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Why It Matters
The outcome will shape Britain’s trade policy, regulatory autonomy, and long‑term growth trajectory, influencing both domestic investors and international partners.
Key Takeaways
- •Brexit uncertainty dampened investment, slowed growth.
- •UK services trade surged; City of London thrives.
- •Labour resists EU customs union, citing sovereignty.
- •Potential customs union would limit independent trade deals.
Pulse Analysis
The post‑Brexit landscape in Britain illustrates a paradox: macro‑level growth metrics have held up better than many forecasts, yet micro‑level business confidence remains fragile. Analysts point to the resilience of the services sector, particularly financial services, which have leveraged regulatory flexibility to attract global capital. At the same time, lingering customs checks and divergent standards continue to add hidden costs for manufacturers, prompting firms to reassess supply‑chain strategies and consider near‑shoring within the UK or other low‑tariff markets.
Labour’s current policy framework seeks a "middle way"—maintaining Brexit’s core tenets while fine‑tuning trade arrangements. This approach has lowered the Bank of England’s Brexit uncertainty index, but internal party dynamics suggest a shift. Prominent Labour figures and trade‑union leaders are lobbying for a limited customs union with the EU, arguing it could recapture modest trade gains without full regulatory alignment. Critics warn that such a move would erode the UK’s ability to negotiate independent deals, especially with the United States, and could obligate the UK to adopt EU external tariffs and revenue‑sharing mechanisms.
For investors and policymakers, the key question is whether incremental alignment can deliver measurable economic benefits or merely re‑ignite political volatility. Studies projecting a 2‑percent GDP boost from a customs union rely on optimistic assumptions about trade elasticity and regulatory convergence. A more pragmatic path may involve targeted supply‑side reforms—streamlining permitting, investing in digital infrastructure, and fostering innovation in high‑growth sectors like AI and life sciences—while preserving the sovereign policy space that Brexit promised. This strategy could enhance competitiveness without the uncertainty of renegotiating EU ties, offering a clearer roadmap for sustainable growth.
"Botched" Brexit: should Britain rejoin the EU?
Brexit after ten years: a mixed economic picture
It is nearly ten long years since the British people voted for Brexit and to leave the European Union. The latest opinion polls show that a majority now believe that Brexit has gone badly. Too much time has been wasted searching for a satisfactory halfway house that does not exist. The additional uncertainty has delayed business investment and dampened economic growth. The increase in friction at the border has hampered the UK’s trade with the EU, at least in some goods. The politics has also remained toxic. In particular, net migration to Britain has surged, rather than being brought under control. The carving out of Northern Ireland has undermined the integrity of the UK.
On the other hand, even this “botched Brexit” has not been the economic disaster that many predicted. The UK still leads the rest of Europe as a destination for foreign investment. Domestic investment is rebounding as uncertainty fades. There has already been some good progress in lowering barriers to trade with the rest of the world. Meanwhile, trade in services has boomed. The City of London continues to flourish and is now a champion of the benefits of smarter regulation. Susan Langley, the new lady mayor, has said that the prospect of realigning financial rules with the EU has passed and warned against linking regulations to any single jurisdiction.
Finally, just to chuck another uncertainty into the mix, many argue that the creeping isolationism of the US under Donald Trump has strengthened the case for Britain to realign more closely with the EU.
Is Brexit being reversed by Keir Starmer?
This is the complicated backdrop against which many of the old debates about Brexit are now resurfacing. Thus far, Keir Starmer’s Labour government has attempted to steer a middle course, with some success. Under Starmer, Labour has stuck to the “red lines” in the party’s 2024 manifesto. This explicitly ruled out a return to the EU’s single market or to the customs union and said no to the restoration of “freedom of movement”. In the meantime, the Labour government has developed the new global trade deals started under the Conservatives and continued the gradual decoupling from EU rules in areas such as financial services and animal welfare (both for the better). Until recently, the long‑scheduled “UK‑EU reset” also looked like something that most people could happily support. The government was simply proposing to tidy up parts of the post‑Brexit arrangements that could easily be improved. Examples here included the mutual recognition of veterinary standards and professional qualifications, and making life a little easier for touring artists.
This strategy has had some real benefits. Brexit has dropped way down the list of concerns for the public and, at least as importantly, for businesses. The Bank of England’s “Brexit Uncertainty index” had already fallen sharply since 2019, but it has remained low under Labour. Yet, this “middle way” now appears to be unsustainable. Labour had framed its position as accepting Brexit as a settled fact. But 2026 could be the year when this starts to change.
This partly reflects internal Labour party politics. The days of Starmer’s premiership appear to be numbered. Potential leadership rivals, notably Wes Streeting and David Lammy, have already broken ranks by backing a new UK‑EU “customs union”, at least implicitly. This followed YouGov polling that suggests that 80 % of Labour voters would also be in favour. Prominent figures in the trade‑union movement and in the media are banging the drum for the customs union, too.
This echoes a wider debate. Could renewed and closer ties with the EU help to address Britain’s economic problems? Some say that forming a new customs union would be a good first step. Others argue that we could also improve our access to the single market by accepting more EU rules. But scratch just a little deeper and it becomes clearer that the choices are not that simple.
