We use cookies to help improve and maintain our site. More information.

16 June 2023

Relationship muddle

We Europeans are relationship people. And that's where a lot of our political confusion stems from. We commingle the notion of strategic interests and external relationships. It is one of the things the UK and the EU have in common. The entire Brexit debate, on both sides of the argument, was about who we wanted to be with, not what we wanted to do. 

The US defines its national interest independently of its relationships. This is the privilege of a superpower. But it is also hard. In the previous decade, the US shifted its focus away from the Atlantic towards the Pacific. Russia's war against Ukraine refocused the US once again on Europe. This has prompted many Europeans to draw the wrong conclusion that the US has seen the error of its ways. This seriously underestimates the Biden administration's strategic thrust.

The obvious problem with the relationship approach to diplomacy is that we are not in control of the other side. It does not answer the Donald-Trump-question: If the former president were to win next year's presidential elections, where would this leave the relationship? Is it not a tad risky to rely for your national strategy on someone not getting elected?

One of the deeper reasons the UK Remain campaign lost the referendum was the absence of a sustainable strategy for the UK inside the EU. Being the financial centre of someone else's monetary union turned out to be as silly as it sounds. What has since emerged is that the Brexiteers, too, did not have a strategy. 

I see at least two competing strategic options for the UK, each of which would have different implications on its future relationships. The first choice is a strategy of re-industrialisation. This is what the Biden administration is trying to do with its inflation reduction act, and what the Labour Party is seeking - though with a much more modest budget. I am not sure how such a strategy can work without the advantage of a large single market. But if that were the choice of a Labour government, then I am convinced that it would lead the UK back into the arms of the EU - or at least to rejoin the EU's single market at some point. Traditional industry and the single market go together.

The alternative, in my view better, strategy would be to focus on 21st century data-based technologies. The UK already has a lead over other European countries in high-tech venture capital start-ups. It is the country in Europe with the largest research into artificial intelligence, which is clearly a growing sector. The UK also is ahead in high-tech medical research. Environmental technologies offer another potentially lucrative niche. And then there are technologies that are not yet fully on our radar screens.

The presence of a large and liquid financial centre gives the UK an edge. So do the UK's excellent universities. High tech goods and services don't suffer the Brexit-specific problem of customs duties, or loss of market access. For this type of business, the freedom to regulate yourselves outweighs the benefits of a single market.

If that were the strategy, the last thing the UK would want is to forge a closer relationship with the EU and subject itself to EU regulation. It became clear during the Brexit negotiations that the EU is focused on depriving the UK from exploiting competitive advantages. In this case, the UK would be better off unaligned, and free to choose its regulatory regime. In neither case would it make sense for the UK to become the junior partner of the US, though.

If we end up in the scenario of a UK focused on high-tech and a Luddite EU focused on industry, the scope for a deepening in the relationship will be limited. The bilateral relationship has improved only because Rishi Sunak has made an effort and because the UK has not yet departed from EU rules. The infamous sunset clause to end all EU regulations at a stroke is gone. But just wait until the UK starts departing from a few strategically important EU rules - on data security, for example. If the UK pursues a high-tech strategy, I struggle to see how this could be made compatible with the EU's regulatory regime.

The Sunak administration is slowly moving in this direction. The prime minister embodies that strategy perhaps better than any other senior UK politician. Labour, too, will need an economic strategy, and build its external relationships around that strategy. What is absolutely not going to happen is that the EU would give Keir Starmer a better deal. 

The EU, too, is muddled about its interests and its relationships. European transatlanticists also have no answer to the Donald-Trump-question. The EU's industry-based economic model is no longer providing economic growth rates needed to finance the welfare states and generate public-sector investment. The EU has slept through the digital revolution. It is delusional to think that it could be the world's regulator. 

The EU's overriding priority should be to resist the temptation to turn the clock back. I would start by asking why has the EU fallen behind in the high-tech race. This is clearly not due to a lack of research. I see the big problem in insufficient private-sector investment. This in turn is caused by a lack of deep capital markets. My advice for the EU is to prioritise the seemingly abandoned capital markets union, and to become less hyperactive. Without the capital markets union, the EU's green agenda stands no chance of success. 

So, focus on what needs to come first, which is not the same as what is most important. And most importantly, focus not on who you want to be with, but on what you want.

If you would like us to notify you when a new column appears, please fill out this form.