UK-EU Reset Deal: A Step Towards Economic Stability or Just Another Promise?
The recent EU-UK reset deal is expected to play a pivotal role in shaping the economic trajectory of the UK, although it is clear that immediate growth outcomes are not guaranteed, especially for Labour, which is under pressure to deliver on its promises to voters. Nonetheless, government ministers are optimistic that this deal will pave the way for a more promising economic future, with three critical components that have received significant approval from the business sector.
One of the standout features of the agreement is the establishment of a common sanitary and phytosanitary (SPS) area. This initiative is intended to alleviate the burdensome inspections on food and agricultural products in exchange for the UK aligning its standards with those of the EU. When Boris Johnson unveiled the trade and cooperation agreement with the EU on Christmas Eve 2020, he mistakenly asserted there would be no non-tariff barriers to trade. However, these barriers, particularly the veterinary checks, have had severely adverse effects on businesses, with many UK exporters echoing the need for an SPS agreement to cut costs, reduce waste, and ultimately boost sales.
Drawing attention to the impact of Brexit, the British Chambers of Commerce has expressed that the potential SPS agreement could significantly enhance trade, particularly as exports and imports have fallen sharply since Brexit—21% and 7%, respectively. There is hope among advocates for a closer economic relationship that this agreement might establish a template for future negotiations across other sectors.
The second noteworthy element of the deal is the commitment to closer cooperation on energy policy, particularly with the alignment of emissions trading schemes between the EU and the UK. The UK government is promoting this agreement as a means to secure exemptions from carbon border adjustment mechanisms, which could save the UK’s steel industry around £25 million annually. This would counteract the penalties imposed by the EU on products that do not meet specific carbon emissions standards, potentially giving UK manufacturers a competitive edge.
Further bolstering the economic landscape, the UK's interest in negotiating defense industry cooperation is also included in the deal. This collaboration may open bidding opportunities for UK defense companies, such as BAE Systems, within projects financed by the EU's planned Security Action For Europe (SAFE) fund aimed at enhancing defense capabilities across member states.
It is important to observe, however, that the contentious issue of fishing rights, which prolonged the finalization of this agreement, speaks more to political symbolism than to hard economic statistics. Research from the Resolution Foundation illustrates that fisheries have suffered greatly under Johnson's Brexit deal, with output potentially decreasing by 30%. Labour posits that eliminating troublesome food checks via the SPS deal will yield more benefits for the fishing sector than long-term access to UK waters for EU vessels.
While the UK government can underscore tangible economic wins from this deal, economists maintain that its influence on GDP growth is likely to be minimal, given the administration’s steadfast refusal to rejoin the single market or customs union. As a result, the reset is projected to make food cheaper, reduce regulatory burdens, open access to the EU market, and add around £9 billion to the UK economy by 2040, a modest increment translating to just about 0.3% of GDP over the next 15 years.
John Springford from the Centre for European Reform has noted that this figure may be overly optimistic, considering his analysis indicating that Brexit has rendered the UK economy approximately 5% smaller than it could have been. His predictions suggest that while a youth mobility scheme could offer a more considerable boost to the economy, the SPS agreement's expected contribution would be quite limited, thus making the 0.3% growth projection seem ambitious.
The Labour Party, however, holds out hope that a reinvigorated recognition from the business community of the UK as an attractive investment landscape will translate into broader economic recovery. Upon assuming power, Rachel Reeves and Keir Starmer believed that a more stable governance approach than the Conservatives would attract investors, a task complicated by subsequent tax rises and stagnant GDP. Yet, they are now banking on a series of agreements—including the India-UK trade deal, tariffs with the US, and the EU reset—to bolster their credibility as sound economic managers, potentially sparking a resurgence of confidence in these uncertain times.
Related Sources: