Small but important steps in EU-UK relations

Good afternoon and welcome back to The State of Britain newsletter.

It was all rather overshadowed by the growing conflagration in the Middle East and squabbling at home over Sir Keir Starmer’s acceptance of freebies, but this week EU-UK relations took a small but important step forward.

After his meeting with European Commission President Ursula von der Leyen yesterday, Starmer gave a press conference (flanked with Union Flags, not a joint affair) at which he said simply “Ursula and I have agreed we can do more together”.

Regular readers won’t be surprised if we don’t get too starry-eyed about that statement, but after all the madness of the past eight years, the significance of the moment should not go unremarked upon.

As one senior EU official put it, the meeting doesn’t “wave a magic wand that makes the last eight years go away” but it does signal the start of “a conversation in a dramatically changed global context, between two like-minded partners, who have much to gain and nothing to lose by seeing where this leads”.

This wide-angle view, which seeks not to put too much pressure on the nitty-gritty of the relationship, is summed up by David Henig, the longtime EU watcher, as a move aimed at “stabilising, normalising and deepening” relations between the two sides.

Tough decisions

Hard to disagree with any of that, including the welcome news that both sides agreed that, not before time, there should be regular “leader-level” EU-UK summits. The first of these is slated for early 2025.

But to be clear, all of the above is the easy part. Indeed, the biggest threat is that politics on both sides of the Channel mean that the EU-UK reset gets stuck in the comfortable waiting room of an annual leaders’ summit, rather than both sides taking tough decisions that make a difference.

The joint statement between the two sides made clear that the (wholly inadequate) Trade and Cooperation Agreement (TCA) remains the core basis for the relationship, while making no explicit mention of UK offensive priorities on a veterinary deal, professional qualifications or touring musicians.

The communique also noted that any moves to deepen co-operation in areas of the economy, energy and security would happen “in full respect of their internal procedures and institutional prerogatives”, which is Commission-speak for “no cherry-picking”.

That line also reflects the concerns of EU member states that any concessions to London must be squared with their own offensive aims on securing fishing rights in UK waters and freer access for their young people to study and work in the UK.

That, as we reported, was made very clear in the hastily arranged EU ambassadors’ meeting ahead of Starmer’s visit, which put clear markers down to the EU commission negotiating team not to get too far ahead of itself.

What this exposes is the gap between the politics on both sides and the demands of businesses impacted by a trade deal which — lest we forget — the Office for Budget Responsibility continues to say will lead to a 15 per cent long-run hit to the UK imports and exports.

Two weeks before Starmer and von der Leyen met, impacted businesses and society groups — represented via the external Domestic Advisory Group (DAG) that advises on the implementation of the TCA — set out a joint list of what they wanted to see improved.

It’s worth a read. Some of the ‘asks’ are about generally making better use of the specialised committees that govern the TCA and doing more to co-ordinate on Brexit 2.0 regulatory issues, like carbon border taxes and supply chain due diligence, that impact trade.

But other areas, like demands for a youth mobility deal and deeper co-operation on chemical data sharing (not really possible, according to EU internal documents, if the UK remains outside the single market) are already the subject of political and legal blockages.

Meanwhile, in the Midlands

This week I was in the Midlands on a reporting assignment talking to manufacturing businesses and it didn’t take long for managers to raise their concerns about the costs and frictions caused by the TCA.

One advanced manufacturer whose products feed into EU supply chains, explained how the frictions caused by rules of origin, customs and more recently the introduction of reporting requirements for the EU’s new carbon border taxes were impacting their competitiveness.

The company has kept its place in the supply chain due to the sunk costs, but is painfully aware that when it comes to future contracts, it will struggle to compete with rivals inside the EU single market.

The business, which has an EU parent company, also wants support from HQ to expand into a larger factory in the UK but isn’t getting any encouragement from across the Channel. “You can feel the tension, we’re well aware of where we now stand,” the manager said.

Given the political constraints noted above, it is not at all clear that the envisaged Brexit reset will come anywhere close to removing the marginal competitive disadvantage faced by such companies.

For the UK’s diplomats, summits to discuss security and geopolitics are more comfortable places than the hard trade-offs that were always presented by Brexit, but have been persistently ignored.

There is a danger that Labour’s Brexit policy echoes the Conservative one in its indecisiveness. The Tories talked big about divergence but then did little to create the regulatory environment to make things happen. It was largely performative.

Labour risks falling into a similar trap of triangulating to satisfy competing domestic political interests rather than confronting the logical limits of their own red lines, and what they mean for business and the investment proposition offered by the UK.

The bald fact remains that Starmer derides Boris Johnson’s Brexit deal while largely sticking to the same political red lines — no single market, no customs union, no free movement — that created it. 

The manifesto talks about “tearing down the barriers to trade” but the prospectus for doing that will remain limited unless Starmer raises his ambitions and prepares to make compromises on mobility and alignment for which he has done little to prepare domestic audiences.

That’s why in the EU ambassadors’ meeting in Brussels this week several member states questioned whether ‘reset’ was even really the right word to describe what was being attempted.

If they’re right, then Starmer might do better to be honest, accept that the UK is ‘never going back’ and make actual decisions about which direction the UK should exit the economic halfway house the Conservatives created.

Based on past experience of the UK Brexit debate, the risk is that Starmer finds it easier not to choose.

I am away next week so will leave you in the capable hands of my colleague Laura Hughes, our public policy correspondent, who specialises in healthcare policy and the NHS.

Britain in numbers

This week’s chart comes from a timely Resolution Foundation briefing paper on apprenticeship levy reform that cites ONS data showing that a “lack of qualified applicants” was a growing challenge for businesses looking to recruit in 2022-2024.

The paper by Sofia Corcoran and Louise Murphy makes the point that since the apprenticeship levy was introduced in 2017 — making all larger businesses pay a 0.5 per cent charge on salary bills over £3mn — it has had the perverse effect of reducing the number of young people getting on-the-job training. The result is that since its introduction the number of under-19s starting an apprenticeship has fallen, while the number of older starters has risen.

In numerical terms, that means the number of under-19s starting an intermediate apprenticeship fell by 30,000 between 2017 and 2023, while higher-level starts among over-25s increased by 45,000 over the same period. 

That is surely not what the apprenticeship levy was intended to achieve in terms of widening opportunity to young people who were not taking the university route into work.

Labour is promising to address this problem as part of its “youth guarantee”, offering all 18- to 21-year-olds access to training, an apprenticeship, or support to find work, but industry is still awaiting details of how a new “growth and skills levy” will work.

More flexibility is promised in how to spend the levy but the early indication on apprenticeships is that this will mean refocusing existing budgets on more entry-level apprenticeships.

The first sign of that came in Starmer’s conference speech, when he announced new Level 2 (GCSE equivalent) “foundation apprenticeships” to support the bottom end, while crimping funding for Level 7 (masters degree equivalent) at the top end.

But as Corcoran and Murphy argue, the government must guard against a more ‘flexible’ levy being used by industry to in effect subsidise substandard courses, or fund more general compliance training that businesses would have paid for anyway.

Given the persistent failure of industry to spend the levy contributions in full, a difficult balance will need to be struck between making the system more permissive without sacrificing the quality that the UK needs to genuinely narrow its skills gaps.

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