EU to the rescue: EU-UK reset takes shape through targeted agreements

Prime Minister Starmer finds himself in political purgatory following Labour’s poor result on 7 May. The Makerfield by‑election on 18 June – triggered by the orchestrated resignation of Josh Simons to pave the way for Andy Burnham – could prove decisive. If the “King of the North” enters the House of Commons and mounts a leadership challenge, Starmer’s position may not survive the summer.

In a speech intended to reboot his premiership, Starmer said he wants to “put Britain at the heart of Europe.” He did not spell out what this would mean in practice or how much progress has already been made. Nonetheless, the speech pointed to two notable shifts in Labour policy. First, he stated openly that Brexit has failed to deliver on growth, migration, and security – a view long treated as taboo. Second, he endorsed a youth mobility scheme with the EU, presenting it as a way to restore opportunities for young people.

This, in turn, creates scope for a broader agreement, as we will outline in this note.

This new commitment builds on Labour’s earlier pledge to “reset” relations with Europe as part of its wider economic strategy. The May 2025 EU–UK Summit set up new frameworks for cooperation on matters such as trade, energy, climate, and defense. Since then, progress has been real but much slower and narrower than the initial political messaging suggested.

At the same time, US policy has continued to shift. President Trump’s confrontational approach has ended the post‑Brexit idea that the UK can sit comfortably between Washington and Brussels. The White House now frames transatlantic ties in ideological terms and openly supports non‑mainstream movements across Europe, including Reform UK. This has exposed the limits of the “special relationship”: As reliance on the US carries increasing political and economic risks, the UK is being nudged closer to Europe.

There are, however, clear limits to how far the reset can go. Labour’s manifesto ruled out rejoining the single market, the customs union, or free movement. Even so, the government has signalled openness to dynamic alignment with EU rules in several areas, which would move the UK closer to becoming a rule taker. UK officials have also floated more ambitious ideas over time, such as a single market for goods. By contrast, Brussels remains cautious. The EU is sticking to the principles that being inside the EU must remain more advantageous than being outside and that the four freedoms – goods, services, capital, and labor – are indivisible. It also has limited political and administrative bandwidth for complex negotiations with the UK.

Ahead of the next EU–UK summit, expected in July, we anticipate progress in four areas: youth mobility, agri‑food, energy, and defense. We discuss these below. As negotiations will proceed in parallel, trade‑offs across these areas will shape the overall outcome. The gains are likely to be incremental rather than transformative, useful as a signal of competence, but not a game‑changer. They are also unlikely to shift the balance in Starmer’s favor on their own, should a leadership challenge take hold.

Youth mobility has been one of the most politically sensitive elements of the EU–UK reset. At its core, it is a time‑limited, reciprocal scheme that allows young people, typically aged 18 to 30, to live, work, study, and travel across the UK and EU without granting full migration rights. The aim is to restore some of the opportunities lost after Brexit and to ease labor shortages in sectors such as hospitality, retail, and other entry‑level services that rely on younger, mobile workers. This was, however, a much more acute problem three to four years ago than it is now.

The EU–UK Trade and Cooperation Agreement provides only limited mobility rights, mainly for specific categories such as short‑term business visitors, intra‑corporate transferees, and certain service providers. It does not create a general right to live and work across borders, leaving individuals subject to domestic immigration rules. For businesses, this has meant higher administrative costs, tighter hiring pools of junior talent, reduced flexibility, and less ability to respond to seasonal demand. A youth mobility deal would therefore go beyond the post‑Brexit settlement.

The initiative originated on the EU side. In April 2024, the European Commission proposed opening negotiations on a youth mobility agreement that would allow 18- to 30‑year‑olds to stay for up to four years, with broad access to work and study and no quotas or purpose‑bound restrictions. The Conservative government rejected the proposal at the time, as it could be seen as a return to free movement. Labour initially shared those concerns, but shifted its position after the 2024 general election. At the May 2025 summit, both sides agreed in principle to work toward a reciprocal “youth experience scheme.” Starmer has now put youth mobility at the centre of his reset agenda.

While youth mobility looks like a done deal, the UK still appears to favor a more restrictive model than the EU. Such a model would likely entail shorter stays, numerical caps to keep a lid on inward migration flows, and no path to settlement – similar to existing UK schemes with other countries. Such limits would reduce the scale and predictability of labor inflows, but again, it is less of a pressing concern than it was three to four years ago.

Finally, on the EU side, there are legal constraints. While the Commission can negotiate an overall framework, aspects of labor market access and residence rights remain closely tied to member state competences. This complicates efforts to design a fully harmonized scheme and could lead to uneven implementation across countries. This means that even though there is political momentum behind youth mobility, reaching agreement will not be straightforward.

Negotiations on a UK‑EU sanitary and phytosanitary (SPS) agreement gathered momentum after the EU adopted its mandate in November 2025. This cleared the way for formal talks and set a political target to reach an agreement this summer.

