John Springford argues that, while backtracking on Brexit red lines would not be politically easy, the domestic reform required to create similar levels of growth would have to be extremely radical. He suggests that a new Brexit deal founded on the free movement of goods, energy and people could be the UK’s best option.
The Stanford economist Nicholas Bloom and his colleagues have reignited debate about how to ‘make Brexit work’. They provide more evidence that the costs of Brexit are larger than the OBR’s projected 4% hit. Reportedly, some Labour cabinet ministers are now arguing that the government needs to go further than Starmer’s cautious ‘reset’.
The Bloom study estimates that Brexit has reduced the size of the UK economy by 6-8% compared to its path if Remain had won. The new and important part of the research corroborates analyses conducted by a group of German and Czech economists, me, and Thiemo Fetzer and Sizhuo Wang, in which the path of Britain’s GDP is compared to countries whose economic performance was most similar before 2016. By peering into firms based in Britain, and comparing output, productivity and investment by firms that trade more with the EU than those who trade less, Bloom and colleagues also find large effects – albeit a little smaller than the cross-country studies.
The problem, of course, is that recovering a decent chunk of those losses would require the UK to jettison its red lines on customs unions, the single market and the free movement of people. The more red lines that are dropped, the larger the potential gains. That’s why Labour ministers are starting to make noises about negotiating a customs union: the hope is for an improved deal without revisiting the vexed question of freedom of movement. A customs union would help, perhaps reducing the costs of Brexit by up to 1 percentage point of GDP, according to the British government’s 2018 study. But that study also estimated that the largest Brexit costs come from the decision to leave the single market.
In our recent essay on Britain’s economic problems, Andrew Sissons and I explain why major surgery is required. It would be politically helpful if domestic reforms could do most of the heavy lifting, allowing governments to leave the Brexit deal in the ‘too difficult’ box, but we are doubtful. The UK is a medium-sized, open economy. Trade, migration and openness to international investment are central to its economic performance, unlike the US, with its huge internal market, natural resources and land that can be used for development.
As a result, a growth policy founded solely on domestic reform has to be extremely radical to deliver productivity gains. That would mean a big shift in resources from consumption to investment; more intrusive competition and labour market policy to press businesses and citizens to work harder and invest more; a planning regime that over-rides most objections, and so forth. Backtracking on Brexit red lines is not easy politically, but such a domestic programme isn’t either.
Since the Brexit referendum in 2016, the UK has become no more open to trade – with goods trade declining in real terms since the post-pandemic spike in 2022, offset by growth in services. Openness to goods trade is now a tenth lower than it was in 2016. By contrast, openness to goods trade in peer economies in Europe is around the same level.
Manufacturing matters, especially to the UK’s smaller cities and towns, where it is an important source of exports and wages. Many of these places are losing some of their few productive, international industries. That means fewer well-paid jobs and too little income coming in. This constrains spending in the local economy, hurting smaller businesses.
As it is big, rich and right next door, any UK goods trade policy must have the EU at its centre. The ‘reset’ deal is the limit that can be achieved without accepting free movement and sizeable financial contributions to EU funds for poorer European regions. The EU has always made these responsibilities the conditions for single market rights.
They have bent that principle, agreeing to negotiate single market participation in agrifood and energy in exchange for the UK formally aligning with EU rules in those areas, and continuing to update its laws as the EU rulebook changes. But applying the same method to the rest of the industrial sector will only be possible if Britain accepts the free movement of people, much like Switzerland, which has a similar deal.
The most committed people on either side of the Brexit divide would hate a new deal founded on the free movement of goods, energy and people. But there is much to recommend it. The UK’s strengths in services and tech mean that becoming a rule-taker in those areas would be challenging. In goods, the UK is not going to regulate differently to the EU, not least because it is the country’s largest goods export market by far, but also because British regulatory preferences – on the environment, consumer safety and production standards – are very similar to the rest of Europe’s.
Free movement would be a benefit to Britons, both because it would lead to higher output and tax revenues at home and offer opportunities abroad. These benefits would be smaller than in the past, because flows have fallen back as wages in Central and Eastern Europe have converged with Western Europe, and unemployment has fallen in Southern Europe. And Ukraine’s accession is some way off, meaning that another 2004-style rise in free movement will not happen for many years – and in any case transitional controls on free movement are likely if it does join.
Since Brexit, the EU has found it easier to integrate in important ways, such as the post-pandemic recovery fund, without the British saying no, and there is limited appetite for the UK to rejoin. But UK participation in its goods market would help EU manufacturers. The EU might only agree to such a deal if the next government would not repudiate it – a difficult ask, given the continued hostility to European reintegration from Reform and the Conservatives.
The question is whether the electorate’s dissatisfaction with the current deal can be channelled into one that works, and whether Labour see political opportunity in reopening the Brexit question. The choice for Britain is the same as it ever was: a trade policy that substantially raises output and productivity; or no free movement.
By John Springford, Associate Fellow, Centre for European Reform