Chancellor Rachel Reeves, who last month declared that Brexit inflicted "deep damage" on the UK economy, participated in a significant discussion in Washington ahead of the International Monetary Fund spring meetings. This engagement underscores Labour's gradual but marked shift towards prioritising closer relations with the European Union, a move driven by both domestic political realities and economic imperatives.
Symbolic Steps and Economic Realities
Reeves joined EU finance ministers for a dinner in Washington last week, marking the first such attendance by a British chancellor since the UK's departure from the bloc. This symbolic gesture aligns with Labour's evolving stance, which increasingly recognises the necessity of mending ties with the EU. The backdrop of global instability, including conflicts in the Middle East, amplifies the urgency, but domestic factors are equally compelling.
Political analysts like Rob Ford and Ben Ansell have long noted that Labour is losing more voters to pro-EU parties such as the Greens and Liberal Democrats than to Nigel Farage's Reform UK. This trend is expected to become more pronounced following May's local elections. Since Morgan McSweeney's departure from government, there appears to be a greater willingness to win back these left-leaning voters rather than focusing solely on Reform-curious "hero voters."
The Economic Impact of Brexit
In her Mais lecture, Reeves cited analysis from the National Bureau of Economic Research, led by British economist Nick Bloom, suggesting that Brexit may have reduced the UK's economic size by up to 8%. This estimate surpasses many previous assessments and highlights the severe consequences of leaving the EU. Reeves emphasised that no individual trade deal with non-EU countries can compensate for the loss of access to the bloc, which accounts for nearly half of the UK's trade and shares intertwined supply chains.
The potential benefits from post-2016 trade deals are dwarfed by Brexit's economic damage. Labour's current "reset" with the EU, as outlined in its manifesto, is projected to add less than 0.5% to GDP, according to John Springford of the Centre for European Reform. While negotiations on agrifood, the EU electricity market, and emissions trading are worthwhile, Reeves is exploring further options, such as "dynamic alignment" with EU rules in exchange for enhanced single market access.
Political Constraints and Historical Ironies
Labour plans to grant itself legislative tools to align with EU regulations without requiring parliamentary votes on every change. However, this approach faces significant limitations. Expanding alignment too broadly could lead Brussels to accuse the UK of "cherry-picking" single market benefits, potentially necessitating acceptance of freedom of movement—a red line for the government. The recent EU-Switzerland renegotiation, which includes freedom of movement and budget contributions, serves as a cautionary example.
Anand Menon of UK in a Changing Europe warns that Reeves and Prime Minister Keir Starmer may be pursuing an unattainable goal: "At a certain point, they're not going to get the benefits without the obligations." This situation carries a deep irony, reminiscent of the chaotic Brexit debates of 2017-2019. Labour's current trajectory resembles Theresa May's failed Chequers deal, which also involved alignment with the EU. Jill Rutter of the Institute for Government notes, "Labour would bite your arm off for that now."
Starmer's Role and Future Challenges
Starmer, as shadow Brexit secretary, played a key role in undermining May's withdrawal agreement by demanding a referendum, ultimately leading to Boris Johnson's harder Brexit. Labour's subsequent push for a second referendum contributed to its electoral defeat. Now, as the party potentially faces a leadership contest, EU relations will be a central issue. Some backbenchers advocate a "Swiss-style" approach, which would require embracing freedom of movement—a difficult proposition given Farage's populist influence and Starmer's past rhetoric on migration.
Starmer once argued for the benefits of migration and free movement, stating, "We welcome migrants; we don't scapegoat them." However, advocating for such policies today presents a formidable challenge. As Labour navigates this complex landscape, its cautious, "crabwise" movement towards the EU reflects both the economic necessity of addressing Brexit's damage and the political tightrope it must walk to regain voter trust and foster growth.
