5 December 2025: Lammy supports a return to the customs union

Deputy Prime Minister David Lammy has suggested that rejoining the European Union’s customs union could increase economic growth as ministers increasingly hit out at the financial damage caused by Brexit.

Mr Lammy refused several times in an interview to rule out reversing Brexit, arguing that leaving the EU badly damaged the UK economy and saying Labour should consider greater cooperation with Brussels.

The OBR forecasts that leaving the EU will reduce Britain's long-run productivity by 4%.

Before the Budget, Chancellor Rachel Reeves said Brexit had an even bigger impact on the economy than critics predicted.

Lammy, who is under pressure over his move to abandon jury trial for all but the most serious offences, may be trying to deflect some of the criticism by trying to switch attention to a subject that is close to the hearts of his backbench colleagues. Or he could be trying on the Chancellor's role for size in case Rachel Reeves feels unable to continue.

The UK finds itself once again debating why its economy has grown slowly since the mid‑2010s. Brexit has reduced UK GDP by 6% to 8%, with the impact accumulating gradually over time. Investment, employment, and productivity were all affected, reflecting a combination of elevated uncertainty, reduced demand, diverted management time, and increased misallocation of resources.

A respected think tank has reported the UK economy is expected to grow by only about 1% in 2026, leaving it close to the bottom of the G7 growth table and adding pressure on borrowers already dealing with high debt costs.

According to Oxford Economics, the Budget has not convinced markets that the UK’s public finances are on a sustainable footing. The consolidation plan is heavily back‑loaded into 2029–30, leans strongly on tax increases and assumed “efficiency savings”, and relies on growth projections from the Office for Budget Responsibility that sit near the top of the forecasters’ range.

These economic concerns sit alongside a complex political backdrop. The Government is well behind in opinion polls, and both the Prime Minister and the Chancellor have low personal approval ratings. While a change of government is seen as unlikely in the near term, given Labour’s large majority, leadership turmoil is viewed as a realistic prospect, which could unsettle investors.

Sales of electric vehicles have slumped since the budget introduced a pay-per-mile plan last week. The market was already concerned that the UK’s net-zero policy had increased the country’s reliance on EVs.

Britons’ reliance on their 34 million cars also comes at a great economic cost. Heavy traffic and congestion cost £7.5 billion a year in wasted time. An estimated £17 billion is needed to fix the worn-out road network.

In the last 30 years, as the UK population has grown by 19%, the number of cars has exploded by 56%. Outside of London, 81% of British households own at least one car.

Fitting all of these vehicles into a reasonably small country means that driving has clear priority over other forms of transport. In Germany, 90% of people living in large cities have access to a tramway or underground train system. In France, it’s 80%.

In the UK, the figure is less than 20%, a level similar to that in the US. This is a significant issue for the PM to consider while making plans for the future.

The pound lost some of its recent lustre yesterday but remains well-supported as the dollar suffers from something of an identity crisis.

Sterling fell back to a low of 1.3322 yesterday and closed at 1.3328.

Bank of England Monetary Policy Committee member Catherine Mann told a conference in New York yesterday that the U.S. dollar's status as a global reserve currency could be undermined by the country's reduced support for its friends and military allies.

"If you can't depend on a certain country to be your ally, then why are you holding their currency in reserve?”

Mann, a U.S. citizen, went on to tell her audience that the United States could draw lessons from Britain, where the pound's share of global reserves shrank from 80% in 1900 to 5% now, she said. The dollar accounted for 58% of global official currency reserves last year, according to data from the International Monetary Fund, down from 65% in 2016.

Part of sterling's decline was caused by the cost of World War I, when Britain shifted from being a creditor nation to a debtor nation, as well as by the growth of the U.S. economy in the 20th century and the further financial hit from World War II.

Recent academic research placed increased emphasis on diplomatic factors as Britain gave up its empire and global military role, rather than purely economic and financial ones, Mann said.

"The military alliances, the institutional relationships across countries, the agreements that countries have with each other, these ... have been identified as being much more important than people thought in the past," she said.

"I do see a corollary in today's environment, where there's a retreat from these alliances by the United States," she said.

