This could be an important year for Britain’s relations with Europe. The tenth anniversary of the Brexit referendum is this summer, with nobody likely to say that it has been a resounding success. Within Labour, meanwhile, a battle is joined on who among senior politicians can show themselves to be most enthusiastic about hugging Europe closer.
Wes Streeting, health secretary and possible leadership challenger, has called for a new customs union between the UK and the European Union, leaving trade economists somewhat baffled. Sir Keir Starmer, while ruling that out, along with full single market membership, aims for closer alignment with the EU “in the national interest”.
I have not spotted anybody senior calling for re-entering the EU, though that is the long-term Liberal Democrat objective. My colleague Daniel Finkelstein has written of the “overwhelming” logic for Labour, if still trailing badly in the polls, to campaign to reverse Brexit at the next election.
That is for another day. For now, it is worth noting that we have been here before. If we go back to the 1960s and early 1970s, the UK had an economic inferiority complex.
Membership of the European Coal and Steel Community in the early 1950s was a non-starter because, as famously transmitted to Labour ministers in the 1945-51 Attlee government, “the Durham miners won’t wear it”. When the European Economic Community (EEC) was established with the Treaty of Rome in 1957, the UK, by then under the Tories, chose to go its own way.
Instead of joining the original EEC six — West Germany, France, Italy, Belgium, the Netherlands and Luxembourg — the government was instrumental in establishing an alternative, EFTA (the European Free Trade Association), in 1960. It had seven members — Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the UK — and the joke was that Europe was “at sixes and sevens”.
EFTA was no substitute for the larger and more powerful bloc, as British business made clear, pushing for membership of the EEC. Indeed, six of the seven founder members of EFTA ended up in the EEC. The only exception was Switzerland, though it negotiated a series of bilateral trade agreements with the EU that come closer to single market membership than the UK’s post-Brexit trade deal.
The British government did not need telling. It was keenly aware that the UK’s growth performance, which we would give our eye teeth for now, was outshone by the big economies of Europe that had joined the EEC. In an era of high tariffs, a legacy of US-led protectionism in the 1930s, internal free trade was a key driver of growth.
Alternatives were tried, such as the Wilson government’s experiment with economic planning in the mid-1960s, under the Department of Economic Affairs. It became clear, however, that only EEC membership would do.
That was easier said than done, with membership twice vetoed by General de Gaulle, the French president. He thought, rather presciently, there were incompatibilities between the UK’s tradition as a maritime nation and EEC membership and that our heart would not be in it. There are echoes today. While some European politicians would love to see the UK coming back, tail between legs, others would fear future episodes in this country’s European psychodrama.
If growth was the aim, then EEC/EU membership, while very far from being the only cause, helped enable it. From the start of our membership at the beginning of 1973 to the referendum in June 2016, UK real GDP (gross domestic product) per capita — the best measure of growth and prosperity — rose by 102 per cent, more than doubling. This was similar to America’s rise, 105 per cent. Comparisons with Germany are difficult because of unification, but the UK looks to have at least matched German growth over that period and exceeded cumulative growth in France by a significant margin.
In relative terms, the second half of the UK’s pre-referendum membership was better than the first. The start of 1993 was when the EEC evolved into the EU and the common market into the single market. From then until mid-2016, UK per capita GDP growth was 46 per cent, better than America’s 44 per cent, unified Germany’s 37 per cent, France’s 31 per cent and just 11 per cent for Italy. Most of the UK’s gain occurred by 2008. In mid-2016, GDP per capita had only just crept back above pre-financial crisis levels.
Since then, the positions have been reversed. UK real GDP per capita rose by 4.4 per cent between 2016 and 2024, compared with 7.5 per cent for France, an astonishing 11 per cent for Italy and, for comparison, 16.5 per cent for America. Only Germany, up 3.6 per cent, provides any succour.
None of this implies that there is a simple EU solution to the UK’s growth problem. This country succeeded as an EEC/EU member because it was a lower tax, flexible economy, able to capitalise when others were held back by what came to be known as euro sclerosis. Economists would say EEC/EU membership was a necessary but not sufficient condition for growth.
Even if you could plonk the UK back into the EU on the same preferential terms that existed before Brexit, which will never be on offer, those advantages would no longer be there. We have become less flexible and more sclerotic ourselves.
Things have moved on in other ways. European supply chains have evolved in a way that often excludes UK businesses. The task of rebuilding would be difficult and take years. The EU is different, economically and politically, from the one the UK left. The euro, from which the UK wisely negotiated an opt-out, has acquired two new members, Croatia and Bulgaria, since Brexit and the eurozone is the dominant force within the EU.
That will not stop politicians from looking wistfully across the Channel and wondering what could have been, as well they might. Closer economic relations with the EU are certainly worth cultivating. But don’t expect them to be a panacea. The solution to our growth problems lies mainly at home.
David Smith is Economics Editor of The Sunday Times