UK and the EU set to remain best of enemies as 2022 dawns
Daniel Boffey Brussels Bureau Chief
When Ursula von der Leyen, the European Commission president, gave her lengthy “state of the union” speech last September, there were mentions aplenty of the EU’s vital relationships with Turkey, the western Balkans and Africa.
The continent’s security and economic prosperity depended on nurturing and deepening ties with its neighbourhood, explained Von der Leyen, a former student at the London School of Economics.
Britain did not register in the hour-long speech. Not a word was said of the UK, the recently exited EU member state and the sixth-largest world economy. Now, read back Liz Truss’s, admittedly short, back catalogue of speeches as foreign secretary. A visitor from Mars might assume that the UK is an Indo-Pacific power. Europe barely gets a mention and if it does it is described in terms of being historical baggage.
The year 2021 has been marked by a remarkable level of petulance in the UK-EU relationship. The unfortunate reality is that 2022 doesn’t offer much hope of redemption.
France will hold the rolling presidency of the EU for the first six months, during which Emmanuel Macron will have an election campaign to fight and win against the centre and far-right. Boris Johnson is on his uppers, with a large and vocal wing of the Conservative party frothing over Covid restrictions and a lack of Brexit dividend.
It is quite hard to imagine a less favourable context for relations to be patched up and mature conversations to be had. And yet the spats must be buried, the difficult compromises simply have to be found. To give just one joint challenge as an example, the most immediate military and diplomatic threat to British interests on the global stage remains Russia, whose government has thought nothing of murdering people on UK soil.
The Kremlin is building up a fighting force of more than 100,000 troops on its border with Ukraine, whose army and navy has been the beneficiary of British training and support. British and EU interests are as one on this.
The UK did not want to include a foreign and security cooperation aspect to the Brexit deal it signed last Christmas Eve. After almost five years of being lectured at, and with the bloc being far from nimble in this area, this was perhaps understandable. The UK holds many of the cards, given the strength of its intelligence agencies and investment in its military.
The government instead sought to focus on bilateral relations, particularly with France, with whom it has close military ties through the 2010 Lancaster House treaties. But the lesson of this year must surely be that relations with France, or indeed Germany, cannot be dealt with in isolation from the wider relationship with the EU.
Downing Street has been seeking a summit between Johnson and Macron for months, where it had hoped to build on past agreements, but has been stonewalled by the Élysée Palace, irritated by the British approach to its treaties with the EU and its constant bad-mouthing of the project, whether over the vaccine rollout or the challenges of illegal migration.
New German chancellor Olaf Scholz attended his first EU summit just a week ago, but it is yet to be seen whether a date with the British prime minister is even in the diary. Britain might not want to be part of the European union, but the EU exists. Ignoring one other might be an option but it isn’t a smart one.
Omicron and decline in trade threaten 5% growth target
Phillip Inman Economics Editor
Britain’s economy heads into the new year weighed down by a decline in trade and falling business and consumer confidence.
Exports were 14% below their 2018 average level in the third quarter of 2021, and there are many economists who doubt sales of UK products abroad will return to 2018 levels until 2024.
UK car manufacturing output declined by more than a quarter in November as the combined shocks of Brexit and the after effects of the Delta variant forced factory owners, struggling with job vacancies and component shortages, to cut production. December, marred as it is by the Omicron variant, is not expected to provide a lift to an industry that exports 80% of what it makes.
Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, says: “Exporters have lost market share, due to the woefully inadequate EU trade deal,” adding that the uncertainty over trading relationships with the EU and other countries, “will continue to deter firms from making Britain their export base.”
On the domestic front, high street sales have failed to hit their usual Christmas peaks and most events, indoor and outdoor, have reported declining visitors.
The Bank of England, worried about the effect of inflation, became the first major central bank to raise interest rates since the pandemic started when it increased the base rate earlier this month.
While the 0.15 percentage point nudge to 0.25% is unlikely to tip many businesses or households into bankruptcy, it came at a time when official figures showed levels of corporate insolvencies already hitting pre-pandemic levels.
