Martin Kaspar is head of business development at a German Mittelstand company in the automotive industry. E-mail: martin.georg.kaspar@googlemail.com

There is much talk of an improved UK-EU relationship after July’s Labour election victory. Talk of closer economic ties on both sides of the English Channel gives rise to the prospect of an uptick in FDI and trade flows. 

But how realistic is it to assume that fundamental change in a strained relationship is imminent?

The new UK prime minister, Sir Keir Starmer, has ruled out re-joining the EU single market or customs union, and reintroducing freedom of movement. What’s more, Europe’s political landscape is shifting towards the nationalist and Eurosceptic end of the spectrum, as laid bare by June’s European Parliament elections. Add to this the souring of UK-EU regulations and trade processes, which increases the bureaucratic burden for businesses operating across their border, and there seems little hope for improved relations. 

But even if the UK-EU relationship is not a passionate love affair, it could grow into a marriage of convenience.

Both parties have more to gain than to lose, warranting a sober reassessment of the status quo. According to many sources, including Unctad and fDi Markets, Brexit arguably led to a decline in FDI inflows, with its current share of the global and European FDI pie dropping to less than half of what it enjoyed in the mid-2000s, according to Unctad data (which includes greenfield investment, mergers and acquisitions and project finance). At a time when the transatlantic relationship with the US is facing challenges — irrespective of who wins this year’s White House race — the UK and EU share a potential problem. With protectionism and industrial policy being the US government’s economic tools of choice, and Sino–western relations becoming a balancing act, London’s and Brussels’s interests increasingly align.

A first step towards a rapprochement would be a revision of the EU-UK Trade and Cooperation Agreement. Trade in goods, which are tariff-free if they meet UK–EU rules of origin, show a continually increasing UK trade deficit vis-à-vis the EU, illustrating the UK’s weakness in this field. Its strength in trade in services, however, does not materialise in a corresponding trade surplus in services. Yet renegotiating the post-Brexit agreement will require the UK to make some concessions, and potentially abandon some of its red lines.

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This article first appeared in the August/September 2024 print edition of fDi Intelligence.