Another crucial period has begun in the Brexit saga. Boris Johnson has ruled out extending the transition stage beyond 1 January, after which the UK will no longer automatically take over EU regulations or align with EU trade policy. So the key question surrounding Brexit will finally need to be answered: what are the conditions for the UK to retain a decent amount of market access to the EU?
The answer the EU has given is that the UK must abstain from unfairly subsidising its companies. That is a fair demand, but the EU also wants the UK to continue to align with EU rules on state aid. The latter is something fiercely resisted by the British, and rightly so. The stakes are high – along with fisheries, it’s seen as the key sticking point in the negotiations. FT columnist Wolfgang Munchau thinks that ‘it is whether [the] EU accepts [an] independent UK state aid policy. If yes, there will be deal. Otherwise no.’
If the EU and the United States were to conclude a trade deal, the EU would be right to oppose submitting itself to the American state aid regime. Likewise, it doesn’t make sense at all for the UK to continue to bind itself to the European state aid machinery.
The UK can, of course, pledge not to engage in unfair state aid. But both sides could also secure that commitment through their own institutions. The UK could, for example, create an independent authority to police state aid, subject to review by Parliament and the UK courts.
Many on the Continent rightly admire Britain’s institutional architecture, with the rule of law as its cornerstone. So why should they distrust the UK here? Things are not always perfect in the UK of course, as Brandon Lewis’s recent comments on international law have shown. But things aren’t perfect in the EU either. Without even mentioning the likes of Hungary or Bulgaria, it’s sufficient to take a look at my own country, Belgium, where the slow moving judiciary just failed after 12 years to conclude a criminal investigation into the financial conglomerate Fortis, following the 2008 financial crisis. At the end of the investigation, nobody was held responsible. So much for distrusting UK institutions.
Fears that the UK would suddenly massively engage in state aid after Brexit – apparently held by Merkel’s man in Brussels, David McAllister – are a bit odd, as Britain only spent half as much on state aid as the EU average in 2018. That’s before Covid drove European countries – and Germany more than any other country in the world – to inject monstrous amounts of government cash into the private sector. Perhaps it’s the British that should be wary about the EU holding up its side of the bargain not to engage in unfair state aid, not the other way around.
— Holger Zschaepitz (@Schuldensuehner) May 18, 2020
Good Morning from #Germany where the govt plans another supplementary budget of €100bn after 1st spending package of €156bn. Measured by GDP, Germany is mobilizing most money in fight against Coronacrisis worldwide. Packages & guarantees add up to >€1.2tn, equal to >33% of GDP pic.twitter.com/0LAMZEN4SU
The EU state aid regime is also becoming ever more politicised, especially in recent years. Margrethe Vestager, European Commissioner for Competition since 2014, has been overruled by the EU’s top court over her attempts to requalify special national tax arrangements provided by Belgium and Ireland as ‘unfair state aid’. Her claims that these tax arrangements were not really open to any company were dismissed. In the past, Donald Trump has dubbed her the ‘tax lady’, referring to her zeal to use her competition powers to force the likes of Apple to pay massive back-taxes retroactively. Her interest in extracting more cash from companies stands in sharp contrast with her permissive attitude – long before Covid – toward European governments that bail out companies or restrict competition, at the expense of taxpayers and consumers. This should serve as yet another argument for the UK not to subject itself to the EU’s legal framework for competition policy.
At the heart of all this, is that EU officials are not comfortable with the idea of allowing the UK to steer its own regulatory course, picking and choosing when to align with EU rules, depending on whether this results in market access or not. Yet such an arrangement is precisely what the EU negotiated with Switzerland back in the 1990s, which has worked fine now for 20 years, despite the EU’s relentless attempts to erode the sovereignty obtained by the Swiss. The EU’s flexibility here was ultimately of great benefit to both sides. In some areas, the Swiss copy and paste EU rules, so not to distort supply chains. In other areas, for example when it comes to financial regulation, the Swiss only receive partial access to the EU single market, in return for regulatory independence. No talk of the EU’s ‘four freedoms’ being ‘indivisible’ here, when services do not flow as freely as goods.
When you think about it, the EU is all about ‘pick and choose’: member states are permitted not to liberalise services or goods when there is insufficient political support. They can also choose whether to join the monetary union (even if they lack an opt-out, like Sweden), whether to agree a common EU prosecutor, or whether to permit passport-free travel. During the Covid crisis, borders were shut at will and there have always been vast differences in how properly member states implement EU regulation. The EU really lacks any argument to dismiss the UK wanting to pick and choose, and it should certainly not use it to refuse a fair and flexible trade deal, which would inflict great damage to the already badly suffering economies of both Britain and mainland Europe.
Policy competition is fundamentally a good thing for the EU. To tackle Covid, an unknown challenge, European governments have taken very different approaches. This trial and error permits member states to observe who got things right and who did not. A top-down approach prevents countries from learning from each other.
When it comes to state aid, the natural compromise is for both the UK and the EU to promise they will not engage in unfair state aid – but trust each other to implement that commitment themselves.