Insolvency experts have predicted a threefold increase in bankruptcies across the UK in 2022 and probably more if interest rates rise by more than the expected 0.5 percentage points by December next year.
The BoE’s GDP growth forecast of 5% next year is beginning to look vulnerable to a downgrade, especially if the government fails to restrict the spread of the Omicron variant and consumer confidence falls further.
Rishi Sunak has avoided providing a further stimulus to the economy after the closure of the furlough scheme after warnings about a rise in unemployment proved unfounded, notwithstanding a £1bn boost for the hospitality and leisure industries to support them during the crisis
However, it has become clear that high levels of inflation will be sustained well into 2022, damaging households’ real disposable income and putting pressure on the chancelor to provide more support, especially for low-income families.
In April, disposable incomes will probably be hit again by a near 40% to 50% rise in Ofgem’s energy price cap, which will push average inflation above 6%.
At a deeper level, the Office for National Statistics revised data for business investment last week. It showed the money spent upgrading plant, machinery and IT fell by 2.5% in the third quarter to leave private-sector investment 11.7% below that seen in the fourth quarter of 2019.
Taking note of the collapse in funds devoted to capital spending, the Office for Budget Responsiblity, the Treasury’s independent forecaster, said it could be partly laid at the door of Brexit, which had cost the UK 4% of its GDP, or around £80bn. The UK in a Changing Europe thinktank, based at Kings College London, said Brexit had left a permanent scar on the UK economy, damaging investment and trade, to the extent that it cost 6% of GDP.
Andrew Goodwin, chief UK economist at Oxford Economics, said that the outlook for the economy would be determined by the way the government reacted to Omicron after a sharp slowdown in growth over the last five to six months.
“The extent to which this hangover carries on into the first three months of 2022 will be determined by what we learn about the new variant of the virus, and the way in which the government responds,” he said.
Serious hits to fishing and farming has left a sense of betrayal
If any areas were to see the sunlit uplands of Brexit, the most likely were surely farming and fishing. These two industries were being hamstrung by EU rules which government ministers could not change, Leave campaigners had claimed. Yet both have taken serious hits since last January, and there is deep anger and a sense of betrayal.
“It’s been an abject failure,” said Jane Sandell, the chief executive of UK Fisheries, which owns Britain’s largest trawler, the Kirkella. It makes up the UK’s distant waters fleet, operating in Arctic waters and providing about 12% of the cod cooked in British chippies. “The only conclusion is that they just don’t care about the distant water sector.”
Fishing is governed by international quota agreements to prevent fish stocks being destroyed by overfishing. Quotas are negotiated each December by Norway, Iceland, the Faroes, Greenland and the EU and in 2016 the fisheries’ minister, George Eustice, said British fishing was being harmed because the UK was denied a seat at the table.
When UK officials took up that seat in December last year they failed, according to Sandell. “There was no deal with Norway. They just gave up,” she said. “They decided there wasn’t a deal to be done.” Since December 2020, the Kirkella has been moored in Hull. “It’s been devastating for our crews.” Jacob Rees Mogg’s “British fish” have mostly been Norwegian.
Last week, the UK did reach a deal with Norway and the EU. “They’ve done a deal, but it’s not a good deal,” Sandell said. “The arctic cod [quota] is a derisory amount. We would normally have about 10,000 tonnes – there’s 500.”
The government said UK vessels could catch 7,000 tonnes of arctic cod, an increase of 1,500 on last year – a statement Sandell said was misleading because it was half the normal amount. “We’ll be operating at 50% capacity next year. In the new year, we’re going to have to sit down and seriously think about the way ahead.” The Kirkella may be moved abroad.
Not all crew are worse off – those catching mackerel and other pelagic fish have seen an increase in the amount they can catch. But, overall, the fishing fleet will be £300m worse off by 2026, according to the National Federation of Fishermen’s Organisations.
