20
Examination of witnesses
Armida van Rij, Wolfgang Münchau and Mujtaba Rahman.
Q1 The Chair: Good afternoon and welcome to the House of Lords European Affairs Committee. This is our first public evidence session for our major new inquiry into the Government’s proposed reset of UK-EU relations. I am delighted that we have as our first panel three experts to get us started: Ms Armida van Rij from Chatham House, head of the European Programme, Wolfgang Münchau, director of Eurointelligence, and Mujtaba Rahman, managing director for Europe of the Eurasia Group.
We are being broadcast and there will be a transcript. We have an hour, possibly a little more if the votes allow us, and I would make an appeal for both questions and answers to be pretty crisp. Witnesses, do not feel you all have to answer each question; if you want to specialise in some and leave some for others that would be fine as well.
All that said, perhaps I can ask you to start with a general setting of the scene for us. If you were making government policy on the reset of UK-EU relations, what would you be seeking to achieve in the reset? Maybe I can start with Dr van Rij.
Armida van Rij: I appreciate the honorary PhD, but I sadly do not have one.
The Chair: Sorry—soon to be, I am sure.
Armida van Rij: Thank you very much, Lord Ricketts, and thank you for having me. In an ideal world there are a couple of things we will be seeking to have here. First is answering the question: “What is the bigger strategic vision for the relationship between the EU and the UK?” At the moment there is not a clear answer for that, certainly from the UK side. That also dictates how the EU responds to what the UK offers, and at the moment there is a lack of clarity on exactly what that offer is.
If we look at the external security environment, it is one of geopolitical fragmentation, a worsening security environment—both on our borders in Europe and further away—and a US that, certainly over the next four years, is going to be more incoherent and perhaps less reliable. If we take that context into account, the most important thing for me is defence-industrial co-operation, which brings and plugs the UK into EU defence initiatives, especially as the European Commission is looking to move into that space and is starting to think about putting more money towards that as well. That, of course, leads to very difficult questions around third-country participation and the single market. The UK’s red lines on this have direct implications on what is actually possible, so that has to be considered. But for me that is absolutely the most essential piece.
The Chair: Very good; excellent to get us started, thank you very much. Who would like to follow up? Mr Münchau.
Wolfgang Münchau: Thank you. I would like to add that the two most important events that will affect the EU-UK relationship are the US elections and the coming German elections. The most important thing that is likely to happen—it is hard to predict elections—is that there is a reasonable degree of probability that Friedrich Merz will be the next German Chancellor. He is the only German politician who is actually talking about the EU-UK relationship, not just in response to a question but actually raising the issue himself. He has always said that the way the EU handled Brexit was a mistake—this is a sort of theme that he has had. So he can be expected to bring some impetus, and I would not say I would wait but I would certainly try to pick him up.
Friedrich Merz’s big idea for the EU is a defence procurement union, which is the CDU’s big campaign theme. Now, this is tricky in the EU because under EU treaty law, defence is explicitly excluded. So the EU cannot simply integrate defence into the single market without a treaty change, so there would have to be some structures. For the UK this is, if anything, an opportunity because these structures are more likely to be outside the narrow single market. But they would be single-market type structures because it is about joint procurement, public bidding and the stuff that makes up the single market.
I would certainly try to engage with this because if the goal is to have a 5% defence spending as a per cent of GDP—this is obviously not going to happen but let us just play with this idea—there is not a single large European country that can sustain the effort.
Armida van Rij: Poland.
Wolfgang Münchau: Poland, yes. Poland can, and probably already does or is very close to it. Macron already said it yesterday, but his Government are the one with the least fiscal leeway. In fact, they have some significant fiscal challenges, shall we call them? Italy does not have the capacity to achieve even 2% under its current fiscal plans. I just did the calculation for Germany today and it would be about €150 billion, which is about half the budget, and would basically mean that the entire social budget would have to be butchered. The only way for Germany to get anything meaningful—meaningful would probably be 3% to 3.5%—would be to achieve significant gains. Anyway, in this case progress should not be measured in terms of GDP but in terms of capacity or ability. That is very much what the CDU is like and therein lies an opportunity.
I was reading the manuscript of your previous session in December. The agenda is very limited. It is related to things that are important in a certain way but not very exciting. So that would be something significant.
The Chair: Thank you very much; we will come back to that issue in the course of the discussion. Mr Rahman.
Mujtaba Rahman: I would encourage the Government to be very ambitious. The debate on the European side has moved on. The context is different. There is an appreciation of the context at the top of the European Commission, and there is a view that Donald Trump’s second presidency actually enables the Commission to make a stronger argument to the member states to focus less on defensive interests—let us say fish and youth mobility—and look instead at strategic interests.
The Government should really lean into that sentiment and look to engage the European Union on things such as defence—there I am talking specifically about money as well as market access—migration and energy. If the UK Government did that, they would probably find a more receptive audience, certainly within the Commission, to reconsider the trade agreement and doing more on the trade side as well.
The leaders in the European Council have a slightly different appreciation and, as I say, there is a recognition that this is not 2016 and the concerns about precedent are no longer as substantial as the ones about context. So there needs to be a debate within Europe about those questions.
Q2 Baroness Scott of Needham Market: Thank you. To some extent, you have answered this in your opening remarks but there is an opportunity, perhaps, if one of you wants to add anything. The mood music, if you can describe it as that, has certainly been warmer and more positive, but beyond that are any of you picking up anything that is more concrete or positive?
