In recent years, a socialist critique of the European Union has returned to prominence on the British left. The Bennite heritage of the Labour leadership, the difficulties of the Eurozone and the ideological exhaustion of neoliberal globalization have broken a tacit pro-European consensus, exposing divisions that continue to frustrate the formation of a coherent long-term European policy. An account of the European Union that portrays it as a single-mindedly free market institution, implacably hostile to a transformative politics in Britain, has been put forward by a range of influential figures--from the Guardian's Larry Elliott to Harvard University's Richard Tuck and Renewal's own Joe Guinan.
As part of this argument, it is commonly asserted that the radical moves towards public ownership in key utility sectors, demanded by Labour's popular 2017 manifesto, would be incompatible with EU law. A 'hard' Brexit, completely separating the UK from the legal framework of the European economy, would therefore represent the only path towards the implementation of Jeremy Corbyn's social democratic agenda for Britain.
As lawyers specialising in European competition and state aid rules, we have undertaken a study of the manifesto that leads us to disagree with these assessments. Addressing the specific history, content, and application of EU rules, as well as their relationship with the longstanding policy preferences of other member states, leads us to conclude that EU state aid laws do not prevent a future Labour government from introducing necessary radical reform of the British economy.
This article seeks to offer a more complete explanation of the nature and purpose of EU state aid rules. Their primary goal is not to embed neoliberalism, but rather to protect a European-scale single market. Their genesis lies in a post-war response to the ruinous beggar-thy-neighbour policies of the 1930s. Their design requires that state aid is channelled to support the kind of 'social market' economy associated in particular with Germany, the Netherlands, and Scandinavian countries. Indeed, amendments to the Treaty on European Union agreed at Lisbon mean that a 'social market economy' has been formally enshrined as an objective of the EU since 2009. (1)
Developments in EU state aid law in the last few years have made it much clearer what national governments can do in terms of domestic economic restructuring. They also demonstrate the progressive potential of rules that prevent individual multinational corporations from pressuring individual member states into granting them large tax subsidies. These legal refinements make it feasible to assess the likely potential impact of EU state aid rules on the pledges made in 2017 Labour manifesto, and to develop a more balanced account of the costs and benefits (from a left-wing perspective) of the UK remaining under the ambit of European law.
We have conducted our assessment with respect to each of Labour's twenty-six specific economic proposals and find that the effect would likely be negligible. Particular concern has been expressed in some 'Lexit' quarters about state aid rules preventing those parts of the Labour programme which favour nationalisation. (2) This is not the case; nor would Lexit in any event be a mechanism for avoiding state aid laws. Any measure of interaction with Europe short of autarchy--whether this took the form of membership of the European Economic Area, or a more limited bilateral trade agreement--would likely impose the same or very similar rules.
Finally, we make a broader point about attitudes towards Europe among British policy elites using the example of a large scale but little-known UK not-for-profit public service, the National Employment Savings Trust (NEST). NEST was set up to provide workplace pensions by the 2005-2010 Labour administration. There were constraints imposed on NEST by the UK government, allegedly deriving from EU state aid rules--but these were entirely driven by British beliefs about EU state aid law, alongside UK domestic interests, rather than any pressure from Brussels. When eventually asked, the EU Commission said these constraints were not required by EU state aid law. The case for Lexit can be seen as a broader function of a counterproductive British mindset that exists across ordinary ideological divides, and tends on the one hand to overstate the power, reach, ideological homogeneity and malign intention of the European institutions and on the other to exaggerate the exceptional nature of the United Kingdom.
A brief history of EU state aid rules
EU state aid rules have been an integral element of the EU since its inception as the European Economic Community in 1957. Three of the countries which signed the original Treaty of Rome had Socialist prime ministers, three had Christian Democratic leaders. The purpose of the Treaty was to create a common economic space within which the mixed economies of Europe could prosper and where the economic drivers considered to have fuelled the rise of populist dictators prior to the war could be controlled. State aid rules were designed to meet both ends. The greater economic space was intended to create a larger market, generating increased opportunities for specialisation at firm level and the exploitation of national comparative advantage. State aid rules were intended to ensure that individual states would not try and free-ride on this larger common market by providing aid to their national companies at the expense of unsubsidised rivals in other member countries. (3) In the 1920s and 1930s, just such temptations had led countries to provide export subsidies and provoked both tit-for-tat export subsidies and counteracting tariffs, helping create the ruinous economic conditions that led to the rise of fascist dictatorships.
In the early years of the European Economic Community, the Community's institutions focused on controlling aid to private enterprise. A single market could not be created if inefficient national enterprises were propped up, preventing more efficient enterprises in other member states from expanding. (4) In the 1970s and 1980s, as countries reacted to oil crises and lack of competitiveness against Japanese and US manufacturing by nationalising and subsidising loss-making national enterprises, the attention of the Community institutions was refocused away from aid granted to private enterprises to controlling aid to state owned enterprises. If economic activities were nationalised and then subsidised to compete, they would have the same potential effect of eliminating the single market as subsidised private national enterprises.
Control of state aid today
Structure of the rules
The drafters of the Rome Treaty were aware that the market does not always deliver, and wanted states to have scope to provide aid to enterprises where this was justified. The state aid rules are intended to control the provision of state aid to individual companies to ensure that it can be provided where it meets a public policy goal, but cannot be provided where it undermines the single market. The rules in the Lisbon Treaty are structured as follows:
a general rule prohibiting aid from the state to individual enterprises in principle. (This is often quoted in isolation by proponents of Lexit). a series of exceptions, some which are always applicable (for example, aid in the event of a natural disaster) and others which are discretionary, ie dependent on a decision by the European Commission and the European Courts. (5) Some of the discretionary exceptions are very wide. For example, aid is potentially permissible '...to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest'. (6)
In order for such discretionary exceptions not to be a mechanism for undermining the general principle, the rules around their operation are policed by the European Commission and the European Courts. Exemptions are delivered either by individual notification of proposals to the Commission from member states, which the Commission then assesses case by case, or by 'block' i.e. pre-defined categories of legitimate aid that can be granted without any prior notification. (7) For instance, aid to research, development and innovation, to risk capital, broadband internet, regional aid, aviation, energy and the environment can all fall within 'block exemptions'.
State aid rules do not affect economy-wide regulation
A further limitation to the scope of state rules concerns 'general', or economy-wide regulation. The member states insisted on wording the European Treaties to ensure that EU state aid rules would not interfere with their ability to set general regulations to structure their economies. To give a hypothetical example: a tax-break given to a single or several favoured individual multinationals could be caught by state aid rules, whereas a general national economy-wide cut in corporation tax could not be caught. Equally, state aid rules also do not impede general regulation including consumer protection or labour laws.
It can of course be difficult to distinguish what consists of a selective measure and what is a general measure when categories of enterprise benefit. This is a question of particular relevance to the Labour Party, which is now seeking to promote alternative forms of ownership in the British economy. Nonetheless, the European Court of Justice has held that, for example, member states are entitled to apply a different tax system for cooperative societies in general because of their specific characteristics that distinguish them from corporations. (8)
How is aid assessed as acceptable?
Assessment of the acceptability of aid is intended to be a logical reasoned process. In order for an aid which requires notification to be cleared, the applicant has to...