At the start of the year, many vessels had been unable to land catches in European ports due to new export rules, but those issues had been resolved, according to NFFO chief executive Barrie Deas. The deal signed with the EU meant that UK fishermen could only catch 12,000 tonnes of non-quota fish in European waters, while their counterparts could take 40,000 tonnes. “It really reflects the imbalance that was in the Common Fisheries Policy,” he said.
Farmers are less directly involved in EU trade but there is clear discontent about the outcome of Brexit. Farming is a significant part of the North Shropshire constituency, a Leave-dominated area that swung dramatically to the Lib Dems in a by-election earlier this month.
The National Farmers’ Union said that total agri-food exports so far this year were down by 16% compared to 2019. Although the pandemic created trade problems, exports to the EU were down by 22% to £7.2bn, but only by 2% in the rest of the world to £4bn.
Pig farmers have been hit by shortages of abattoir workers, while fruit and vegetable growers have not been able to find people to pick crops. Livestock farmers have benefited from higher prices caused by extra demand during the pandemic last year – beef is up about 15%.
Nick Adams, an organic beef and sheep farmer in Derbyshire, helped campaign for Leave and remains convinced it was the right decision. “The prediction was that we would lose our main export market to Europe, but that hasn’t happened,” he said. As an organic farmer, he relies less on fertiliser, which has risen in cost, and does not need a large labour force.
“I do appreciate other sectors have found it incredibly difficult, but relying on cheap labour needed to be changed and would have had to change anyway.”
Elections and DUP are threat to the ‘protocol pragmatists’
Michael Savage Policy Editor
Brexit has forced Northern Irish businesses to deal with new barriers, while the delicate political balances in the region have been strained. Yet close observers warn that the combination of Northern Ireland elections next year and the potential for a Tory leadership challenge mean further pitfalls await for the region in the months ahead.
Months of negotiations with the European Union over the workings of the protocol governing the special treatment of Northern Ireland after Brexit have seen both sides give ground. However, the talks have also resulted in last week’s resignation of Lord Frost, the government’s chief negotiator, and provoked growing agitation from the Democratic Unionist party.
Several figures said that negotiations that should be about technical fixes to the trading arrangements between Northern Ireland and Britain were already being used politically – and those tensions would only increase as May’s elections to Northern Ireland’s assembly in Stormont approached.
Business figures in Northern Ireland said that some of the early teething troubles with the new arrangements had dissipated and their impact was now split. Some companies continue to be hit by the new checks taking place in the Irish Sea, but others are booming – exports to Ireland have increased 63% over the last year.
While difficulties remain, Stephen Kelly, chief executive of Manufacturing NI, said the vast majority of his members were “protocol pragmatists” who wanted to make existing arrangements work. He also questioned the UK government’s previous insistence that the European Court of Justice (ECJ) be removed from oversight of the protocol – something Frost had demanded before his resignation.
“I haven’t had a single conversation from 2016 to today with a business that is concerned about ECJ oversight,” said Kelly.
“It is purely a political issue. The things that we’ve been asking for begin with stability, and there’s no doubt about it that we have an unstable political environment here. But business is getting on with it as best it can. Where you have prosperity, you have peace.”
Political tensions are rising, however. The DUP are already reported to be planning to pressure Liz Truss, the foreign secretary now in charge of negotiations, to suspend part of the protocol. That would provoke some kind of reaction from Brussels. The UK had been softening its demands before Frost’s resignation, but there are fears that Truss’s leadership ambitions could tempt her to woo the support of Tory Brexiters with more sabre rattling.
“At the beginning of the year, there was a hope that because we had the [overall UK-EU Brexit] agreement, because we had the protocol, there could have been the possibility of bedding down and just dealing with it,” said Katy Hayward, professor of political sociology at Queen’s University Belfast and senior fellow in the UK in a Changing Europe thinktank.
“We end the year in a very different situation, with the DUP threatening to pull out of power sharing. Coming into this next assembly election by May next year, the protocol can be seen genuinely as a campaigning issue.”