Monday, February 26

Brexit talks: Why the wrangles over state aid?



Talks on a free trade deal between the UK and the EU have resumed in London this week with state aid emerging as a key sticking point.

What is state aid?

Margaret Thatcher thought Europe allowed too much of it, Jeremy Corbyn believed there was not enough: but what exactly is state aid?

Since the European project was launched in 1957, member states have been banned from giving companies or industries special help that would distort competition. Governments cannot hand out subsidies, tax rebates or take stakes in companies “unless it is justified by reasons of general economic development”.

But there are many exemptions. In recent years the EU has relaxed state aid thresholds for “innovation clusters”, broadband, culture and heritage, small and medium-sized companies and local infrastructure. During the coronavirus outbreak and 2008 financial crisis, EU state aid rules were eased to allow emergency bailouts and job-protection subsidies.

As an EU member state, the British government took little advantage of flexibilities: in 2018 the UK spent 0.38% of GDP on state aid, compared to 0.79% in France, 1.45% in Germany and 1.55% in Denmark.

Why is state aid a problem in Brexit talks?

The EU has said it will only grant tariff-free access to the single market if the UK respects European standards on environmental protection, workers’ rights and state aid. Known as “the level playing field” the EU wants to prevent British firms undercutting their European rivals, either by tearing up environmental legislation or by showering companies with government grants or indirect aid.

Boris Johnson’s government argues the level playing field defeats the whole purpose of Brexit, by tying the UK to EU rules in perpetuity. Ahead of the latest round of talks this week, the UK’s chief negotiator, David Frost, said its position derived “from the fundamentals of being a sovereign state”.

Is that all?

There is more. The prime minister is also unhappy about what he agreed with the EU on state aid under the Irish protocol, as part of the broader Brexit withdrawal treaty.

To avoid a hard border on the island of Ireland, Northern Ireland will continue to follow a swathe of EU rules, including state aid (the specific EU regulations on state aid are listed over seven pages in the protocol).

That means the government must notify Brussels of any state aid affecting Northern Irish companies, potentially meaning any UK company with a presence in the region. Number 10 sources have complained the Brexit deal “never made sense” and are planning legislation that will row back parts of the agreement, including on state aid. EU officials strongly reject the suggestion that the Irish protocol lacks clarity, while warning the government against reneging on the deal.

What does the UK want?

The government is thought to want a free hand to support companies, especially tech start-ups. Behind this vision is the prime minister’s chief adviser, Dominic Cummings, who opposes the UK Competition and Markets Authority becoming a state aid regulator, akin to playing the role of the European commission in Brexit Britain.

But the government’s policy on state aid is yet to be published. Johnson, who once lauded the EU for pursuing “free trade and free markets” rather than “state aid and cartels”, is yet to make a detailed case for what the government wants.

What does the EU want?

The EU’s 27 member states set a demanding opening position for the EU’s chief negotiator, Michel Barnier, that proposed keeping the UK in lockstep with EU rules on state aid as they evolve.

The Frenchman, however, has indicated he is ready to discuss a softer approach that would allow the UK more freedom. Rather than requiring the UK to follow EU rules to the letter, he proposed devising with the UK “a toolbox”, or common approach. With negotiations stalled, the details remain unclear, but the EU would expect the UK to set up a tough independent regulator to oversee state aid.

Can the two sides agree?

There is a deal to be done. The EU has signalled some appetite for compromise, but Number 10 is keeping Brussels guessing about its true intentions on state aid.

The prime minister has a strong economic incentive to compromise on state aid, but the risks of no deal are real. If the talks collapse over the issue, it would be a remarkable turnaround for the party of Margaret Thatcher, who once complained Europe was failing to live up to its own founding treaty, “intended as a charter for economic liberty”.

But in the event of no deal, the government would not escape all state aid regulation. The UK would remain bound by World Trade Organization anti-subsidy rules, meaning the EU could impose tariffs on British goods if it believed UK subsidies were harming European industry.

Even the government’s “Australia-style” agreement (in reality, no deal) comes with state-aid strings attached.