emotion and baggage and try dispassionately to unpick the UK’s reset with the EU. It was always going to take place under Starmer’s Labour; the intent, buried in mixed messages, was in its manifesto: “With Labour, Britain will stay outside of the EU…….we will reset the relationship and seek to deepen ties…..There will be no return to the single market, customs union, or freedom of movement”.

To the letter, we remain ‘outside the EU’, we are explicitly not a member (which means we have neither say nor vote); we are not back in the customs union, otherwise on the basis of being illegal we would rapidly be unwinding the recent trade deals with Japan, India and the US. However, the single market and freedom of movement are grey areas: we have not returned in full to the single market, nor have we readopted full freedom of movement, but we are to varying degrees increasingly party to both. And under the defence pact, we will be contributing again to the EU budget.

Asymmetry and ‘Dynamic Alignment’

We are fully part of sub-units of the single market, specifically all trade in Northern Ireland (as has been the case since Brexit was completed with the Windsor Framework), and now, as agreed this week, in the pan-UK food and agricultural products sector. Of great significance is that in both instances the UK has adopted the principle of what is termed legalistically as ‘dynamic alignment’: whenever there is a change of EU rules or standards in the areas to which we are signed up, we will be bound automatically to comply; in such instances, the European Court of Justice (ECJ) has legal supremacy, the UK courts and parliament are not only subsidiary but irrelevant. That is an erosion of sovereignty and a direct loss of it in those specific areas. On the basis that membership of the EU is binary (either you are in or not), and with it the right of representation, the new arrangement for food and agricultural products reinforces the existing Northern Irish precedent that the UK is a rule-taker, not a rule-setter; these are no longer sovereign areas of policy. The relationship becomes asymmetric in favour of Brussels.

For Brexiteers, with the promise that these pan-EU summits will become annual events, the nagging fear is that with precedents established, every summit will introduce new areas of trade and commerce that become subject to ‘dynamic alignment’: industry, financial services, banking, pharmaceuticals etc. Before long, so much of trade in goods and services with the EU might be covered by ‘dynamic alignment’ that the call for a seat at the policy making table becomes inevitable.

The UK has reached a new similar ‘dynamic alignment’ agreement in the energy sector: in the details of rejoining the Emissions Trading Scheme we would become a member of the system which trades carbon credits (an emissions-mitigating mechanism seen by some as verging on ‘greenwashing’) on a pan-EU basis; more importantly the UK will align with EU rules pursuing net zero, the legal authority over which is the ECJ. The pragmatists will argue that in joining a pan-EU energy regulation system, energy becomes a level-playing field for industry, rather than a competitive weapon; those who argue against will say it is yet another area of industrial policy and, pertinently, a cause for concern for national security, that is represented by a major concession of sovereignty and loss of control.

Defence and EU protectionism

A new defence pact is central to the London-Brussels reset. Only EU members and countries with a formal defence treaty with the EU are allowed access to the new €150 billion defence loan scheme known as SAFE (Security Action for Europe). As the loan pool derives from the central EU budget to which all member states contribute, participating non-EU countries are required to pay an access tariff. The UK’s fee has not been fixed but speculation is that it could be around £16 billion, based on our former contribution of 12% to the EU budget when we were a member of the Union.

Under the scheme, the UK MoD would be able to access the pool for purchases of products of which 65% of the value of the components is sourced from EU member states or members of the European Economic Area, plus Switzerland and Ukraine. UK defence contractors may contribute up to 15% of each project’s value, or a maximum of 35% if the UK contractor already has an existing relationship with a participating EU partner. Accelerated by Trump’s exhortations to Europe and Canada to take extra responsibility for their own defence, led by Ursula von der Leyen and Emmanuel Macron, Europe’s defence procurement has been substantially reformed since 2022: the onus is on EU capitals to source from EU contractors unless there is a compelling reason they should shop elsewhere. Poland is currently the UK’s biggest overseas defence customer; without a pact with the EU, companies such as BAe Systems could have been at risk of being shut out of such contracts.

But the UK pact goes much further: it potentially binds the UK to participate in EU military operations. This has significant implications for command, control and liability, and the sovereign authority of the Westminster parliament for the deployment of UK armed forces. It remains to be seen how this new confection sits militarily with NATO (for example, the UK’s 3^rd (Warfighting) Division is operationally attached and integral to the US 2^nd Armoured Corps; who has first dibs drawing on its resources? Who would have authority over its deployment and rules of engagement in a conflict: Westminster? The Pentagon? NATO HQ? The European Commission?).