For businesses, the gains are clear. Less paperwork, fewer delays, and lower spoilage should make trade more predictable and reduce costs across key supply chains. Given clear evidence that post‑Brexit SPS rules have raised barriers for exporters and pushed up prices for products more exposed to imports from the EU, an agreement would help to contain excesses in food inflation. This matters for voters and the wider economy, as food prices play a disproportionate role in shaping inflation expectations. Furthermore, the current situation in the Middle East and the risk of rising food inflation has given fresh impetus to the idea that any measures that could contain prices for consumers is worth considering.

A clear trade‑off follows from dynamic alignment. It would significantly limit the UK’s scope to diverge from EU rules on food and agricultural regulation (if it wanted to). Under the EU mandate, any carve‑outs are expected to be narrow and conditional, and cannot lower standards or put EU producers at a disadvantage.

In practice, this would constrain the scope for a US-UK agriculture chapter in any future US-UK deal.US negotiating priorities typically include greater access for its meat, dairy and crops, as well as regulatory approaches that differ from EU rules, including on food safety treatments and crop protection. Meeting these demands would require the UK to move away from the EU rulebook, but that is impossible under a Common SPS Area.

This means a US deal that builds on the hastily concluded UK–US Economic Prosperity Deal would remain possible in principle, but the room to offer concessions on agricultural market access and standards would be much tighter. Note too that UK voters are also broadly resistant to deals that dilute domestic food standards, which already limited the scope for compromise. This caps the depth of any future UK-US agreement.

Under the Trade and Cooperation Agreement (TCA), the UK and EU committed to build a new energy trading relationship. The May 2025 reset narrowed this down to two priorities for 2026: Linking emissions trading systems (ETS) and restoring more efficient electricity market integration.

In November 2025, EU member states approved a mandate to negotiate ETS linkage. In practice, this would make UK and EU carbon allowances interchangeable and allow firms to trade across both systems. A successful agreement would support mutual exemptions from the EU’s Carbon Border Adjustment Mechanism (CBAM) and reduce frictions in goods and electricity trade.

That alignment is not yet in place. The EU’s CBAM entered its full regime on 1 January 2026, and UK exports remain in scope without exemption. Importers must account for any gap between UK and EU carbon prices. UK government estimates put the cost at around GBP 800m per year. This weighs on margins and (European) demand for UK exports.

Linking the systems would remove this friction, but comes with a trade-off. The EU’s mandate implies dynamic alignment with EU carbon rules, reducing the UK’s scope to diverge if it wants to. That limits its ability to offer concessions or make the case for a clearly differentiated regime in any UK-US negotiations. The UK may gain a role in technical discussions, but would not have a say in formal decision‑making. Carbon prices would also converge. Given the smaller and less liquid UK market, convergence is more likely to come through higher UK prices than lower EU prices. This shifts the adjustment from a border cost to a domestic one, raising input costs in the near term even as export conditions improve. At the same time, a linked system would deepen the market, improve price discovery, and reduce volatility, supporting better risk management.

Electricity market reform is closely linked to this. Electricity flows mainly from the European continent and Norway into Great Britain, and then to Ireland. Both sides are working toward an Electricity Agreement that would reconnect the UK to EU trading platforms and restore market coupling. Since Brexit, electricity trade has relied on less efficient arrangements, where interconnector capacity and electricity are traded separately. This reduces the efficiency of cross‑border flows and raises costs. Energy UK estimates that inefficient trading has added between GBP 120m and GBP 370m per year to UK wholesale electricity costs. These higher costs feed through directly to consumer bills.

Reintegration would restore market coupling and allow power to flow to where it is needed most. This would lower wholesale prices, reduce volatility, and improve system efficiency as more assets are added to the system, providing more scope for offsetting imbalances. It would also increase competition from imported electricity, putting some downward pressure on UK prices.

The impact matters because industrial electricity prices in the UK are extremely sensitive to expensive gas. Gas sets the electricity price almost all the time in the UK, as it is used to balance electricity supply and demand in each hour of the day. This keeps UK power prices closely tied to expensive gas, even when renewable generation is rising sharply. Reintegration would certainly not remove this link, but it would weaken its impact by increasing the supply of cheaper power from abroad when needed. The government is also taking other measures to weaken this link over time.

There are also longer-term gains. Current inefficiencies reduce the value of cross-border infrastructure and limit incentives to invest. Restoring integration would raise returns on these assets and support further investment in renewables and grid capacity. For households, this would eventually mean more stable and gradually lower bills. For businesses, especially in energy-intensive sectors, it would reduce costs and narrow the price gap with European competitors, creating a more level playing field over time.

The May 2025 EU‑UK Security and Defence Partnership (SDP) expanded cooperation in defense production, procurement, and industrial investment, but did not provide the UK with meaningful access to EU funding instruments or core joint procurement programmes. In practice, this created a gap between politics and economics: Cooperation resumed, but the UK remained outside the EU’s emerging military-industrial base.