Mujtaba Rahman: That is probably the single biggest critique on the European side. They appreciate David Lammy in the Foreign Affairs Council, Rachel Reeves at the Eurogroup, Keir Starmer will be there in February at the leaders’ retreat, and they are scheduling a UK-EU summit in late March or early April. But the sense in Europe is that the Government have still not squared their own circle: how do you make this part of your economic agenda in a meaningful way, in light of the red lines that you have articulated? What that ultimately means is that the summit in March or April will not be as robust a stepping stone to an overall agreement but will begin to flesh out what a potential common agenda may look like.
So what I am saying here, in effect, is this will be the start of a process, as opposed to the midpoint, and enabling both sides to come to convergence on the issues that they are talking about.
Armida van Rij: To add to that, the first thing is the lack of clarity and things being a little slow, as we have talked about. There is a risk of expectation mismanagement whereby the UK is tending to think about this as not having to be concluded in a year or two, there is time and this can take place over the next five or even 10 years, unlike with the withdrawal agreement. That is not being communicated clearly to the Commission or the member states, so the member states are still asking, “Where is the rush? What is the offer? What are we trying to achieve here?” But if we look particularly at the external context, actually there are things that are really quite pressing that we should be getting on with, but things seem to be a little slow.
The other thing I want to mention is, if we look at the institutional set-up of where the UK sits, or where the UK issue is handled within the EU, it is at the working level within the European Council. That means that it is immediately addressed at the technical, nitty-gritty level, rather than at the political level, which takes me back to the earlier point about the bigger strategic vision that we want to have for this relationship, given the external context that we have talked about.
Wolfgang Münchau: Let me add that there has been a very significant degree of regulatory divergence in the last five years, not from the UK side but from the EU side. The EU has changed significantly in those five years. This has been one of the busiest Commission periods. The green legislation has certainly been ahead of anywhere else, but in particular the digital legislation—the Digital Markets Act, the AI regulation, crypto regulation, the Digital Services Act—are Acts that the UK has not followed and is unlikely to follow because it would conflict with both the previous and the current Government’s strategy for AI and small businesses. So I see the chances for an agreement on trade—a general trade agreement, not the main thing.
I also see there is a competition between the UK and the EU to strike trade agreements with the United States. A US-UK trade agreement would obviously not facilitate an EU-UK agreement. So, certainly, the new stuff on defence, Russia and the need to increase defence co-operation would stand a significantly greater chance because both sides actually see the urgency, whereas on trade the EU does not see the urgency. The EU does not have that many choices to offer in terms of trade and is going around in circles on that.
Q3 Lord Jackson of Peterborough: My question is on red lines, and whether the Government should have red lines for the reset. Mr Rahman, I read very closely your blog post of 11 August, in which you were sort of philosophical and insouciant about dynamic alignment with the EU standards, the level playing field and the role of the European Court of Justice in policing new agreements, which surprised me given that this current Labour Administration have currently offered only a look at UK touring artists, a veterinary and SPS agreement, and mutual recognition of professional qualifications. So is there anything beyond warm words between the two? It seems to me that on the really substantial issue to which you allude in your blog post, ostensibly this Government are not giving ground. Only yesterday, the Minister specifically said that a youth mobility scheme is out of the question; they did not need to be that definitive, but they were at the Dispatch Box. Is this just mood music or is it too soon to be talking about red lines? I do not see any action. This Government have been in for six months, have had 14 years to prepare a policy, and at the moment there are just endless meetings and warm words.
Mujtaba Rahman: There have obviously been challenges on this side with the transition from opposition to power, which the European side recognises. To be fair, there have also been transitions on the European side. The assumption has been that not much has changed in the EU because von der Leyen is a second-term president but I do not think that is right; her reconfirmation took a lot of time. There have been lots of political challenges in the member states, not least France. There is an election in Germany. So I do not think the EU side has been in a situation or an equilibrium, frankly, to engage properly with the UK on the reset.
The appointment of Michael Ellam as the Sherpa responsible for Europe and international economics is going to be absolutely important. It is seen as a game changer in Europe because he is someone who comes in with credibility, he understands Europe, he knows Whitehall and will be a very important link between senior officials and Ministers on the reset.
On the substantive question, the Government have said, “No customs union, no single market”. There is a lot one can do beneath those red lines that would still be a material improvement on the TCA. For example, if the Government were to strike an SPS agreement with the EU and agree to dynamically align on agri-food products, that could potentially set a precedent for the Government to consider, on a sector-by-sector basis, other areas of the economy where it may make sense and would be in the national interest to dynamically align.
If the Government were to do that and accept oversight of the ECJ, that would force an internal debate within the EU about what additional access to the single market that should confer. That is not a debate the EU has had to have because there was a belief, when Theresa May was Prime Minister, that Olly Robbins and Theresa would not be able to get the deal through Parliament, and then when Boris Johnson won, obviously he articulated much firmer red lines. That is why I say, if the Government are ambitious on the question of dynamic alignment, even on a sector-by-sector basis—
Lord Jackson of Peterborough: May I just ask you, as you have alighted on that, how do you see the context of the Product Regulation and Metrology Bill? The Ministers are saying to us on the committee, “Well, it is just about business competitiveness and being fleet of foot and flexible”, but obviously it feels like sort of Chequers 2.0 in legislative form—or maybe I am too cynical.
