Research claims EU deal will fuel growth — and Labour is listening

However, the fact this report is being shared with key cabinet ministers suggests Sir Keir Starmer is examining the benefits of aligning on standards.

The research undertaken by Frontier Economics, a consultancy chaired by Dame Sharon White, the former chair of John Lewis, comes after the Bank of England halved its growth forecast last week. It now expects the economy to grow by just 0.75 per cent this year, compared with a previous forecast of 1.5 per cent made in November, in a blow for Rachel Reeves as she tries to revive confidence.

Dame Sharon White chairs Frontier Economics

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The report, which is expected to influence the government’s thinking as it prepares for new talks with the bloc, models the effect on the UK economy of greater EU-UK regulatory alignment, along with the impact of external factors — specifically, potential import tariffs imposed by America.

It claims the UK can secure significant growth of between 1.7 per cent to 2.2 per cent through a policy of deep alignment in goods and services with the EU, while alignment on goods alone can also drive growth by between 1 per cent and 1.5 per cent. This will be controversial as it means that Britain would have to accept rules set in Brussels.

The study defines strong regulatory alignment in goods as “mutual recognition of the UK and the EU of each other’s regulations”, while strong regulatory alignment on services would involve “recognising the equivalence of each other’s regulations across the services sector to minimise regulator divergence in services”.

According to the report, alignment on goods offers disproportionate economic benefits for areas outside London with the largest growth in this scenario projected in Leave-supporting areas, including the West Midlands, East Midlands, North East and Yorkshire. This is because they are regions that are “intensive in manufacturing” and will therefore benefit from scenarios that reduce the costs of doing business and trade.

In monetary terms, alignment delivers similar growth in exports for the EU ($29.7 billion) as for the UK ($32.9 billion). In the scenario of US tariffs being applied, deep alignment between the EU and UK would shield the EU by offsetting some of the lost US trade with friction-free UK trade.

However, Brexiteers would argue that alignment would prevent the UK from making its own rules on goods and services to attract trade, undermining its competitiveness and making us “rule takers” once again. The UK government has recently expressed a desire to establish its own regulatory framework for artificial intelligence, suggesting it may diverge from the strategies adopted by the EU and its other Western counterparts.

Closer alignment with Brussels will upset Brexiteers such as Boris Johnson

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Concerns are also likely to be raised about the state of the eurozone economy, which ground to a halt in the fourth quarter of 2024 as Germany and France, the bloc’s two largest economies, posted worse than expected contractions. Germany’s economy shrank by 0.2 per cent, worse than the anticipated 0.1 per cent decline, while France’s GDP fell by 0.1 per cent.

A Whitehall source said the report’s findings broadly echoed government projections for growth based on closer alignment with the EU. “We know that there is significant growth to be had by closer economic ties to the EU,” the source said. “We are very keen to increase trade but what we end up with will depend on what we have to give to the EU. It will have to benefit both sides. We are not going to go cap in hand.”

In the coming negotiation, the Europeans are expected to drive a hard bargain and will want increased access to Britain’s fish stocks for EU trawlers, and a youth mobility scheme to reopen freedom of movement for the under-thirties — which the government has already publicly ruled out.

To coincide with the release of the report, called Modelling the Effects of Closer UK-EU Cooperation and of US Tariffs, analysis of a poll of nearly 15,000 people found that support for alignment with EU standards and regulations was the most popular option in all but two constituencies in Britain (Castle Point and Clacton, both in Essex).

According to the survey by YouGov on behalf of Best for Britain, two in five (41 per cent) said the UK should be more closely aligned with the EU; one in five said they either favoured the status quo (19 per cent), thought the UK should be less closely aligned with the EU (22 per cent) or did not know (18 per cent).

Nigel Farage campaigns in Clacton on the day of the general election

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The poll also found that in every seat in Great Britain bar Clacton, the most popular option was for the UK to improve trade access with the EU even if it required the UK to follow some specific rules, standards and regulations. In Farage’s seat, Clacton, the results were extremely close, with 42 per cent opposing and 39 per cent supporting.

Of those who voted Labour at the last election, three in five (64 per cent) said the UK should be aligned more closely with EU standards and regulations and only seven per cent did not. Two thirds of those voters (66 per cent) would go as far as supporting the UK improving trade access with the EU even if it required the UK to follow ‘all’ EU rules and regulations. Only one in five (20 per cent) were opposed.

Naomi Smith, chief executive of Best for Britain, which is funded by donations and crowdfunding exercises, said, “No other policy proposal or infrastructure investment has the potential to move the economic dial on this scale in this timeframe. It not only falls within the prime minister’s stated red lines for his Brexit reset, but appeals to the voters he won from the Conservatives at the last election and whose support he needs to keep.

“Deeper regulatory alignment with our largest market offers growth to every corner of the UK and is the change Britain has been waiting for. Voters want it, businesses need it, the time is right for the government to commit to it.”

However, Anand Menon, professor of European politics and foreign affairs at King’s College London, said it was unlikely Labour would pursue the kind of deep alignment outlined in the report. He also doubted Brussels would offer it. He said: “The most interest part of the report is the suggestion that the EU would benefit from this kind of deal in a world where there are tariffs.”

However, he said it was “an absolute given” that alignment on goods and services would be “good for our economy”.

The report comes days after Starmer became the first British prime minister since Brexit to join a gathering of European Union leaders. They met for what was described as an “informal retreat” at the Palais d’Egmont in Brussels, a 16th-century palace in heart of the Belgian capital.

Sir Keir Starmer met EU leaders in Brussels on Monday

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Nick Thomas-Symonds, the European affairs minister, told the EU/UK Forum in Brussels on Tuesday the UK must be “ruthlessly pragmatic” with Brexit reset talks and strike an ambitious deal in just three months.

One of the potential economic growth benefits comes from securing new deals on food, animal products and agricultural goods, which would reduce the huge burden of paperwork for British exporters to the EU and make it cheaper to import food.

It would also remove most of the bureaucracy that remains for goods crossing the Irish Sea from Great Britain to Northern Ireland. The EU already has such an arrangement with New Zealand and Switzerland, based on mutual recognition of standards. Only 1 per cent of imports from New Zealand are checked under their treaty.

There are also economic gains to be made from a deal on energy, which could involve linking the UK and EU emissions trading schemes, further investment in energy technology and perhaps some joint procurement projects.

The British team are also eager to get an agreement allowing touring artists and performers to visit the EU more easily, something which would require a “carve out” of the Schengen agreement. They would like to secure mutual recognition of professional qualifications to allow lawyers and financial services specialists to work in the EU.

Liam Byrne, chair of the business and trade committee, said: “Business and unions alike are really clear that faster growth for Britain demands closer ties with Europe — and this report shows exactly how we can cut the red tape holding back progress.

“It’s reassuring that ministers have declared they’ll be ruthlessly pragmatic. In an uncertain world that’s the right mindset. And this report is a game plan for turning that instinct into action.”