New Prime Minister, Same Problem

When British Prime Minister Keir Starmer led the Labour Party to a landslide victory in July 2024, he hailed the result as the end of 14 years of misrule by the Conservative Party and the beginning of a long period of stable, technocratic government. Starmer, the cautious former director of public prosecutions, drew a deliberate contrast to Conservative Prime Minister Boris Johnson’s illegal parties during the COVID-19 lockdown and the financial meltdown triggered by Johnson’s successor, Liz Truss, by promising a return to seriousness, and his Chancellor of the Exchequer Rachel Reeves vowed to pair fiscal responsibility with a more active state. The exhausted electorate gave Labour a modest 33.7 percent of the vote, which translated to 411 out of 650 seats in the House of Commons because of the way votes were distributed. It was no ringing endorsement—immediately dubbed a “loveless landslide”—but it was more than enough to earn Starmer the benefit of the doubt.

Almost two years later, voters’ doubt has hardened into something closer to contempt. Labour has been trailing Nigel Farage’s insurgent Reform UK party in most national polls by almost ten points, a sharp contrast to the 2024 election, when Reform’s share of the vote was nearly 20 points below Labour’s. On June 22, his position no longer tenable, Starmer bowed to the inevitable and announced that he will step down as soon as Labour chooses his successor. His all but inevitable successor is Andy Burnham, the popular former mayor of Greater Manchester who joined Parliament after winning a by-election in Makerfield on June 18 with nearly 55 percent of the vote.

Most explanations for Labour’s troubles focus on tactical errors: Starmer’s communication failures, Reeves’ overly strict fiscal rules, a cut in 2024 to pensioners’ winter fuel payments, and a tax on family farms imposed in 2025. All are real, but they are symptoms, not causes. The deeper story is that Brexit, the defining political event of modern British history, is finally presenting its bill, and Labour happens to be in office as it arrives. For a decade, the United Kingdom managed to defer a full reckoning with its vote to leave the European Union in June 2016. Starmer’s strategy depended on neutralizing Brexit as a live political issue, defusing it so that it could neither rally his opponents nor split his own coalition. This meant ruling out a customs union or membership in the single market and dressing up modest regulatory cooperation with the EU as the limit of his ambition.

Electorally, that strategy worked. It cost nothing in the short term, and in the comparatively forgiving conditions of 2024, the British economy could underperform its peers but avoid an acute crisis. That environment no longer exists. U.S. President Donald Trump’s return to the White House, his weaponization of tariffs, and the breakdown of the rules-based trading order have exposed a British economy with no shock absorbers left. The EU, for all its dysfunctions, has a huge internal market and the scale to negotiate with the great powers as more than a supplicant. The United Kingdom does not.

The best way now for the United Kingdom to weather the global storm—and the best way for Labour to keep its coalition from falling apart—is to pursue closer partnership with the EU. There is reason to think a grand bargain is possible. The British economy needs access to European markets, and Europe needs Britain’s military power. What is needed is a final, elusive ingredient: political will.

WHAT HAS GONE

To understand why the United Kingdom is suffering more than its continental neighbors from recent economic shocks, it helps to recall what EU membership provided. The single market gave British firms barrier-free access to 450 million consumers and made the United Kingdom a magnet for foreign investment seeking a foothold in Europe. The customs union spared British exports the rules-of-origin checks, sanitary inspections, and paperwork that now burden shipments across the English Channel. Rules that allowed EU firms to operate anywhere in the bloc—a privilege known as passporting—made the City of London the continent’s de facto financial center, and coordinated regulation gave the United Kingdom a seat at the table when European standards were written. None of this required the United Kingdom to give up its currency, central bank, fiscal policy, or army. The opt-outs British Prime Minister John Major negotiated at Maastricht in the early 1990s gave the country most of the upside of integration with little of the supranational constraint. This was a deal the rest of Europe tolerated because the United Kingdom brought military weight, financial expertise, and a counterweight to Franco-German dominance.

The decision to leave that arrangement was, as Mark Blyth and I argued in Foreign Affairs two years ago, a colossal economic own goal. The introduction of nontariff barriers raised the cost of trading with Europe by an amount the British government–funded Office for Budget Responsibility now puts at roughly four percent of long-run GDP. This means a permanent reduction in national income to the order of $132 billion a year, just under $4,650 for the average household. British exports of services to the EU, financial services above all, have not recovered their pre-referendum trajectory, and foreign investment has shifted toward Amsterdam, Dublin, Frankfurt, and Paris. As the British physicist Richard Jones has noted, by the end of 2023, British real per capita GDP was roughly 28 percent below what growth trends between 1955 and 2008 predicted. Brexit is not the sole cause—chronically weak productivity, years of underinvestment, and the long shadow of the 2008 crisis that was followed by years of austerity all predate the referendum—but it worsened existing trends and foreclosed the easiest routes back to growth. For most of the post-referendum period, these costs were diffuse and easy to dismiss as the special pleading of economists who had opposed Brexit all along. Resilient British employment (much of it low-paid, low-productivity service work) made it possible to claim the doom-mongers had been wrong. They had not been wrong. They had just been early.

