UK rapprochement with the EU looks as far away as ever

Labour Party campaign theme was appropriately succinct: 'Change.'

The Labour Party’s sweeping victory in the UK elections marks, you might think, a dramatic shift in the country’s prospects. If only.

Prime Minister Keir Starmer and his team promised competent, pragmatic centrism — an achievement in itself, given the party’s posture before Starmer took over. And whatever happens, the departing Conservative clown show won’t be missed. Labour’s campaign theme was appropriately succinct: “Change.” (In other words, “Anything But This.”) Unfortunately, delivering the right kind of change will be beyond difficult.

Starmer and his chancellor of the exchequer, Rachel Reeves, face two huge obstacles. One is the UK’s dire fiscal condition. The other is the centrality of restoring economic relations with the European Union. The new government understands both problems, and much of what Starmer and Reeves have said about them is sensible. But feasible solutions are nowhere in sight.

Thanks to the pandemic and the Tories’ persistently bad fiscal management, the UK finds itself with historically high taxes, seriously underfunded public services and dangerously mounting public debt. There’s no painless cure. Fiscal control demands some mix of even higher taxes and cuts in public spending.

To their credit, Starmer and Reeves haven’t (yet) resorted to magical thinking. In particular, they haven’t said fiscal control isn’t needed. They say they’ll get public debt under control, eventually. They’ve promised not to raise rates of income tax or value added tax, but left themselves some elasticity. (“Working people” won’t see higher taxes, they say; we’ll see how narrowly they define that category.) Their spending promises have been similarly restrained, except for commitments to limit medical waiting times and make other repairs to the beleaguered National Health Service.

In short, the new government acknowledges the fiscal problem but has no firm answers.

Faster economic growth, as Starmer and Reeves insist, would mend the public finances. But it can’t be summoned on command, especially if you’re having to hike at least some taxes and/or squeeze public spending. One of Labour’s main ideas for boosting gross domestic product is, for want of a better term, deregulation: Cut planning delays in home building and industrial construction, for instance, and speed up approvals for new technologies. Desirable as such changes might be, they’re unlikely to deliver a growth dividend big enough or quickly enough to move the budget arithmetic. And if such reforms were easy to do, they would have already happened.

Slow growth is indeed the crux of the matter. Its basic cause is a shortfall of private and public capital, compounded by the direct and indirect costs of Brexit. Starmer and his team are right to emphasize the role that greater political stability and closer cooperation with the EU would play in promoting investment. But political stability can’t be taken for granted, and a material improvement in UK-EU relations isn’t on the cards.

Labour’s massive majority in parliament is misleading: It was secured with just 34 percent of the vote (a tribute to first-past-the-post voting in a fracturing electoral system). Disenchantment will set in as the new government wrestles with the Tories’ toxic legacy. If it moves to restore fiscal control as firmly as its non-promises allow, many of its MPs, party members and supporters in the country will accuse it (unfairly) of breaking its word; if it doesn’t, it will be threatened by worsening financial stress. The stability that investors demand may prove fleeting.

Some kind of breakthrough with the EU would make a big difference. According to plausible estimates, Brexit has cut the UK’s long-run productivity by 4 percent. Starmer and his team appear intent on repairing as much of this damage as they can — but the scope is limited.  Labour said next to nothing about Brexit during the campaign, and for good reason: simply reversing it can’t be done. Most voters might wish Brexit had never happened, but this doesn’t mean they’re eager for a tortuously renegotiated entry on worse terms than the deal they rejected.

Marginal improvements to the current arrangements are worth pursuing. Reeves talks about limited regulatory realignment including “mutual recognition,” for instance. That would be better than nothing. But the EU dislikes such “cherry picking” even when it stands to collect a share of the gains. As throughout this misadventure, it judges its larger interest to lie in refusing to help the UK out. As viewed from Brussels, it’s good that Brexit hurts. Ideally, it ought to hurt some more.

Might this change, given that European politics is itself in flux right now? Populist parties with nationalist and euroskeptic tendencies have made inroads in France, Germany, Italy and other EU states. It’s interesting to speculate on what might have happened in the UK-EU talks that preceded Brexit if those preferences had gained ground earlier. Perhaps an agreement allowing a measure of national control over internal borders could have been reached. In that case, Brexit might have been stopped in its tracks.

As things stand, however, Europe’s populist surge doesn’t portend an orderly process of cooperative EU reform – one that the UK might find helpful – but rather paralysis and instability, nation by nation. With attention thus diverted, the European Commission will find it easy to maintain its hard line on the UK – and, with euroskeptics making progress in national capitals, it will have all the more reason to do so. Bottom line: For Europe’s sake, now more than ever, Brexit has to be seen to be a mistake.

It's a pleasure to see Britain’s dysfunctional Tories hammered. No electoral drubbing was ever more deserved. Unrepentant neoliberals like myself take further pleasure in seeing a Labour government with such Blairite centrist instincts overwhelm the House of Commons. Congratulations – and condolences. Enjoy it while it lasts.

Credit: Bloomberg