Mujtaba Rahman: I cannot answer that specific question because I am not across the detail of that specific piece of regulation. What I would say is that after the discussions I have had with many people in Whitehall and Westminster, my general sense is this is not a Government who will pursue divergence for ideological reasons: this is not divergence for divergence’s sake. It is dynamic alignment if it makes sense in the national interest. So again, an SPS agreement is a form of cherry-picking. There is recognition of that on the European side, assuming that a deal can be struck this year between the two sides in that sector, that may pave the way for more sectoral agreements over time.
The Chair: Does anybody else want to follow up on red lines?
Wolfgang Münchau: I am very sceptical about dynamic alignment because we are no longer starting from the same position. If countries negotiate very technical details in a regulatory matter, they bring up an awful lot of their own requests, as the UK did when it was a member. When one is outside of the process, it is going to be very difficult to maintain regulatory alignment for a long period of time.
No one can do it sector by sector but if the UK tried, there may be some sectors where that is possible. I have not detected an appetite from the EU to accept these fundamental, specific deals. The TCA was a kind of deal that made sense from the EU’s point of view, but to open this up and have a Swiss kind of agreement, which was always considered to be a nightmare—to have sector by sector type agreements given the different nature of member states and their different interests—I am very sceptical that this can happen, even though it might benefit the UK.
Armida van Rij: I would just add that there is limited scope within the TCA framework, but defence, security and foreign policy do not really sit within the TCA framework. So that is where there is more opportunity to go beyond what those red lines currently are. I talked about that earlier so I will not repeat it.
The Chair: We will come back to that, absolutely. Baroness Lawlor, please.
Q4 Baroness Lawlor: I am sorry for being late, I am on another committee proposing amendments to a Bill.
To what extent are the EU’s existing arrangements for co-operating with non-member states an obstacle to the reset? Here my particular interest is in trade, and I was extremely interested in the work Wolfgang Münchau has done, and his comments on the regulation of AI, and GDPR of course, which he rightly pointed out is part of our legacy but is coming up for renewal.
From what you say, the UK is far more nimble in the AI, GDPR and all these digital areas and, correct me if I am wrong, you have suggested that we would be foolish to tie ourselves to an EU model in these areas, where we have great potential but the EU has no, to use your own words, skin in the game. Would you like to elaborate on that and whether you would envisage arrangements for co-operating on this matter in the trade area?
Wolfgang Münchau: You are absolutely right: the EU has given itself a lot of regulation, often due to a misunderstanding of the nature of digital businesses. I have just completed a book on the German economy and Germany was an extreme case, but it influenced EU thinking disproportionately. It had underestimated the impact of digital technologies on our lives pretty much consistently, which was a misjudgement made by successive Governments—no single party can be blamed—and by industry.
The EU’s regulation on digital has been enacted entirely in respect of the consumer. This has even been confirmed by the ECJ, which interprets laws on privacy and data protection purely from the interest of the consumer, not the producer. This interpretation has been taken to the extreme and we have had several relatively amusing exchanges between Elon Musk and Thierry Breton, who was the former industry commissioner in charge of many of these laws, especially the Digital Services Act, and the DSA demands that social networks commit to fact-checking. Breton’s own interpretation was that Musk even broke the law when he interviewed Trump on X.
So there is a sense of, I would not call it censorship, but certainly a sense of control that the EU likes to insert. We saw the cancellation of a presidential election in Romania, not because of vote rigging but because of a misinformation campaign—as the court decided—on TikTok. This attitude towards data and new businesses is very different from that in the UK, and the UK certainly has a competitive advantage in the digital area.
The UK has far more start-up businesses, certainly in the AI area, that are much more likely to achieve scale than the EU does. Therefore, I could see that it is not where the UK would adjust to the EU, but the other way around at some point because the EU now has this problem of unravelling this legislation, which is going to be very difficult. Therefore, I would probably say it might be an opportunity.
It is the same with finance: the EU never achieved a capital markets union. It is creating something it is calling a savings and investment union, but this will be far short of the goals that a genuine capital markets union could have provided. So there are opportunities for the EU to connect with the UK in that sense, but not the other way around.
Baroness Lawlor: You mentioned the capital markets: given the problem of debt in the EU, would moving closer on data or digital be in the UK’s interest, or are we better to wait for the EU to seek co-operation with us? Whether that is through data protection or indeed the new EU AI regulation, which I agree with you is a disaster for AI.
Wolfgang Münchau: I would think strongly the latter.
The Chair: Lady Nicholson, you wanted a brief intervention as well, and then we will move on to the next question.
Baroness Nicholson of Winterbourne: Given that we from the United Kingdom are in this unique position of understanding both the German position—because we have known it well over a very long period—and that of the US, are we able to actually gain from both sides? It is an extraordinary position to be in. We understand the Germans; we pretty well know they are not going to fundamentally alter how they deal with data protection because they have this huge need for privacy arising from the last world war. The US position is completely different. Can we keep that flexibility and make something of it?
The Chair: Briefly, if we could, because we have a lot of other questions on the reset that we want to get through.
Wolfgang Münchau: If anyone is unhappy about the German data protection and regulation, it is the Germans themselves. At the moment there is such a pushback coming from industry and voters as well that I do not think the legislation is sustainable as it is, especially with what is happening now in the United States. We should not assume that the EU legislation as it was drafted and the confidence with which it portrayed it is sustainable. I do not think this is the case so I would wait and see whether there is going to be a dynamic alignment. The UK is uniquely positioned if it plays its cards right.