The clearest signal is in the British bond market. A government bond yield is the interest rate that a country pays to borrow. A rising yield signals that lenders see the risk of lending to that country as increasing. It makes the servicing of the national debt more expensive, leaving less money for everything else. The yield on ten-year British government debt has climbed steadily through 2025 and into 2026. This is not primarily the result of Labour’s fiscal decisions. Reeves has been more disciplined than her Conservative predecessors, and the fiscal rules she adopted to guide her economic policy are tighter than those set by the previous Chancellor of the Exchequer, Jeremy Hunt. Yet bond yields keep rising. Part of the explanation is global: the U.S. Federal Reserve has been slow to cut interest rates, which keeps borrowing costs elevated worldwide and drags up yields on other governments’ debt, the United Kingdom’s included. Meanwhile, term premia—the additional compensation investors demand for holding longer-dated debt—have also risen everywhere.

But the United Kingdom has consistently underperformed its peers. Its ten-year yields now trade at a premium of roughly 115 basis points over comparable French bonds and 185 over German ones—meaning the United Kingdom must pay markedly more than its neighbors to borrow for the same length of time. This spread reflects not the state of London’s public finances, which are similar to those of Paris and Berlin, but relative growth prospects and a diminished capacity to absorb shocks. Investors cannot see how the United Kingdom grows out of the trap of weak growth and expensive borrowing without either a fundamental change in its relationship with the EU or a sustained austerity that would test the limits of political tolerance.

SECOND THOUGHTS

The most striking development of the past year has been the quiet but unmistakable shift in public opinion on Brexit. Polling by YouGov since 2022 has shown a majority of the electorate views Brexit as a mistake. Indeed, this month, 56 percent of Britons said it was wrong to leave. Among Labour voters, the shift is starkest: roughly four in five support opening negotiations on a customs union. There is no consensus for rejoining the EU, but the debate is no longer about whether Brexit delivered on its promises. Instead, the debate concerns how closely the United Kingdom should reconnect with Europe. That so many of these voters are nonetheless drawn to Farage—who campaigned for Brexit and now argues not that it was a mistake but that the political class failed to deliver on it—says less about enthusiasm for Brexit than about a complete disillusionment with the established parties. Reform’s rise is powered by anger over immigration, stagnant living standards, and failing public services, and a large number of the people who back it tell pollsters in the same breath that leaving the EU was a mistake.

This change in sentiment has not yet translated into policy, however. Starmer’s team was scarred by the 2019 election in which Labour’s support for a second referendum on leaving the EUcost it scores of seats in northern England that had previously been among the party’s most secure (its so-called “Red Wall”). As a consequence, Starmer was determined to avoid doing anything that could be cast as a betrayal of Brexit. The 2024 Labour manifesto ruled out rejoining the single market and the customs union and promised only a vague “reset” with Brussels. In office, the party has produced a security partnership, a modest agreement related to sanitation in the trade of agricultural products, the United Kingdom’s resuming its participation in the Erasmus scheme for students, and some technical cooperation on energy. This is hardly enough to satisfy voters who care less about student exchanges or veterinary paperwork than about the high cost of living, flat wages, and public services stretched to the breaking point.

The challenge to Starmer by fellow Labour politicians must be read in this context. Former Health Secretary Wes Streeting—who had been considering his own leadership bid before deciding to support Burnham—has gone furthest, calling in May for the United Kingdom to rejoin the European Union. Burnham cannot be as boldly pro-European. Makerfield voted to leave the EU in 2016, and accordingly, he kept discussion of Europe out of the by-election. The discipline paid off, but the leanings of his new constituency will remain a source of tension for Burnham. Nationally, a majority may want closer ties with Brussels, but the immediate threat to Burnham’s seat comes from the Euroskeptic Reform.

TRIPLE TROUBLE

Burnham, who is now overwhelmingly likely to be crowned Starmer’s successor in mid-July, faces what is best described as a trilemma. The new prime minister can have any two of three objectives: continued legitimacy of the Brexit settlement, restored credibility with bond markets through a plausible growth strategy, or unity of the Labour electoral coalition that returned the party to power in 2024. But he cannot have all three. Honor the referendum and keep the coalition together, and the bond markets impose their discipline as growth disappoints, and fiscal headroom shrinks. This, in essence, has been the Starmer-Reeves strategy, and its failure is increasingly evident. Pursue a customs union or single-market realignment with the EU to restore growth, and Reform will run a “Brexit betrayal” campaign that could fracture Labour’s majority. Try to finesse it—deeper integration in some sectors, rhetorical defense of Brexit in others—and the worst of both worlds could result: too little to satisfy markets and too much drift to pacify Brexiteers.