The mess that is migration

When it comes to the politically charged subject of migration, the government is all at sea, almost literally so with illegal migration and the cross-Channel boat people. Its legal migration policy is also increasingly a spaghetti confection of tangled initiatives which have no coherent shape.

Starmer’s post-local elections reaction to the drubbing by Reform produced an astonishing volte face. From welcoming migrants with open arms for the good of the economy only a year ago in its manifesto, Starmer has now declared the UK of being in danger of ‘becoming an island of strangers’. This sits uneasily with the new Indian trade agreement which includes a provision for Indian companies to be able to relocate Indian employees to the UK without being liable for UK National Insurance; in the EU reset, the 18-30 ‘young people’ cohort will have mutual travel and work restrictions lifted between the UK and the EU and the Erasmus university exchange programme will be restored. Good news for the hospitality sector which has historically relied heavily on young people from the EU as a source of willing and competitive labour, it is not clear how this initiative helps get the one-million-plus UK youngsters who are neither in employment nor training into the workplace.

It seems politically contradictory to be saying a week ago that we want to limit immigration and then immediately to open the door to tens of millions of European 18-30 year-olds. An annual intake cap is still to be negotiated. The OBR still has to catch up with the shifting sands of migration assumptions: in its fiscal and economic forecasts at the beginning of 2025, it assumed an annual net immigration figure of 340,000 based on Office for National Statistics data projecting to the end of the decade.

Whatever the incoherence of the government’s immigration policy as a whole, what is undeniable is that the principle of ‘free movement’ with the EU has been both endorsed and re-adopted; it is simply a question of scope and scale.

It is a big deal

It is an integral part of politics that commission, omission and semantics (i.e. ‘spin’) play a large part in the message of policy gestation. While there is much to be pleased about for those seeking greater harmonisation and reduced friction (access to e-gates for UK and EU passport holders travelling back and forth; reducing paperwork on the passage of mutual trade in agricultural and food products), for Brexiteers suspicious of the government’s motives, there are obvious concerns about what is being conceded and how much more is intended.

Chris Mason (BBC political editor) and Faisal Islam (BBC economics editor), both public opinion-formers with the national broadcaster, were keen to conclude that while it was a big moment for EU-UK relations in the post-Brexit era, in reality Starmer’s announcement did not add up to much of great significance. On the contrary: while of relatively little economic importance, substantive sovereignty concessions have been made with the door wide open for more. What we have analysed above is demonstrably a big deal, even without once mentioning that EU access to UK waters and our national fish stocks has been granted pari passu with the British fishing fleet until 2038, a significant concession.

But is it a good deal?

That it is a big deal is clear. Whether it is a good deal or not is a matter of opinion. Fiscally, it appears that Rachel Reeves may have to find yet more unplanned cash, this time potentially £16 billion to fund the SAFE participation and the Erasmus programme (SAFE was only invented two months ago). International trade is a function of commercial opportunities and exchange rates as much as it is about pacts. What we can say is that her assertion that the UK benefits economically from this reset to the tune of £9 billion between now and 2040 a) will almost certainly be wrong, b) will not be able to be accurately measured and c) even if correct, in the overall scheme of an economy worth £2.6 trillion, is virtually irrelevant.

This is about politics more than directly about economics. It also reflects a character trait of Keir Starmer: he is no attention-seeker in the mould of Trump, Macron or Farage, politicians with the hides of rhinos. But he does suffer FOMO: fear of missing out. He has a thin skin; he is a politician who on his own admission does not like politics; he needs to be liked and to belong; whether that is a good quality to be a successful lead negotiator is a moot point.

The reset is manna from heaven for the Rejoin constituency; it is equally red rag to a bull for Brexiteers and the Stay Out lobby. Starmer’s political calculation appears simple: with polls consistently showing a majority in favour of rejoining the EU over those who wish to stay out, a realignment with Europe that does not involve the UK being a member maximises the support of the former and minimises the damage with the latter. With four more summits before the next election, time will tell whether his gamble playing EU Grandmother’s Footsteps with Red Wall voters and Reform works or not. This one will run and run.

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