Monday’s EU-UK summit will feel like the culmination of a process, but really, it’s the start of one. The main outcome will be a Security and Defence Partnership, albeit the UK is unlikely to successfully negotiate access for UK firms to EU-wide defence loans at this stage.  

In other areas, what matters are the specific areas explicitly confirmed for further negotiation. The summit will explicitly pave the way for talks on UK participation in the EU’s electricity market, linking Emissions Trading Schemes, and an SPS agreement, all of which will require dynamic alignment and ECJ involvement in dispute resolution. 

Behind the scenes, negotiations have been challenging, with EU Member States adopting a harder line than the Commission in response to UK demands. On immigration, the final language on youth mobility could look closer to what the UK wants, e.g., calling it a different name, acknowledging the need for both sides to agree a cap, no waiving of visa fees or access for dependents. But the EU is still pushing hard for further specifics on educational exchange – like a cut in tuition fees for EU students – and that risks holding up agreement on popular measures like e-gate access for British citizens.  

Handled badly, there’s likely to be enough in this agreement that could fuel a ‘betrayal’ narrative in the UK. Areas to watch are wherever the UK and the EU end up on fisheries, anything which implies the UK will be a rule-taker, and the cumulative financial contributions the EU demands from the UK. There is plenty of political risk.  

The Government will conclude it still needs this reset economically. The challenge is that what is on the table so far won’t get close to the Treasury’s informal target of recouping around a quarter of the OBR’s Brexit hit, i.e., 1% of GDP.  

This would require further EU concessions on trade, which it is not presently willing to give, as well as moving fast to secure something concrete enough for the OBR forecast in the autumn. 

Overview: defence agreement now, start of formal talks on other areas 

As we said last week, the focus of Monday’s summit will be on defence and security. Both sides will agree to – and publish – a comprehensive ‘Security and Defence Partnership’ (SDP). The SDP will explicitly commit to six-monthly dialogue meetings at Foreign and Defence Secretary level, alongside the option for the UK to join the Council on relevant topics – arguably the most significant seat at the table for the UK that the EU has been prepared to grant since Brexit.  

Expect there to be explicit areas of cooperation across the full spectrum of defence capabilities, from peacekeeping and space to cyber and artificial intelligence. EU sources will be at pains to stress that this is a scope that goes way beyond existing EU SDPs with countries such as Japan and South Korea.  

But what really matters to the UK is amending ‘buy European’ clauses to ensure UK defence firms aren’t hindered by the definition of ‘commonly procured items’, particularly when it comes to the European Commission’s SAFE instrument (loan funding of up to €150 billion). All we can expect on Monday is a vague commitment to explore whether further cooperation in this area is possible. This will fall short of UK Government hopes, and movement would likely require some direct brokerage between Starmer and Macron. It could provide a further spur to separate talks on the possibility of a pan-European ‘rearmament bank’ to harness more capital for defence.  

Otherwise, the main output from the summit will be a joint document setting out in public the future areas for negotiation. We expect both sides to commit to talks on UK participation in the EU’s electricity market. In return, it’s likely that the UK will give ground on limited dynamic alignment in this area and a role for the ECJ within a dispute resolution mechanism.  

On SPS (Sanitary and Phytosanitary) rules or a veterinary agreement, this was a key commitment in the Labour manifesto and is now a major ask from the UK Government – and Brussels knows it. While the EU seems prepared to agree to quite a maximalist scope, they are likely to insist that any agreement is time-limited, particularly given the time-limited nature of the UK’s offer on fisheries.  

As with the arrangement on electricity, it is probable that the UK will need to sign up to some aspects of dynamic alignment and the involvement of the ECJ in dispute resolution. Given some reports in the British press about the SPS agreement undermining the UK’s novel regulatory approach to gene-edited crops, don’t be surprised if the UK pushes hard for some form of exemptions to dynamic alignment. But the bar is likely to be high.  

The final area of significance on the economic side covers the proposal to link respective Emissions Trading Schemes. We expect the summit conclusions to confirm that this is what both sides are working towards, with possible detail on the sectors that could come within the scope of any linking agreement. Sectors to watch here might be maritime but also international aviation, given the differing approaches between the UK and the EU in the past and – particularly when it comes to air travel – the knock-on impact on costs if airlines pass these on to consumers. Again, we expect relevant dynamic alignment and a dispute resolution mechanism involving the ECJ to apply. 

Youth mobility is where the UK has pushed back hardest 

In recent negotiations – especially considering pressure on Labour in domestic politics, amplified by Reform’s performance at local elections – it is immigration that has proved the main sticking point between both sides.  

UK negotiators are pushing for the blandest reference to a youth mobility scheme that the EU is willing to accept at this stage. Expect no references to a ‘youth mobility scheme’. It could be called a different name, given the Government’s concern at any reference that conjures up freedom of movement. The Government will want explicit mention of any beneficiaries paying contributory charges to the NHS and of them not being eligible for wider benefits while in the UK. They will want dependents excluded. A win for the British would be to convince the EU of the need for a cap on the number of people eligible, even if the precise number will be up for negotiation.  

