This week kicks off with a European Council meeting, which will be attended by UK prime minister Sir Keir Starmer.
With the German parliamentary elections are also drawing near, challenger Friedrich Merz will be debating incumbent chancellor Olaf Scholz this week.
The Bank of England (BoE) will also be making its first interest rate decision of 2025.
Starmer in Brussels
Starmer will join a European Council meeting in Brussels today (3 February), the first time a UK PM has attended such a gathering since Brexit.
Reports suggest Starmer will be aiming to begin talks on a UK-EU security deal, as part of his “reset” of relations – an intention set out at the start of his premiership last year.
However, ahead of the visit, EU diplomats have warned that Starmer will struggle to make meaningful progress without submitting to a “package” of “interlinked” concessions. Speaking to the Times, a source said:
“The security part is essential for us, we share security interests with the UK but at the same time there is no beating around the bush that fisheries are also very important.”
An agreement giving European fishing boats access to UK waters for fishing is set to expire next year.
A youth mobility scheme, which would enable 18–30-year-old UK or EU citizens to live and work in either jurisdiction for up to four years, has previously been rejected by Starmer. The diplomat suggested this would also need to be reconsidered to yield progress on the defence pact.
Fresh energy…
The FT reports that Starmer is also heading to Brussels with a more ambitious plan on economic cooperation, with a proposal to link the UK and EU Emissions Trading Schemes (ETS) – a plan which EU relations minister Nick Thomas-Symonds told Parliament’s Business and Trade Committee was “absolutely” the UK’s “ambition” for the schemes.
ETS linkage could also reduce cross-border friction when both parties’ Carbon Border Adjustment Mechanisms (CBAMs) are fully rolled out. CBAMs act as a tax on high-emission imports in order to prevent firms offshoring carbon-intensive production processes to avoid paying tax for producing those goods locally.
Two EU officials told the FT that the UK has already requested that ETS linkage and CBAMs are on the agenda for an EU-UK summit set to be held in the spring.
…is needed
Ahead of the visit, a leading think tank on UK-EU relations criticised the Labour government for not taking greater steps towards building economic and on the EU relationship.
“What has been proposed so far is small in scale and technical, rather than a vision for a substantially different relationship,” said UK in a Changing Europe (UKICE) researcher, Jannike Wachowiak.
She added that it’s “difficult to avoid the impression that EU policy is peripheral to Starmer’s government”.
German election
The German election draws nearer, with voters set to take to the polls later this month (23 February). Party leaders will be facing the public and one another this week, as the election campaign heats up amid a controversial political manoeuvre from Friedrich Merz.
On Saturday (8 February), the Christian Democratic Union’s (CDU) leader will address sister party Christian Social Union (CSU). On Sunday (9 February), he’ll face off against incumbent Olaf Scholz, whose Social Democratic Party remain in third place, behind surging far-right force Alternative for Deutschland (AfD).
The Chartered Institute of Export & International trade’s director of international affairs, Fergus McReynolds, suggested Scholz is facing an “uphill task” to turn things around ahead of the polls opening.
Merz controversy
However, commentators have questioned whether the intervention of former chancellor and CDU leader, Angela Merkel, will impact Merz’s current popularity.
Despite taking a taciturn stance on German politics since stepping down as chancellor three years ago, she spoke out to criticise Merz for using AfD parliamentary votes to pass an anti-immigration motion.
Leading parties have previously united in a decision to exclude the far-right group from participation in parliamentary decision-making, even when they have sufficient seats to contribute. This informal “firewall” has been in place since the AfD began increasing in popularity, and was described approvingly by Merkel as “an expression of great state political responsibility”.
Merz’ decision therefore marks a watershed moment, which Merkel condemned on Friday:
“I consider it wrong to abandon this commitment and, as a result, to knowingly allow a majority with AfD votes in the Bundestag for the first time”.
UK rate decision
The BoE will take the decision over whether to lower or hold UK interest rates on Thursday (6 February).
Entering 2025, it was predicted that the UK could expect at least two rate cuts this year, easing borrowing costs in a boost to businesses and homeowners.
Ahead of this week’s decision, City AM reported that economists and investors are widely expecting rates to drop from 4.75% to 4.5% – which would be a third cut since the 5.25% peak reached in August 2023.
Several concerning economic markers, following the Autumn Budget’s controversial National Insurance Contribution hike for employers, has convinced many that the cut will go ahead. Chief European economist at Goldman Sachs, Jari Stehn, told the FT:
“We think that the weakness in the recent growth data, deterioration in labour market indicators and gradual progress with underlying services inflation will mean that there is widespread support for a [quarter-point] cut.”
However, inflation has crept up to 2.5%, with prices expected to rise further following the Autumn Budget and a weakening pound. Experts predict inflation will reach 3.3% this spring, which could stay the BoE’s hand on future cuts.
Other dates in the diary
Monday – British Retail Consortium (BRC) economic monitor
Tuesday – Budget debates in Scottish and Welsh parliaments
Wednesday – Society of Motor Manufacturers and Traders (SMMT) car sales figures
Thursday – Results from Amazon, AstraZeneca and Nippon Steel
Friday – FAO food price index
Saturday – Labour Party local government conference
Sunday – China consumer price index
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