State aid rules stop governments giving unfair handouts. Britain has pledged to keep them after Brexit, but how to build a regime that works?by George Peretz / November 1, 2018 / Leave a comment
State aid rules are a major feature of the EU internal market. They confer large powers on the Commission to prevent member states from giving unfair handouts to firms. They can affect very many aspects of national policy, from tax policy to industrial strategy. One might have thought that, post-Brexit, they would vanish from the UK. After all, Britain is seeking a looser relationship with Europe.
But, on the contrary, a quiet consensus has emerged that they will stay: and stay even if there is “no deal.” This has not been widely discussed—but it matters. The issue speaks directly to the role of the state in the economy. How has that quiet consensus emerged, and what does it mean for the UK?
An obvious problem arises when countries open themselves up to trade with each other: what happens when the government of country A starts handing out large subsidies to its own industries, which can then flood in at low prices to country B, forcing it either to replicate those subsidies to its own industry or to accept the hit to its own producers?
WTO anti-subsidy rules allow country B to impose tariffs (“countervailing measures”) in those circumstances. But the EU state aid rules go further: all subsidies and tax breaks to support specific companies, sectors, or regions are subject to control by the Commission, exercised either through specific exemptions (which in practice deal with most of the support given to industry by member states) or by approving specific measures notified to the Commission before they are put into effect. The test for approval essentially involves balancing the public policy gains against distortive effects on competition. That regime is backed up by a rule—that is superior to any national rule—that state aid which is neither exempt, nor notified and approved, is unlawful, and if given has to be repaid with compound interest.
Where does the UK fit in? Under all governments since 1973, the UK has supported enforcement of the state aid rules: the UK grants much less state aid per head than many other EU countries, and has a very good record of compliance.
But there was certainly no guarantee that Britain would retain them post-Brexit. The state aid rules impose a routine constraint on government policy. Many types of public/private cooperation can…