In a nutshell, a “customs union” is an agreement to remove tariffs on most, or all, goods traded between member countries. To make this work, all members must apply a common external tariff to goods imported from outside the union. It is not possible for a non‑EU nation‑state, such as the UK, to join the EU’s Customs Union (capital “C”, capital “U”). But it would be possible to enter some more limited form of “customs union” with the EU, as Turkey has done, and as then‑prime minister Theresa May initially proposed as part of her Withdrawal Agreement.
Would a customs union with the EU work?
However, there are three compelling reasons to oppose this idea.
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Limited tariff gains – Most UK‑EU goods trade is already tariff‑free and quota‑free under the EU‑UK Trade and Cooperation Agreement. Remaining tariff benefits from a new customs union would have to be weighed against the UK’s obligation to apply EU tariffs on imports from the rest of the world, which are often higher. The UK would probably also be obliged to share customs revenues with the EU and to allow countries that the EU has trade deals with to access UK markets with no guarantee of reciprocity.
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Non‑tariff barriers remain – Checks at the UK‑EU border would still be required, especially if the UK stays outside the single market and the Schengen free‑movement zone. Those checks could only be reduced by accepting a raft of other European regulations – with no say on how these are determined.
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Loss of independent trade‑deal making – The UK’s ability to negotiate new deals, particularly for goods, would be severely limited. Existing post‑Brexit deals might have to be renegotiated or abandoned, making the UK look like an unreliable partner. For example, UK goods exporters currently enjoy lower US tariffs than EU competitors; that advantage, partly due to Brexit, would be lost.
Any support for rejoining a “customs union” would likely fall away if these costs were properly explained. Indeed, YouGov polling last summer found that only 9 % of Labour voters would be happy for the UK’s tariff policy to be decided by anyone other than the UK government itself.
Single market would bring few benefits
The Liberal Democrats have argued that a new customs union with the EU could boost the UK economy by 2.2 % and tax revenues by £25 billion, citing a February 2025 Frontier Economics study. In reality, that study relied on heroic assumptions about the impact of small changes in trade openness on productivity and modelled regulatory alignment that is not on the table.
Some supporters claim the EU would offer relatively favourable terms, but recent negotiations over a limited UK‑EU reset have stalled because the EU wants to extract every possible concession. The UK is being asked to overpay to rejoin the EU’s Erasmus student‑exchange programme and even for the right to contribute to Europe’s defence. Adopting the EU carbon‑emissions scheme and additional carbon taxes would raise energy costs further.
There is little evidence that realigning with the single market would provide a substantial economic boost. EU policymakers are experts in “managed decline” and over‑regulation. While the EU may be weaker without the UK, it would be madness to seek closer alignment with a struggling bloc.
The UK could do more good by demonstrating the economic advantages of supply‑side reform and smarter regulation outside the EU. If other European countries then want to follow, all the better. Europe’s biggest banks and insurers have already called for EU regulators to copy the UK’s example to support growth and competitiveness.
A more positive vision of Brexit
This would support a more positive vision of Brexit, based on going back to basics. The vote to leave the EU in 2016 was essentially a vote to regain control of borders, laws and money. Polling shows that the British people still want their own government to make policy in a wide range of areas, not just trade. This is incompatible with giving sovereignty back to the EU. The UK must be able to diverge from European regulations, especially in growth sectors such as AI and life sciences, and run its own trade policy and immigration rules.
The academic studies that suggest a large negative impact on trade, productivity and growth are worth scrutinising. Two frequently quoted figures are 4 % and 8 %:
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The 4 % figure comes from the Office for Budget Responsibility (OBR) and is an average of 13 external studies, many of which used pessimistic assumptions. The key driver is an assumed 15 % fall in “trade intensity”, which is weakly supported by data. In reality, UK trade intensity has tracked that of EU peers rather than collapsed. Most economists agree that UK trade has held up better than expected; any drag is likely to fade as businesses adjust and new deals deliver benefits.
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The 8 % figure originates from a NBER working paper that compared UK per‑capita GDP growth to a weighted “doppelgänger” group of countries (61 % US, 11 % Estonia, 10 % Greece, etc.). This methodology is problematic: the control group is dominated by the US, excludes obvious benchmarks like Germany or France, and does not account for other shocks such as Covid‑19 and the energy crisis. Moreover, Canada’s slower growth is linked to high net immigration, not Brexit.
Which way should Britain jump?
In summary, the mainstream narrative on Brexit’s economic impact relies on many dodgy assumptions and selective use of data. While it is important to acknowledge the negative effects, it is equally important to question their magnitude and duration, and to consider alternative explanations.
Looking forward, the UK needs to decide which direction to take. Many will continue to argue that Britain’s economy can only thrive if fully unbound from the EU. However, it is increasingly easy to imagine Labour heading into the next election with an explicit commitment to realign more closely, even if this stops short of full membership. That would be a more honest position than the current fudge. Yet reopening the “Brexit wars” could increase uncertainty again and do more harm than good, especially as many in the EU seem determined to punish the UK for daring to leave.
This article was first published in MoneyWeek's magazine.
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