Q5 Baroness Ashton of Upholland: I am particularly interested in how any reset is going to affect our ability to have economic growth, which is fundamental to all nations. We are no exception. I wondered whether you could give me a sense of what you think of the three priority areas that have been identified: the SPS agreement, touring artists and mutual recognition.
Mujtaba, you started this by saying that these could be the kind of foundation to enable things to move on. I would be interested to know how much impact you think they will have, both on the overall relationship and whether that helps to ease the way, but especially: is it going to be sufficient to start to see a change in how the economy of Britain currently is and the opportunities for linkage with any country, of which our closest and nearest neighbours are obviously very important?
Mujtaba Rahman: The economic impact of the three areas you have articulated would be minimal, but it is less about the economic impact and more about building trust between the two sides and through that process of negotiation, enabling the Government and the Europeans to become a bit more ambitious in the scope of what they are defining. As I said, I think there is appetite within the Commission; I do not buy this argument that we are in 2016 and the Commission and the member states are going to approach any Brexit renegotiation in exactly the same way. I simply do not accept that because of the context and the current leadership within the European Council.
António Costa is absolutely open to the idea of exploring ways in which the relationship can be bolstered, and to be creative about that. Von der Leyen is absolutely there, Donald Tusk is there, and I think Merz is there. Even within France the debate is evolving, but in the first instance the Government have to come forward with a more ambitious agenda. I suspect that we will get an agreement on the youth mobility scheme. There is a lot of discussion in Brussels about perhaps linking it to academic exchange to make it more palatable on this side, given the concerns about perceived links to free movement of labour. There will be a deal on SPS, I am sure, and a few other areas. Then the more important question is really what that then enables over time.
Wolfgang Münchau: The UK’s economic productivity growth rate declined around the time of the global financial crisis; Italy’s started to decline around the time it entered the euro; Germany’s started to decline around Brexit, actually. So every European country suffers from a decline in productivity that has very little to do with the subjects we are talking about. It has nothing to do with the youth mobility scheme or phytosanitary provision or fisheries; this is about the way our economies work.
The reset has absolutely zero influence on this particular issue. There are other things that all countries need to do, and the single market has not achieved the growth rates people had hoped for when it was created. I am not opposed to the single market, this was an important area of European integration, but the economic benefits of it have been vastly exaggerated and it has certainly not achieved the significant productivity performance that we all hoped for. One has to be realistic about what this reset can achieve.
Q6 Baroness Anelay of St Johns: I would like to follow up on what my colleague, Baroness Ashton, was asking about: what are the matters on which we should negotiate?
I was very interested in Mujtaba Rahman’s comment, that it is more about gaining trust in the first instance and then you can negotiate more. So those three issues mentioned by Baroness Ashton are really a starting point and my question follows on from that. What are the Government missing out on at the moment? Are there areas where they are not currently considering negotiations which would have a stronger implication for the economy? I ask that against the background of a very respected Minister saying yesterday, “I am not sure that, if you are engaged in a quite important reset as the UK Government are, it makes enormous sense to pick and choose the different issues on which you might negotiate”, which seems to undermine what the Government are doing. So can you help them by pointing out areas where they can build even more trust in the negotiation?
Mujtaba Rahman: It is very hard to articulate what the Government are up to because there is really no detail on what they intend to deliver via the reset. That is why I said the real objective for March and April is to mesh together enough of a common agenda to give the impression of momentum, but it is really going to be the start of the process. I suspect, with the appointment of Michael Ellam and the summit, we will get a lot more momentum and a much finer understanding of the detail of what the Government’s actual plans are. Officials in Brussels and European capitals are really at a loss as to what the Government actually want to do.
That being said, you get the impression that there are a number of offensive priorities where the Europeans would like to see process and more collaboration: migration is a very big issue where they would really like the Government to lean in and do more strategically with the EU. It is absolutely the case for energy; security and defence is another big area. Again, that would enable a bigger, more comprehensive discussion on trade.
But these are strategic areas where the Commission is focused and, frankly, the Commission is willing to have an argument with the member states, providing the Government lean in. What it does not want to do is rerun what happened in 2016: the Commission, in effect, draws up the plan for the Government, which the Government then assumes to be its own. It is looking for more definition and ambition from London first and then, assuming that is forthcoming, there would be a partner on the other side. I am not saying it will be easy, there will be a lot of politics involved, but it is willing to have that discussion with the member states if the Government are forthcoming.
The Chair: I am going to come on to security and defence as our next question, actually, just to make sure we get it in before any possible votes. So were there any other comments on Baroness Anelay’s question?
Armida van Rij: I just want to add to that, which might tie us into security and defence as well. It is worth just taking a second to think about the context in the EU, which has changed since 2016. Yes, resetting this relationship with the UK is important but it is not the sole priority for the EU, given the context in which it is operating. There is Russia’s war in Ukraine, there are all these enlargement discussions and there is sluggish economic growth—those are top priorities. The UK is part of that, but it is not the only thing.
That is why I very much agree with Mujtaba and, as I have said earlier, the UK has to come with an offer. But within the scope of the TCA that offer is very limited because of the UK’s articulated red lines. So there are limits on that.
That takes us back to defence and security, where there is more scope. One thing that should be looked quite carefully at is how we can increase and improve that; for example, by signing an administrative agreement with the European Defence Agency, which the US, Ukraine and Switzerland have all done. Third countries are doing this, including some of the UK’s closest allies, and it would be a useful way to start thinking about actually making progress on this. What I believe may be holding the Government back a little in terms of being willing to articulate what this might look like, which is problematic, is that they are still terrified of the Daily Mail headline saying, “Labour is seeking to rejoin the EU”, or whatever it may be.