U.S. President Donald Trump has been much more insistent than his predecessors in telling European countries to shoulder more of the cost of NATO.

Mann said this could lead to greater dominance of the euro as a reserve and trade currency in Europe and nearby areas, much as the dollar took over in Latin America in the 1920s and 1930s. But the stalled growth of the yen as a global currency since the 1980s showed this was not a certainty. It relied on countries with potential reserve currencies being willing to give up some control over financial institutions.

"It's going to be a long time before we see the Yuan moving in that direction," she said.

It seems likely that President Trump will now announce his pick for Chairman of the Federal Reserve before the Christmas and New Year Holidays. While hardly needing to use Rachel Reeves’ tactic of “testing the water” before the announcement, there has been a steady flow of rumours from the Treasury and Oval Office recently, which have made Kevin Hassett the favourite candidate.

Though Hassett is among several names that have been mooted for the top job at the Fed, he stands alone for the amount of time he has spent in Trump’s proximity. A career economist, Hassett was appointed as Trump’s top coordinator on economic policy after serving in his first administration as the head of the Council of Economic Advisers, an older, more research-oriented body than the National Economic Council.

After leaving the first Trump administration in 2019, Hassett briefly returned to the White House to serve as an adviser on the COVID-19 pandemic. Crucially, Hassett has signalled his support for cutting interest rates faster, something Trump has been angrily demanding from the current Fed chair, Jerome Powell, for months to little avail. Trump has insisted that concerns that his tariffs could spell a return to high inflation are overblown and suggested that the benchmark rate should be set as low as 1%.

Several investors have expressed concerns that Trump will exert “undue influence” over Hassett, making the Federal Reserve less independent than intended.

The dollar index regained a little poise yesterday. However, next week's FOMC meeting, at which a rate cut is expected, and the confirmation of Kevin Hassett’s appointment may see it continue its downward progression.

It reached a high of 99.08 yesterday and closed at 99.06.

The ECB’s infatuation with inflation continues unabashed. Discussing a quarter-point fluctuation in consumer prices while the economy is close to recession, except in a few places like Spain and Italy, does not seem to be the best use of technocrats' time.

Nonetheless, every time the ECB president steps onto a podium to speak about the economy, she is unable to lead with anything other than inflation.

The most ironic part of this infatuation is that a large part of the fall in consumer prices this year was due to the strength of the Euro, which was almost exclusively driven by the weakness of the dollar caused by President Trump's tariff policies.

Eurozone retail sales were flat in October 2025, following a modestly revised 0.1% increase in September and falling short of expectations for a 0.1% rise. Gains in food, drinks and tobacco sales (+0.3% vs. –0.2% in September) and automotive fuel (+0.3% vs. 0.0%) were offset by weaker non-food purchases, which slipped 0.2% after holding steady a month earlier.

On an annual basis, however, retail activity showed more momentum: sales rose 1.5%, up from 1.2% in September and slightly above the expected 1.4% increase.

This is data that should draw more comment from ECB officials, rather than constantly discussing a race that has already been run.

Earlier this week, the European Commission unveiled plans to boost EU resilience to threats such as rare-earth shortages by strengthening trade measures and adding new economic security tools.

The plans mark the culmination of Europe's slow realisation that it must act fast and across sectors to end years-long dependency on single points of origin for energy or goods. It follows several painful jolts in the form of the COVID pandemic, Russia's war in Ukraine and the impact of U.S. tariffs.

The EU executive set out what it called an "economic security doctrine" for the 27-nation bloc, which is also contending with Chinese restrictions that have choked off supplies of essential commodities.

The Commission wants to remain a global manufacturing leader, but risks falling behind China and the U.S. in technologies like batteries and AI.

It agreed on Wednesday to end Russian gas imports by late 2027, and the Commission wants to repeat this success with the REsourceEU Action Plan, which aims to accelerate the development of its own resources.

It is refreshing to know that Ursula von der Leyen is pushing for the EU to use its vast purchasing power to secure the region's supply chains.

The euro slipped back a little yesterday but is well-supported overall. It fell to a low of 1.1641, despite making a fresh high of 1.1665 earlier. It eventually closed at 1.1644.

Have a great day!