The Observer view on trade relations: Closer ties with EU is the lever for economic growth

 

The Observer view on trade relations: Closer ties with EU is the lever for economic growth

Observer editorial

Amid sluggish UK productivity and global insecurity, pulling closer to Europe is diplomatically and economically vital

 

Sat 16 Nov 2024 20.00 CET

https://www.theguardian.com/commentisfree/2024/nov/16/the-observer-view-on-trade-relations-closer-ties-with-eu-is-the-lever-for-economic-growth

 

Achieving the fastest sustainable growth in the G7 was the Labour party’s highest-profile pledge going into the general election last July. Chancellor Rachel Reeves has said that boosting growth is “at the heart of everything she does”. But there was concerning news last week with new figures showing the economy grew by just 0.1% in the three months to the end of September, falling significantly short of expectations.

 

Some business leaders have linked this anaemic growth to uncertainty in the run-up to last month’s budget. But it will largely still be a product of factors outside the new chancellor’s control, including the decisions of the last Conservative government.

 

It is nevertheless disturbing news for Labour as well as for the country. The Resolution Foundation forecasts disposable household income per person is forecast to rise by just 0.5% a year on average over the course of this parliament. The results of the US election sound an important alarm bell about the extent to which voters are willing to punish incumbent centre-left governments for failing to deliver noticeable increases in living standards.

 

Ministers will be hoping that the Office for Budget Responsibility’s growth predictions – it last month revised its forecasts down for the last three years of this parliament – are too pessimistic and that the government’s combination of borrowing more to invest in public infrastructure, and supply-side reform in areas like planning, will deliver a bigger hit to growth in the moderate term. But they also need to be pulling every lever available to them to drive up growth and living standards in the next few years.

 

The lever that Starmer and Reeves have said too little about is closer alignment with the EU. For any country experiencing the sluggish productivity growth and low levels of business investment the British economy has seen in recent decades, reducing trading barriers with close and friendly neighbours would be an easy win.

 

The UK has done precisely the opposite to this with its decision to leave not just the political institutions of the EU, but the single market and customs union. Brexit has significantly depressed British exports and GDP, a cost the UK could ill afford. Last Thursday, the governor of the Bank of England highlighted the long-term impact of Brexit and urged ministers to “rebuild relations” with the EU.

 

The government is quietly taking measures that could help it do just that; most notably in the product regulation and metrology bill currently making its way through parliament that will allow ministers to unilaterally align with EU product regulations relating to environmental impact. But ministers appear held back by their fear of being attacked by the right for being too close to the EU. There is little other explanation for Starmer rejecting the EU’s sensible and popular proposal for a youth mobility scheme with the UK, for example.

 

Starmer must start meaningful negotiations with the EU and an honest conversation with voters about what’s required now

 

As the Commission on UK-EU Relations argues, both the EU and the UK could benefit from closer cooperation in a range of areas, from defence, to climate, to higher education, to travel for work purposes. The UK could also benefit from joining the Pan-Euro-Mediterranean Convention, which covers EU trade with countries such as Algeria, Morocco and Lebanon, and which would potentially increase the amount of goods UK companies could export to the UK tariff-free. Bespoke agreements in these areas might only have a marginal impact on GDP; but they would be a helpful signal of UK-EU willingness to cooperate and in doing so could be a bridge to the UK ultimately rejoining the single market and customs union.

 

To enable this requires a shift in approach from both the EU and the UK. On the EU side, there are welcome signs that for at least some, improving the relationship with the UK is a growing priority, but this will need to be accompanied by a more flexible approach to alignment, on the understanding the UK is committed to moving closer still over the medium term. On the UK side, ministers still scarred by Brexit’s impact on Labour’s dismal electoral performance in 2019 need to be braver in publicly making the case that a closer relationship with the EU could help deliver the improvement in living standards voters quite rightly want to see.

 

There is no time to waste: achieving sufficient alignment to have a meaningful impact on GDP could take years. Starmer must start both negotiations with the EU and an honest conversation with voters about what’s required now. There are far bigger political risks for Labour in the years ahead: most notably that President Donald Trump instigates a global trade war that drives higher inflation and even poorer growth prospects for the UK than predicted by the OBR last month. It would be madness for the government to bet on him offering the UK favourable trade terms given our greater volume of trade with the EU and the closer political affinity to its approach to regulation.

 

Labour is entirely correct that the economic inheritance bequeathed to it by the last government is profoundly unenviable. And the global insecurity and economic headwinds that a Trump presidency could unleash might make things worse yet. These uncertain times only make it more important that the UK pulls closer – diplomatically and economically – to our partners and allies in the EU.