The Chair: In case we come to votes fairly shortly, we ought to tackle the security and defence pact as well. I would ask Lord Stirrup to bring his question in a different order from the one that members have.
Q7 Lord Stirrup: There certainly may be scope for doing more on security and defence co-operation, but there are also some significant obstacles, which we cannot overlook. For example, one thing that has been mentioned is the UK participating more in CSDP missions. But I am presuming that the UK Government would see defence and security co-operation as between equals, whereas the EU arrangements—for example, for CSDP missions—see third-party countries as add-ons, doing what the EU wants to do in the way the EU wants to do it. If we are to have that kind of practical security co-operation, is there a need for some form of new mechanisms that treat the UK in a different way from being a purely third-party country? Would the EU be willing to go down that route?
On the defence industrial front, one of the problems with European defence industrial co-operation in the past has been countries have seen it as an alternative to spending more money on defence. But if you want European defence industry to grow, you need European defence orders; therefore, you need significantly increased defence budgets. Even accepting that we are not going to get 5%, is there any realistic prospect of EU countries coming up with sufficient additional defence investment to sustain that kind of industrial capacity? If not, would a better approach be to look at bilateral and multilateral co-operation with specific countries rather than the EU as a whole, particularly given the rather significant divergence of political views on foreign policy within the EU at the moment?
Wolfgang Münchau: This is an excellent question. What makes me optimistic is the fact that the situation in Russia and the new US Administration are focusing minds on defence in a way that has not happened before. There is now an agreement, certainly in the German political sphere, that defence spending of 2% is desirable. Even the Greens want 3.5%. This is a shift in views in terms of defence spending. It is the first time I have seen a large political party in Germany putting defence procurement specifically on its agenda.
These shifts are realistic, but I agree that this is unlikely to happen as an EU project. EU institutions, as they are set up today, are not designed for this type of co-operation. We also know of the reticence of France to engage in these defence procurement projects. I could well see UK-Germany co-operation on this. This would be significant and material, and it could pave the way for a larger network of countries participating in this.
We should also remember there are still EU countries that are not in NATO, so the EU is hamstrung. It has defence-related programmes, but it has the problem that there is a specific treaty exclusion on defence in the single market. People can get around it—the EU is very good at getting around things—but if you wanted to do something seriously, you do not want to get around it; you want to have something that is right and serious.
When it comes to defence, this is not about headlines or fluff; this is something real. I would assume that the bilateral route, given also the urgency of the situation, is not something that can wait for another 10 years. This is something that I would definitely start, and the EU has done this. The bailout regime of the eurozone started as a multilateral institution. It has not yet been completely brought into the EU framework, but it is a very normal procedure for this to happen.
Armida van Rij: I take your point, but we need to think about the bigger picture here, which is that there is war in Europe, and stocks across Europe are depleted. We do not have the capabilities we need to fight future wars without the Americans—who, for the next four years, who knows? We need to have a better unified vision for European defence, what that looks like in practice and how we do it.
The single market is going to be sacred for the EU and for the Commission. That is just the way it is. Having said that, as both panellists have said already, there is understanding of the context and of the need to be pragmatic. Ultimately, if we have to, they will find a way. I find it quite interesting that in some cases there is closer co-operation between EU accession countries—that is, which are not yet and have not been a member of the EU—than with the UK, with all the alignment that there is with the UK and with all the assets the UK has to bring to the table. If we think about the bigger picture, we need to get to a situation where we can defend Europe as a whole and which takes into account NATO assets and EU funding abilities. Ultimately, it is about the defence of our continent. That is what we should be thinking about, rather than nitpicking, essentially.
Lord Stirrup: I entirely agree with you. That is what we are thinking about, but is the EU thinking sufficiently to be imaginative and innovative in the way it approaches the problem?
Armida van Rij: It is, but the bilateralisation of the UK’s relationship with individual member states is making things more complicated. We have seen the defence pact with Germany, the announcements coming out of Poland, and then how this relationship also builds with the European Commission. Defence is currently not a Commission competence. Technically it sits at the governmental level, but it is moving into that space. We are seeing multiple forces here. There is a bit of a tug of war between the Commission and the member states over who owns defence—that will change if the Commission starts putting serious money towards defence through the new budget that is going to be negotiated—as well as over who owns the relationship with the UK in the defence, security and foreign policy space. I do not think there is a clear answer or way through that, but those are the dynamics at play at the moment.
Mujtaba Rahman: The political energy in Europe right now is on the big question of the EU’s own security and defence in light of some demands that Trump is making. There is a recognition at the highest levels within the Commission that the EU cannot afford to wait until the next financial period—so the next EU budget that starts in 2028—and that something will need to be done in the short term, which means, in effect, between now and that period. There will need to be a discussion, certainly within Europe but also with third countries, about the best way to proceed.
The fiscal questions are incredibly complex, and there is little trust between member states. In order to facilitate the building of trust, in the run-up to the 3 February leaders’ retreat, António Costa and his team are focused on the what, not the how, in the hope of building consensus. Let us be clear: that means, in effect, that we are trying to strike agreement within Europe on an integrated defence policy and what we want to do collectively where countries have critical gaps at the national level but do not have the fiscal space to move by themselves. If you can agree on that, then the financing questions will follow.
