This matters because prolonged economic underperformance in the UK changes the incentives on both sides of the Channel. Governments and regulators should expect more pressure for sector-specific fixes, more disputes over implementation, and more requests for pragmatic cooperation that stop short of full institutional reintegration. That creates risks of piecemeal governance, but also openings to shape standards, market access terms and enforcement mechanisms in ways that protect EU interests.
Key Risk
City of London firms face a compounding risk: without a financial services MoU, UK institutions cannot passport into EU markets, while EU firms face reciprocal gaps in UK equivalence decisions. This leaves a structural gap in cross-border asset management, insurance, and derivatives clearing that worsens as regulatory regimes continue to diverge. Smaller firms, unable to maintain dual regulatory footprints, are the most exposed.
Strategic Opportunity
The fiscal pressure documented here creates political conditions the European Commission and UK Treasury have not had since the TCA was signed: both sides now have domestic incentives for sector-specific deals. Energy interconnectors (NEMO, BritNED, IFA2) already demonstrate operational interdependence – an EU-UK electricity market agreement modelled on the Norway-EU framework would reduce costs on both sides and is technically achievable without reopening the TCA.
Historical Context
The closest structural parallel is not European integration but European reintegration after a partial exit. Norway’s 1994 decision to enter the EEA rather than full EU membership created exactly the kind of sector-specific governance complexity now visible in the UK-EU relationship: Norway accepts EU single market rules with no formal vote on them, pays into EU programmes, and navigates opt-outs on a case-by-case basis. The political cost of that arrangement remains contested in Oslo. The difference is that Norway chose it deliberately; the UK arrived at something similar by accident, without the institutional framework that makes Norway’s position stable.
What to Watch
- Monitor OBR forecasts for explicit Brexit cost estimates – the Office for Budget Responsibility has begun incorporating divergence costs into long-run fiscal projections; any upward revision shifts the domestic political calculus on reintegration.
- Watch the UK-EU financial services dialogue under the Windsor Framework follow-on track – the absence of an MoU on equivalence has been flagged by both the City of London Corporation and the AFME; movement or stalemate there is the clearest leading indicator.
- Track UK energy interconnector utilisation rates and any UK-EU joint infrastructure statements – the National Grid’s annual electricity ten-year statement is the authoritative source.
- Observe UK government response to IFS and Resolution Foundation analysis on public services funding gaps attributable to lower-than-trend GDP – this is where fiscal pressure converts into political pressure for pragmatic EU engagement.
Read more: John FitzGerald: UK government is still paying the cost of Brexit →
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