By George Peretz
In his speech yesterday, Jeremy Corbyn cited state aid control as a reason for not wanting to stay in the single market after Brexit.
That argument faces three main problems.
The first is that the EU has made it clear that state aid control will be a red line for any free trade agreement with the UK after Brexit. Brussels sees this as part of a "level playing field". Its fear here is legitimate. The UK is economically very big and very close to the continent. If it can subsidise its industries to its heart's content, it could flood the European market with cheap goods, which producers in France, Germany and elsewhere would be unable to compete with. That is why state aid rules are written into the EU’s deep and comprehensive fair trade agreement with Ukraine and its agreement with Turkey – also a (limited) customs union. So, unless Labour is advocating no-deal – which it obviously is not – the state aid regime is just something it is going to have to live with.
The second problem is that WTO rules permit any other WTO member, including the EU and the US, to respond to any goods subsidy with countervailing measure of retaliatory special tariffs. There can be no doubt that they would do so if given cause.
I dealt with both of those points in evidence to the House of Lords EU committee recently, so I’d like to focus on the third problem. This is simply that it’s hard to see why state aid control should be a problem for Labour in the first place.
At the end of his speech, Corbyn was asked about a point I'd made earlier that day on Twitter. I'd suggested that most EU Member States grant more state aid per head than we do, and that all the Scandinavian countries, with their much larger state sectors, live more or less happily with the state aid rules.
In his reply, Corbyn mentioned four things: postal services, water, railways and banks.
Let's take them in turn. On postal services, water, and railways, Corbyn’s problem seemed to be not so much about state aid as about objections to liberalisation and possible controls on nationalisation.
It’s important at this point to distinguish separate issues. As far as nationalisation is concerned, EU law raises no objection. Anyone who knows the continent knows that in most countries most operators in the sectors mentioned by Corbyn are state-owned. There are EU rules requiring member states to open up postal services and railways to competition (though there are no such rules in water). But member states still have wide powers to regulate and to ensure, for example, that all homes get a postal service at a uniform price.
None of that is about state aid. Indeed, many member states have been able to provide large subsidies to their rail and postal operators to ensure high quality universal services. What state aid rules in fact do is ensure that such subsidies are well-targeted and effective, by requiring proper identification of the goal of the project and proper analysis of the effectiveness of the proposed grant in achieving that goal. What they prevent is ill-targeted aid, such as the money repeatedly thrown down the black holes of national flag carriers or tax exemptions given to large multinational companies in return for locating in the state concerned - an objective you'd have thought Corbyn would sympathise with.
On banks, Corbyn complained that the Commission required that large parts of RBS be sold off, as a condition for approving the rescue and restructuring aid provided to it during the financial crisis. But it’s important to be clear about what was going on there. The Commission’s approach was, first, that those who owned the banks concerned and were responsible for getting it into trouble should, if at all possible, bear as much of the cost of rescue as possible. It’s hard to see any objection to that.
Its second aim was to prevent competition in the banking sector being wholly distorted by the handing over of large sums of money to certain banks. So it required RBS to sell off parts of its business that could be sold (the money going, of course, to the state to offset the amount handed over to RBS). Again, it’s not obvious what the objection is to that.
It’s important, again, to be clear that the state aid rules do not prevent the state from owning banks. Many banks on the continent are state-owned. The Commission’s stipulations on RBS were not imposed just because it had become a state-owned bank, rather they aimed to address the damage done to competition by the grant of large sums to RBS in order to rescue it from the black hole into which its previous management had sunk it.
It’s therefore not easy to see what the Labour objections are to the state aid regime. Indeed, an analysis by two leading state aid specialists, Andy Tarrant and Andrea Biondi, of 26 economic measures in Labour’s 2017 manifesto found that only two of them might have to even be notified for clearance by the Commission, with seven falling within existing exemptions and the remainder not amounting to state aid at all.
Finally, Corbyn mentioned the possibility of obtaining "protections, clarifications or exemptions" from the state aid rules. It's difficult to comment on that without knowing quite what he meant. There is probably little room for 'give' on the concept of what a state aid is, not least because it is more or less the same as the WTO definition of 'subsidy'. In any event, that would open up a Pandora's Box for certain member states that would love to be able to tweak the definition.
But it may be possible to agree some leeway for the UK when it comes to the policy question of balancing the justification for a state aid measure against the damage to competition that it may do, which is the core test for clearing a request. This would require some sort of mechanism for resolving EU concerns if UK policy had become too lax.
There is some precedent here. The EFTA Surveillance Authority, which applies state aid policy in the three EEA states, has the freedom to set its own policy within the framework of the rules, though it tends in practice just to follow the Commission's policy.
The state aid rules are not perfect. They can often be hard to apply, and can delay important projects because of the need to get approval (although even here it's worth noting that Commission decisions approving aid to banks were often taken within hours). But it would be a serious mistake to rule out single market membership, or any other deep trading arrangement with the EU, on the false basis that they are a major obstacle to a Labour government seeking to widen public ownership or support industrial development.
George Peretz QC is a barrister specialising in competition, state aid, agriculture, tax, trade, and public law at Monckton Chambers
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