The fact that this will be discussed in February is really important. I suspect you will not strike agreement within the EU, whether it is because of veto players like Viktor Orbán or NATO-neutral countries that do not wish to participate in a collective European defence effort. But that will enable the creation of an intergovernmental structure that brings in third countries, and the UK would be a meaningful contributor in that context.
The final thing I would say is there is a current discussion taking place within Europe on the European defence industry programme. That is €1.5 billion, so the amounts are meaningless, but the framework is absolutely critical, with the discussion over European preference and the perception of the US’s role in European security going forward. All those issues are being debated in the context of this EDIP proposal that most member states believe will form the basis of the agreement that underpins the bigger initiative in response to Trump as well as the MFF. That is absolutely worth paying attention to.
Q8 Lord Jackson of Peterborough: I am going to ask about the institutional political landscape in the EU now. It is quite interesting. If I can go back to your article—forgive me, I got it wrong; it was not on your blog, it was in the FT, which of course you knew—we are told that the single market is inviolate and its integrity and the institutional architecture have to be protected. Yet, in your article, you say—for instance, on the defence issue—“Ukraine is now being progressively integrated into parts of the single market rather than being forced to swallow wholesale the acquis communautaire—the body of common law—wholesale, showing that the EU can prioritise politics, and think creatively, when it wants to”.
My question is: why is the EU not willing to extend the same flexibility to the United Kingdom? Although the Commission has changed, as has the Parliament, is that position going to remain as implacable as it has been since Martin Selmayr articulated, somewhat unfortunately, that essentially the UK has to suffer for delivering Brexit?
Mujtaba Rahman: I will risk the scorn, I am sure, of my fellow panellists here when I say this, but I do not believe the indivisibility of the four freedoms is sacrosanct. That is not a view you will hear many, if any, people say in Europe. But it is worth going back to 2016. The core elements of the single market were linked to the indivisibility of the four freedoms. Those two things were separate, and ultimately there was a European Council decision that linked those things.
Again, most important in the first instance is the Government being clearer about the detail in their own ambition. Assuming they were to do that, I think there is a debate to be had within the EU which is internal to member states such as France. Macron was absolutely clear on the need to ensure that the Brexit settlement was worse than membership, but now that Brexit is perceived as not having been a success, there is a little more space within member states and the Commission to think a bit more creatively about the possibility of improving ties.
There is not a huge demand from the member states on the Commission to improve the relationship. Most member states are happy with the status quo, which is why if the Government want to pursue this path they need to make the argument and be persuasive in Brussels, and again demonstrate how across the entire relationship certain wins for the UK Government—for example, on trade—could be counterbalanced by concessions on other core interests that relate to the EU. Whether that is on energy, migration, or whether that relates to security and defence is yet to be defined. Again, the conversation within Europe has evolved, and if you speak to far-sighted officials, who see the relationship in strategic terms—they are the most senior officials—there is a willingness to contemplate a new relationship. But it is something the Government must lean into.
Lord Jackson of Peterborough: Are those officials in the Commission or Council? Who has the balance of power?
Mujtaba Rahman: Von der Leyen is a remarkable president who understands geopolitics and sees the geopolitical landscape very clearly. She absolutely wants to do more with the UK and, as I said, is willing to have an argument with the member states if the UK were to lean into that space. We knew Donald Tusk’s position when he was European Council president. He is now in Poland. The objective of the Polish presidency in the first six months of this year is security and defence. It was a top Polish priority to ensure that Keir Starmer would attend the leaders’ retreat on 3 February and create an opportunity for him to engage with European leaders. I think the same for Kaja Kallas, Friedrich Merz and also António Costa, who I know is quite keen on figuring out a way for the two sides to collaborate more closely together.
Armida van Rij: To the tail end of your question—why does the EU not consider this?—it already has in the past through PESCO, the Permanent Structured Cooperation. Usually, to be able to join PESCO, a third country has to have an administrative agreement with the European Defence Agency. The UK does not. It has none the less been able to join PESCO, so there has already been a case where the EU has leaned into the UK.[1]
Q9 Baroness Hayter of Kentish Town: You mentioned some of the differences between member states on defence. Going to other areas, are there differences between member states which will influence the reset agenda? Some of us do not follow particular countries as closely as you do, so it would be useful to have your insight on that.
Armida van Rij: To kick us off—I am sure you will be able to add more detail—there is definitely a difference in terms of those member states which are open and pushing for third-country participation in whatever context or sector that may be. Those tend to be smaller countries and those that the UK worked very closely with when it was still a member of the EU. So there is momentum and appetite among smaller member states to think through third-party participation on key issues.
On specific sectors, countries have different priorities. For Germany, as we have already heard, youth mobility is a huge issue. For France and the Netherlands, fisheries are a big issue. Again, this takes us back to the bigger vision and the overarching strategy: should that really be the priority over some of the bigger strategic issues?
Wolfgang Münchau: I would like to add that one factor which will impact the EU’s willingness to open up more—there is already some movement, I would agree—would be the United States. If Donald Trump imposed tariffs on certain sectors of the EU but not on the UK, the EU’s willingness to open up would very much depend on the UK’s own behaviour. If the UK prioritises its relationship with the United States, that answers the question. So, it depends very much on what he does, and how the UK and the EU respond, whether they co-operate together, with him or against him. There is a significant degree of uncertainty about this. This will possibly be a larger factor, because the tariffs and the policies he is trying to impose on Europe are very significant. They have significant fiscal and industrial policy consequences which are bigger than the relatively moderate agenda we are talking about in terms of the reset.