The problem is that, from Brussels’ perspective, this involves swallowing a scheme that is far away from the Commission’s starting proposal from April last year. All the more reason for the EU to play hardball in other areas. It will want to pursue discussions on wider business visas with the UK. Likewise, the EU is refusing to move on some of the measures which are likely to be more ‘retail’ with the British public – like British citizens using e-gates at the border, musicians’ visas – without the UK being amenable to discussions on reducing tuition fees for EU students. This last aspect looks highly difficult, given that the Government has just published a White Paper on migration, including a proposal for a levy on fee income from international students.   

This remains the meat of the negotiation. To get close to some of the more maximalist benefits, the UK needs to persuade the EU to remove further trade barriers. Unless there’s a big shift in political will from Brussels, the demand for more concessions from the UK on migration is likely to remain a key feature of this negotiation.  

This dynamic could also hinder progress on illegal migration, where the UK is the demandeur. Expect loose commitments to greater data sharing and cooperation on returns to third countries but for the UK to prove unsuccessful in its request to have access to databases covered under the Dublin Regulation.  

Other areas of vulnerability for Starmer are on fisheries, the UK’s precise role in dispute resolution, and UK financial contributions 

Stepping back, the clear risk for Starmer throughout this exercise was always going to be immigration, so it is no surprise that this remains the area where UK negotiators are pushing hard.   

But it’s not the only area of political risk. Overall, the trap for Labour here is that the sum of the concessions to the EU will support Reform and the Conservatives in putting forward a ‘betrayal’ narrative.  

On fisheries, the UK Government has acquiesced to EU demands to move away from annual negotiations on a quota. London is also prepared to broadly lock in status quo access for EU fleets by rolling forward the deal that expires next year. But there’s a major sticking point over how long the deal should last, which threatens to overshadow the whole agreement.  

Fisheries are also tricky political territory. Polling done for a report by the Good Growth Foundation found that ‘allowing EU boats and fishing greater access to UK waters’ is one of the top non-negotiables with the public. Part of the Government’s sell will be to point out that there is no greater access, alongside hoping to quantify the opportunities for the UK fisheries industry stemming from the SPS deal and pointing out the overall benefits to the Scottish economy in particular of the wider agreement.  

On dispute resolution, ministers will hope the public is able to swallow a role for the ECJ in arbitration mechanisms. But the challenge will be figuring out the extent to which the UK has an equal say in any such forum. The politics of the UK having to ask to participate here will be tricky and strengthen the arguments of the Tories and others who will point to a loss of sovereignty, and that this cements the UK as a ‘rule-taker’.  

Lastly, it is worth watching out for the number of times the EU stipulates that it requires a financial contribution from the UK. There will be no macro ask from the EU for a UK transfer to the overall Budget. Both sides know that the politics of that is toxic in the UK. But the risk is, if we see EU requests for a financial contribution to align on ETS, as part of the SPS agreement, and potentially in return for benefiting from EU defence mechanisms, then this could start to add up.  

To get to the Treasury’s desired economic boost, the UK will need to push the EU for more on trade 

Overall, what is on the table so far doesn’t reach what we think is the Treasury’s threshold for the desired benefit to the UK economy as a result of this ‘Brexit reset’. As a reminder, we think some of the Government’s internal thinking was set out in this report from Frontier Economics. This analysis found that deep regulatory alignment in goods alone could boost UK real GDP by 1-1.5%, with deep alignment in services taking that boost to 1.7%-2.2%.  

The problem is that the details in this deal don’t yet show a path to the baseline scenario here: recovering around a quarter of the OBR’s estimated 4% Brexit hit or 1% of GDP. Individual areas are not to be discounted, e.g., some estimates have found that the boost from an SPS agreement alone could equate to around the same boost to UK GDP from the entire India FTA.  

But to get close to 1%, the UK would need to secure concessions beyond ETS, SPS and electricity. That would involve the removal of non-tariff barriers in more goods sectors, e.g., chemicals or pharmaceuticals. It would be a similar model to what Switzerland has negotiated with the EU, albeit Brussels will stress that – unlike the UK – the Swiss pay into the EU Budget and accept freedom of movement.  

In the absence of further major concessions from the UK or a significant change in the political calculation on the EU side, this will be tough.  

The UK will need tangible progress by September to hit OBR deadlines  

If Monday is the start of a process, then the next question is what the likely timeframes for any further agreement are, particularly given the absence of a forcing mechanism like we saw in past years with various ‘no-deal’ deadlines.  

Here, it is the UK Government who will want to force the pace. Rachel Reeves will need all the help she can get for the OBR forecast in the autumn, and so the Treasury will be keen to have tangible results they can take to the OBR for possible scoring in advance of the Budget. Unless negotiations intensify over the summer, this looks very difficult. 

Conclusion  

It’s long been clear that there is sufficient political goodwill on both sides for the EU and UK to explore some form of ‘Brexit reset’. The problem is that the respective red lines – e.g., for the UK, not rejoining the institutions; for the EU, a maximalist agreement on mobility – were always going to limit the possible landing zone.   That’s particularly become clear in difficult conversations in recent weeks, with the UK Government – mindful of domestic constraints – pushing back hard on immigration and fisheries. The risk is that, in expending political capital here, it gets harder for the UK to secure concessions in the area that really matters for the economy: removing trade barriers. Plus, the PM and his team will need to make a concerted push again over the summer amidst a political backdrop that isn’t getting any more favourable.

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