State aid is much misunderstood. It is cited by Jeremy Corbyn as a central reason for Labour’s policy to leave the European Union – but frustratingly never by reference to the specific policies he would seek to implement that State aid supposedly prevents. Conversely, State aid control is considered a non-issue by Conservatives. Which conservative wouldn’t want restrictions on wasteful corporate welfare and giving taxpayers’ money to foreign investors etc?
Both positions are fundamentally misguided. EU State aid control does not prevent nationalisation, or the rolling back of market liberalisation (such as in the NHS or prison services). But nor is it a backwater that can be safely ignored on the basis that subsidisation is a bad thing anyway so who cares.
State aid matters for two reasons:
First, the concept of State aid is much much wider than is commonly appreciated. The notion of State aid has been steadily expanded by the ECJ and the Commission. A concept that started life as a natural consequence of a customs union (because within a customs union it is impossible to use tariffs to defend your producers against unfair subsidisation) has expanded to catch very large parts of fiscal decision making – especially fiscal policy used to enhance competitiveness. Examples of the reach of State aid are included in a paper I co-authored with Barney Reynolds for Politeia: The Withdrawal Agreement, State aid and UK competitiveness.
Second, once something is considered State aid it falls within the European Commission’s jurisdiction either to approve or disallow (or often indeed ignore). This is, of course, a big part of why the Court and Commission expanded the notion of State aid in the first place. Doing so increased the Commission’s jurisdiction over the Member States and while the Commission almost always approves aid that is shown to be proportionate and socially useful, the role of the Commission in this area is inherently a mix between the political and legal. The role requires delicate judgment about whether the aid is really necessary, what would be the consequences of approving it or disallowing it for fairness across the Member States etc. However, while State aid control involves significant discretion, it is very important to dismiss immediately any conspiracy theory that during the UK’s membership the Commission has routinely abused its control or that Member States are treated unfairly (e.g. that France gets away with it and the UK is unfairly picked on). That is complete nonsense in my experience.
The controversy around State aid in a Brexit context therefore is less about the constraint it inevitably represents and more about who controls fiscal policy – especially insofar as it affects competitiveness. If Brexit is supposedly about taking back control, it should be immediately obvious why the State aid provisions are so important in the context of the Withdrawal Agreement.
The Withdrawal Agreement deals with State aid in two different ways:
In the transition, the EU retains full jurisdiction over State aid in the UK while the UK loses all of its political power in the EU. This is the basic bargain of transition – but the difficulties this causes are particularly acute in State aid as the European Commission has ability to approve or disallow fiscal decisions falling within the definition of aid. The Withdrawal Agreement requires the Commission as a legal matter to treat the UK as if it were still a Member State – and legally it will almost certainly do so. But the State aid system of control has always mixed law and politics. While the UK was treated fairly as a Member State, with the UK powerless, there is room for the Commission to treat the UK differently in ways that are non-justiciable (i.e. not open to legal challenge). Whether you think they will or not depends on whether you trust the Commission. Given that in transition the UK isn’t actually a Member State anymore and moreover is in the process of transforming itself into a competitor to the Member States, will the Commission resist the temptation to use its fiscal control via State aid to treat the UK less favourably than it should? Difficult to say.
In the backstop, which realistically reflects the permanent position because either the UK remains in the backstop itself or the new relationship is explicitly to be “built” upon it, the position is more nuanced but not much better – at least not in respect of goods:
- The UK follows EU State aid rules dynamically – as the Commission and ECJ expand the notion of State aid in future, the UK is committed to following suit. This is despite the fact that State aid is already more than wide enough to catch genuinely distorting subsidisation.
- The UK CMA has formal decision making power in Great Britain. However, this power is only really nominal. The CMA is not entitled to take a decision until the Commission has offered it’s “opinion”. This opinion is effectively prior approval. Why? Because the CMA’s position in seeking to resist the Commission’s view would be so weak. First, the CMA is inexperienced in State aid and has anyway agreed to follow exactly the same policy and procedure as the Commission. Second, the CMA must await the opinion regardless of how long it takes and must take upmost account of it when it arrives. Third, if the CMA were to disregard the Commission’s opinion, the Commission will have the ability to impose unspecified “interim measures” against the UK to compensate. Fourth, the CMA has no equivalent powers vis a vis the Commission.
- The Commission retains full decision making power in Northern Ireland. It is very difficult to understand how this can be defensible and why the CMA cannot do the job. An entirely foreign organisation will fully control any fiscal policy in Northern Ireland that can be described as State aid without any democratic oversight or political legitimacy.
There are remedies to these imbalances – including in a world where the backstop is retained. The recent paper I co-authored with Barney Reynolds The Withdrawal Agreement, State aid and UK competitiveness walked through how these might work.
Whether the Withdrawal Agreement is accepted in its current terms or amended it is important that all sides of the debate understand the State aid provisions of the Withdrawal Agreement. They will fundamentally affect the UK’s ability to use fiscal policy to improve its competitiveness post Brexit.