The Chair: This links to a question that Baroness Blackstone was going to put. Do you want to follow up on that now, Baroness Blackstone, to link the two? Then I will come to the Duke of Wellington.
Q10 Baroness Blackstone: I am very happy to do that. Perhaps you could elaborate a little on how you see the change in the Administration in the US affecting EU-UK relationships. You have alluded to this once or twice, but if you could focus a bit and say more about it, it would be helpful.
Wolfgang Münchau: Friedrich Merz believes that he can secure a trade deal with the United States. There are people in the UK who believe this is possible, that they can secure a trade deal with Donald Trump. It is not easy to secure a trade deal with Donald Trump, so I wish both of them luck. More likely, no one will succeed in achieving a trade deal. In terms of the indications we have had so far, there may be some blanket tariffs, and we will know a lot more in the next few days. But it could well be that he uses tariffs as a transactional negotiating tool in discussions about industry relocation. He certainly wants countries with very large export surpluses with the United States—the UK has a small one; Germany has a very large one—to shift production to the United States. He will achieve this one way or the other, either with or without the tariffs—whatever the macroeconomic consequences may be; he seems not to care that much about that.
There is a case to be made for the UK and the EU to co-ordinate their response to Trump, but there is also a temptation for either side to cut a special deal with him. That is what is ultimately likely to affect the UK-EU relationship, more than the issues that we have been discussing in respect of the resets.
My sense is that the Trump agenda has not been fully agreed, certainly on trade. I am hearing that there are significant differences of views inside the new Administration about tactical matters, not so much about the ultimate goal, but certainly about whether tariffs should be imposed indiscriminately or should follow negotiations. But I think he is serious about rebalancing bilateral, not multilateral, trade imbalances. This is not about changing global imbalances, which one could argue from an economic point of view might be sensible; this is really about bilateral transactional balances—a very different matter. This will impact the European economy, and it will need to find a very clever way to respond. Again, the UK is better placed than the EU on this because it has a lower surplus, but it is highly uncertain how this affects us.
Baroness Blackstone: Were the UK to do a special deal, as you put it, with the Trump Administration, would that affect the perceptions of the EU collectively or of the bigger member states towards the reset? Would it make them more negative?
Wolfgang Münchau: Oh yes. If the EU were to achieve a trade deal with the United States, the reset will happen in a very different way. You may find that the EU would want to have a trading relationship with the UK that is much more remote than the one it has at the moment. So there are choices to be made. There is a great sense of anxiety in EU capitals about what is happening in the world, about Putin, Trump and Xi, and if Trump now picks the UK as a strategic partner in Europe, maybe with Meloni and Viktor Orbán as his special friends in the EU, that would be very difficult and would put the EU on the spot, in a way. I would not think opening up to the UK would be a European priority at that moment.
The Chair: I will give Mujtaba a quick word, and then I am going to come to the Duke of Wellington to raise one other subject that I would like to cover.
Mujtaba Rahman: Ultimately, it depends on the nature of the deal the Government would seek with America. But I suspect, given we have an $800 billion trading relationship with the EU versus a $300 billion one with the US, the Government will be guided by where the economic interests take them. Ultimately, given the Government’s stated growth agenda, that will be more towards the EU.
If you think about what Trump has done to the European agenda, which is to force security and defence to the top of the political agenda, and if you think about the competitiveness challenges that the EU is grappling with, the question they are asking in Brussels is whether their security is bolstered and their competitiveness enhanced by a closer or a more distant relationship with the UK. I think the consensus is ultimately that a closer relationship will both facilitate the EU’s competitiveness challenges and reinforce and support its security.
Just very quickly on security, on Ukraine, there is a lot of collaboration and discussion taking place. I understand the most consequential discussion now is on a potential peacekeeping force, where the UK would participate alongside Polish, French and German troops in the Ukraine theatre, albeit not on the front line. There is a question about whether the US would provide a backstop role in that context if there were an attack, but the fact that debate is taking place is building tremendous credibility and equity for the UK in the EU. It is among a coalition of European member states, but it is absolutely appreciated.
If you look at all the financing initiatives for Ukraine, the UK contributed £3 billion to the extraordinary revenue accelerator, the G7 bond that is now dispersing to Ukraine. If you look at the broader security and defence agenda, the things that António Costa is contemplating presenting to EU leaders in February—integrated air defence, drones, capacity to recover and repair critical infrastructure and undersea cables if they are attacked—the UK has a very material contribution to make to all those areas, as well as to support the EU. Of course, there are fiscal space challenges certainly within the UK and also within Europe, but finding the money to advance these projects is not straightforward for any country, and there is a view that if the two sides were to collaborate there would be more that could be done together.
The trade piece is complicated, and I think the Government are very nervous about sending a signal around binary choices. They will be very careful in the kinds of trade arrangements they seek to strike with the US and what that signals with the reset, but there is a lot on the security and defence agenda and a tremendous amount to be done on Ukraine together, and they see that in Europe.
The Chair: Thank you very much indeed. Personally, I am very cautious about the idea of peacekeeping forces, because they are positioned potentially between two warring armed factions. The presence of troops on the ground is one thing, but I saw references in the press to peacekeeping forces. On the point of wording, I did not hear the Prime Minister say that.