The situation today most closely resembles that of 1976, when Prime Minister James Callaghan’s Labour government went cap in hand to the International Monetary Fund amid a currency crisis. That episode is remembered as a humiliation—and it was. But it was also the moment that external discipline forced Labour to abandon the postwar Keynesian strategy of sustaining full employment through active demand management. This was a transition the government did not choose but had imposed on it by markets, inflation, and ultimately, the IMF. The current leadership faces a similar moment. The shock absorbers that allowed the United Kingdom to underperform without sliding into an economic crisis—low global interest rates, the rules-based trading order, and EU membership itself—have all been stripped away. What remains is an economy that must grow faster than it has been, that needs to be financed at rates higher than it can afford, and that faces the most hostile global environment in a generation. Before long, something will have to give.

If there is an exit from the trilemma, it lies in a grand bargain whereby the United Kingdom offers the EU access to its substantial military and intelligence capabilities in return for durable access to the single market. Such an arrangement would enable enough integration to satisfy the British bond markets without the repudiation of Brexit that would shatter Labour’s coalition. The case for doing so has only sharpened since Blyth and I proposed it in Foreign Affairs in 2024. The worry then was that Europe was too passive and dependent on Washington to make a deal worth Britain’s while. That Europe is gone. Jolted by Trump’s actions—his abandonment of Ukraine, his threats to Greenland, and his wavering on NATO—the continent has begun, haltingly, to take its own defense seriously. Early this year, the EU began disbursing a $175 billion rearmament program, borrowing collectively for the first time in its history to finance joint defense projects and rebuild a hollowed-out industrial base.

The core of future cooperation is being built, however, not by Brussels institutions but by “coalitions of the willing,” the most important of which is led by France and the United Kingdom. Paris and London anchored Ukraine’s defense after U.S. aid collapsed from more than $19 billion in 2024 to a token $400 million in 2026, and in April they convened 51 countries to plan an independent mission to reopen the Strait of Hormuz. The United Kingdom already supplies the money and manpower that Europe needs to defend Ukraine and deter Russia. But, because it is not in the single market, it collects none of the economic dividend from being a serious European actor. A grand bargain would fix that. Europeans might balk at rewarding a country that chose to leave, but the status quo no longer serves the EU well. Current British contributions are voluntary and reversible, hostage to whoever governs in London. A binding treaty would lock British forces, money, and intelligence into Europe’s defense for the long term. And the United Kingdom is in a position to charge for those contributions precisely because the continent can no longer count on the United States.

The boldest version, and the right one, would not treat security as a sweetener to a trade deal. Instead, London and Brussels should sign a single-market and customs agreement as well as a binding security partnership. The economic deal would restore most of what Brexit destroyed, including friction-free trade in goods and agriculture and selective access in services, but allow opt-outs to make it acceptable to the British public: no obligation to adopt the euro and no free movement of people. Brussels would not concede on the latter lightly, but because it urgently needs British defense capabilities, it may be willing to accept managed, reciprocal labor-mobility schemes for the young or for skilled workers in place of unconditional free movement. The security deal, meanwhile, would tie the British armed forces, defense industry, and intelligence services into Europe’s collective defense—through joint procurement, integrated planning and command, and guaranteed contributions to European missions—by treaty, ensuring that the partnership endures through political ups and downs in London.

None of this will come easily. But Labour’s hand is stronger than the timidity of its red lines suggests. The United Kingdom should present itself not as a supplicant but as an indispensable contributor to a European security project finally getting serious, and ask to be paid accordingly. The alternative of continued decline, rising yields, fiscal contraction, and the slow electoral suicide of the party is a route that leads nowhere.

THE END OF THE ROAD

In an essay published in Foreign Affairs in early 2017, I argued that Brexit would damage the United Kingdom more than the European Union, the costs would build inexorably, and the change would eventually force a reckoning. That prediction has been borne out. The EU has not collapsed. Instead, it has grown more cohesive through a series of crises—the pandemic, the war in Ukraine, the return of Trump—and Brexit is now widely understood across the continent as a cautionary tale rather than a path to follow. The United Kingdom has learned the hard way that smallness in an integrated world is not the same as sovereignty.

Burnham’s commanding win in Makerfield lets him claim, with some justification, to be the one Labour figure who can keep Reform at bay. If, as seems likely, he is elected as Starmer’s successor, he will have to confront the trilemma head on, facing a Reform party that is now a serious electoral force and an electorate that is exhausted, angry, and convinced that the political class has not been honest about the tradeoffs ahead.

Brexit was, at its core, a revolt against an economic settlement that had failed large parts of the British population. The tragedy is that it produced an even worse settlement. It was always a fiction that the United Kingdom could leave the EU without incurring economic consequences, but now the idea has been disproved conclusively. It remains to be seen whether Labour will tell the truth about the cost of staying outside the EU, and whether the country’s political and economic system can absorb that truth without a deeper crisis of legitimacy. In the 1970s, the Callaghan government eventually accepted the discipline that markets impose, and Labour paid for it by spending 18 years out of government. But this generation of Labour politicians has not yet accepted its own predicament and is still trying to finesse a position that economic and geopolitical reality no longer permits.

The party that won power on a promise of competent management may yet be able to summon the courage to acknowledge the damage that its predecessors did and to begin, however cautiously, to undo some of it. Brexit’s bill has come due, and someone will have to pay it. The only question is whether Labour does so on terms that allow it to govern—or on terms that ensure it does not.

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