That gap became clear in late 2025, when talks on possible UK participation in the EU’s proposed EUR 150bn Security Action for Europe (SAFE) program failed to reach agreement. SAFE is designed to pool demand, scale up joint procurement, and provide more predictable order flows for European firms. It also includes provisions that effectively favor EU‑based production, to ensure that the value added accrues to European companies. While SAFE does allow for third‑country participation, negotiations with the UK highlighted the limits of this model, with both sides unable to agree on the financial terms of participation.

This SAFE episode reflects a broader post‑Brexit dynamic. There is a persistent distributional tension over where defense spending, production capacity, and jobs will be located, with the EU prioritizing the development of its internal market and industrial base. This is guided by the idea that membership must remain more attractive than any external arrangement, both to maintain political cohesion and to protect the integrity of the single market.

More recently, political signals have been more constructive. The European Parliament has called for closer engagement, and at the May 2026 European Political Community Summit in Yerevan, Prime Minister Starmer signaled openness to participate in European support initiatives for Ukraine. This includes a proposed EUR 90bn loan program, with two thirds earmarked for defense spending. The EU has indicated that the UK may then participate in related procurement.

However, the summit also showed that the structural divide persists. Discussions focused largely on scaling production, particularly in areas such as air defense, missiles, and joint procurement. This reflects Europe’s shift toward more sustained industrial mobilization. The UK remains a large military player, but continues to sit largely outside core EU financing and procurement frameworks. This has resulted in a dual system. The EU is increasingly consolidating demand internally through instruments such as SAFE, while cooperation with the UK relies on more flexible, intergovernmental arrangements.

The macroeconomic implications are significant. We detailed in a previous note that well-targeted and sustained defense spending could act as a long-term growth lever, but EU‑led procurement is increasingly anchoring demand, supply chains, and industrial capacity within the bloc. At the same time, the UK faces more limited access to scale and less predictable order flows, while the government itself faces hard financial constraints to ramp up its own defense spending.

Looking ahead, gradual progress without full integration appears the most likely outcome. Coordination on joint procurement is likely to deepen, particularly around Ukraine‑related demand and, over time, more structural programmes. However, this activity will remain centered on EU frameworks. The UK may secure selective, project‑based access, often on a pay‑to‑play basis rather than full participation, while supply chains remain partially connected but increasingly shaped by EU rules that prioritize production within the bloc.

Estimates of Brexit’s economic impact vary and continue to evolve. One recent and widely cited study suggests UK GDP is now 6% to 8% lower than it would have been inside the EU. This is striking, but we think it fails a basic plausibility test. The “counterfactual UK” behind this result relies on a basket of comparator economies that do not closely resemble the UK. In particular, the model assigns a large weight (around 60%) to the United States – an economy that has diverged sharply from its peers since 2020, driven by exceptional fiscal stimulus, energy independence during an energy crisis, and a massive surge in AI‑related investment.

If we run a similar counterfactual exercise ourselves, we obtain a comparable headline loss (around 7.8%), but with the same underlying caveats.

Such magnitudes are difficult to square with the relatively modest shifts in aggregate UK trade flows, and with its broadly similar macroeconomic performance across major European economies in recent years. Since 2020, these economies have faced a common set of shocks: Pandemic‑related supply disruptions, followed by a sharp increase in food and energy prices after Russia’s invasion of Ukraine. The full effects of the Iran crisis are still unfolding, but are also expected to hit European economies harder than the US.

As we explained last year, we prefer to look at a benchmark which places greater weight on geographically and economically comparable Northern European economies. It may give you slightly lower explanatory power in a world that pre-dates Brexit (and all the subsequent crises), but does intuitively make much more sense. Using this approach, and updating our analysis through to 2025Q4, the UK’s post-Brexit underperformance appears less severe than in many other synthetic control estimates, but is still meaningful. Taking 2016Q2 as the starting point, we estimate a cumulative shortfall of around 4.2%. This is broadly unchanged from a year ago, but still equates to roughly GBP 1,750 per person per year, a gap that would have eased current cost‑of‑living pressures.

The UK’s weak growth reflects a combination of structural constraints and policy choices that have weighed on the supply side. Persistent underinvestment, heavy regulation, slow planning processes, labor shortages, and a low appetite for risk continue to limit firms’ ability to expand. Brexit has compounded these pressures by raising trade costs, reducing labor mobility, increasing uncertainty, and diverting resources away from productive activity. The result is a sustained drag on productivity and potential output, which in turn has contributed to rising economic dissatisfaction and greater political volatility.

This suggests that any gains from closer EU ties will also emerge slowly. Reducing frictions with the EU makes clear economic sense, but it will not deliver rapid improvements in living standards. With the UK maintaining its current red lines and the EU continuing to link access to concessions, progress is likely to remain incremental and technical, limiting its political impact ahead of the next (leadership) election.

We believe that only more ambitious steps could materially shift the outlook. While Labour is likely to intensify its push toward closer alignment in the second half of its term, the EU will remain pragmatic and protective of its interests, offering access only in exchange for credible, durable commitments – particularly given the currently elevated risk of a future policy reversal.