Q11 Duke of Wellington: Youth mobility has been referred to once or twice. Mr Münchau mentioned that, a day or two ago, the Government said they would not contemplate such a scheme. I had not picked that up, but I am mystified, I must admit, why something as benign as a youth mobility scheme should be finding such resistance, apparently both from the new Government and the previous Government. I wonder what arguments any of you might have in favour, from the UK’s point of view, of a youth mobility scheme. Of course, it is tied up with the immigration figures and student visas. Many of us have been asking for years for student visas not to be included in the immigration figures, for obvious reasons; nevertheless, there seems to be a reluctance on the part of this Government. What arguments would you suggest to try to overcome this scheme, which would seem to be very much in the British and European interests?
Armida van Rij: I will mention two quick things, if I may. The first is, for reasons that I do not understand, the Government tied youth mobility to freedom of movement, which is one of their described red lines. Why they did that, I do not know, because they are fundamentally different. But in doing so, they have now put themselves in the position where, if they come back on youth mobility, as we hope they will, they are opening themselves up to a line of attack from those in opposition and beyond to say that they are reneging on that particular red line. I do not understand why they have tied youth mobility to freedom of movement. The only obvious thing I can think of is a misunderstanding and a lack of understanding of what the two things actually are.
As for a potential argument—personally, I disagree with this—I wonder whether the Government are so focused on economic growth and pursuing an economic growth agenda that youth mobility might not be seen as actively contributing to that agenda, and therefore it is not at the top of the priority list, even though, certainly for the EU side, it would be a quick, easy win and something that is very important for some of the bigger member states.
Mujtaba Rahman: Morgan McSweeney is your campaign chief. He is now running Downing Street and is petrified about Reform and very nervous about Nigel Farage. I think that is the answer to the question. They are very nervous about what the situation will be with the right in five years’ time. They look at the situation in France and what has happened with Emmanuel Macron and the surging Rassemblement National, and it scares them. That being said, there is a recognition that a deal will be done. The Government are holding it in reserve. It is a negotiating tactic. They know the EU wants to move on youth mobility. It is unlikely that an agreement will be on a scheme as vast as the European Commission proposed in the run-up to the general election. It will be something a lot narrower, but they recognise that this is a demand from Germany and key member states, and they will have to give. It just does not make sense in a negotiation to give up the most offensive ask from the EU immediately. So I expect they will do it at a later stage.
Q12 The Chair: Can I just ask one wrap-up question? Ms van Rij, you said at some point this might be a process that would last five or even 10 years; where do you think the reset will or can get to by the end of this year—or is the right timeframe to think of where it will get to before the next general election? Is it different depending on different parts of the reset?
Armida van Rij: The EU-UK summit that is going to happen in the spring is positive. One of the things that I would potentially expect to see coming out of it is a joint declaration on security and defence, because a declaration is not legally binding and does not need to go through Parliament; it is an easy, quick way to set a framework for co-operation. But a lot will depend on the external context. We have talked about Trump. How is he going to move over the next few weeks and months? That will either hasten things or slow things down, as Wolfgang was saying earlier.
The other thing is this tension that we have talked about between the reset with the EU and the Commission and the bilateral reset between the UK and individual EU member states. That is clearly accelerating and moving far more quickly than the Commission, or EU institutions, reset, and the Government will continue to pursue that. My only word of caution is, in doing so, one cannot ignore the EU institutions, and we certainly do not want to annoy them. That is the constant tension and balancing act between pursuing bilateral relations, which are easier to do in the defence, security and foreign policy space, because it is intergovernmental, as we have discussed, and the Commission does not have a direct mandate, and, at the same time, things that have to go through the EU being essential.
There is also the TCA review coming up in 2026, and I would expect preparations for that to get well under way within the next year, bearing in mind everything that we have discussed so far and that there is not really an appetite from the EU side to renegotiate the entire TCA and go through it page by page, as perhaps the UK may want.
The Chair: Do we see the reset being gradually wrapped up into the review of the TCA and that of energy and fisheries, which are already on the programme for 2026? Are we looking at a multi-year programme for the reset on the trade institutional side, for example?
Armida van Rij: I would think so, also because the TCA allows for additional agreements under or as part of the TCA, so there is scope to widen those. The one sticking point that has not come up yet is the lack of full implementation of the TCA, particularly on the UK side, and how that frustrates the EU. So not doing so will cost a bit of good will.
Wolfgang Münchau: I very much agree. I would not call it a reset; I would call it a gradual development of the relationship over a long period of time. It will be affected by external events and not by the past. It will be affected by technology. This is basically not the single market in the EU any more; it is outside it. It will be affected by geopolitics, by Ukraine, and by Trump. These are factors that might drive us together or apart, not what is on anybody’s agenda.
The Chair: Mujtaba, do you have any wrap-up thoughts on that?
Mujtaba Rahman: The best-case scenario is a movement towards an SPS deal by the end of the year, with parallel negotiations on fish, youth mobility, migration, energy—that is probably not the base case; I suspect it will require a bit more time—but that we are in a much more mature negotiation, with a number of tracks running in parallel between the two sides, certainly more than we have today, with a much better understanding of the detail in the Government’s plans.
The Chair: Thank you very much indeed. We have managed to get through without a vote. I am very grateful that you have given us a bit of extra time, covered a lot of ground, and got us off to a very good start for our inquiry. With the thanks of the whole committee, I draw the public part of the meeting to a close.
