8 June 2020

Professor Erika Szyszczak is Professor Emerita and a Fellow of UKTPO, University of Sussex.

Control over state aid is a stumbling block for the future of a EU-UK trade agreement. The EU is seeking dynamic alignment of any future UK state aid rules. This is a bold demand, especially since the EU state aid rules will be in a state of flux in the forthcoming years. But if no agreement is reached there are implications for domestic UK policy.

The Political Declaration of 17 October 2019 agreed the need for a level playing field (LPF) for open and fair competition through regulatory convergence with common high standards in the areas of state aid, competition, social and environmental standards.[77]

The EU mandate requires the application of the state aid rules if the UK wants to maintain access to the Single Market. This is consonant with the Association Agreements (AA) with the countries bordering the EU, especially the sophisticated EU-Ukraine AA. But the EU has set greater obligations for the UK.

The negotiation framework Council Directives demand that the UK creates “…an independent, adequately resourced enforcement authority with effective powers to enforce the applicable rules which would work in close cooperation with the European Commission.” [94]

Any disputes about the application of the state aid rules should be subject to dispute resolution. The text also includes the provision to ensure that UK courts apply state aid rules and make preliminary references to the European Court of Justice (ECJ) where there are questions of interpretation. This goes much further than the demands made of Ukraine where an independent regulator enforces and monitors the domestic state aid rules, with an annual report sent to the EU.  The EU-Ukraine AA legal provisions do not have direct effect in Ukraine and there is little opportunity for domestic courts to apply the state aid rules.^[1]

The UK takes the stance that it would introduce its own regime of subsidy control but does not want the involvement of the European Commission or the ECJ. One argument put forward for denying the European Commission a role in the domestic state aid regime is the length of time taken for the European Commission to approve state aid schemes. On past experience this is a disingenuous position to take. The 2019 EU State Aid Scoreboard reveals that 94.7% of state aid is automatically legal under the General Block Exemption Regulation (GBER). Furthermore, the schemes the Conservative Government has indicated it will introduce involving “green” measures for the economic recovery would also be eligible for other EU green light state aid schemes. Indeed, the UK has rarely had any legal skirmishes with the European Commission, or the European Courts, in the area of illegal state aid.

In its negotiating position of February 2020, the UK states that any new EU-UK Trade Agreement should include reciprocal commitments for transparency on the award of subsidies which go beyond the requirements set out in the World Trade Organization’s Subsidies and countervailing measures (SCM) Agreement. Both parties should notify each other every two years on subsidies granted to goods or services. This would be similar to the EU –Japan EPA and the CETA. In addition, the future Agreement should allow requests for consultations on any subsidy that might harm the interests of the other party. The consultation commitment should not be subject to the Agreement’s dispute mechanism.

Under the May government of 2016-2019 the UK stance on state aid was hazy but, with the appointment of Boris Johnson as Prime Minister and the clear majority obtained by the Conservative Party in the General Election of December 2019, it became a lot clearer and more activist.

The political message was more than the removal of the EU yoke. The Conservative manifesto saw a role for the strategic use of public financing.  The Election campaign was imbued with the advantages of supporting local industries without the constraints of the EU procurement and state aid rules. Promises were made of government spending on infrastructure, science and the levelling up of the regions in the UK. There was a vision, with a nod to the US, of ploughing public money into large-scale projects to position the UK as a world leader, unfettered by EU rules.

Thus, the UK is at a cross-road in state aid control. To maintain a close trade relationship with the EU it must manoeuvre into a position where it gives effect to a state aid regime equivalent to that maintained by the EU, with an effective and robust independent enforcement process.

One question not addressed by the UK, is whether it could have a role in the development of future EU policy. The European Commission must get the balance right in judging the acceptability of its rules by the Member States. But there are stirrings for an aggressive industrial policy at the national level. The UK could find that any weakening of EU state aid policy leaves the UK exposed to greater competition from its nearest neighbours.

Peretz points out that the UK has already tied its negotiating hand. The effects of Articles 10 and 12 of the Northern Ireland Protocol are to preserve the application of EU state aid rules in the UK. ^[2] Peretz shows that the Articles apply to any UK measure that has an effect on trade in goods between Northern Ireland and the EU27 and the UK Government has no control over the interpretation of the test.

The UK has to find domestic credibility. The reaction of the Government to the COVID-19 crisis has revealed the need for transparency in the granting of subsidies and accountability in procurement, to put aside allegations of cronyism. The large public investment necessary for the post-COVID-19 economic recovery will require a greater role for the state in the years to come. But, to date, we wait for a domestic plan for state aid. ^[3]

Footnotes

[1] Kseniia Smyrnova, Erika Szyszczak, “Modern Approaches to State Aid: Ukraine” [2020] 19.1 European State Aid Law Quarterly 8-18, available at: https://estal.lexxion.eu/article/ESTAL/2020/1/5

[2] Is there any scope for agreement between the EU and UK on subsidies?, 14 April 2020, UKSALA, available at: https://uksala.org/is-there-any-scope-for-agreement-between-the-eu-and-uk-on-subsidies/

[3]George Peretz QC commented upon a Conservative Party proposal to base a domestic state aid/subsidy regime on the WTO rules circulated to journalists in the Prospect Magazine, The Conservatives’ new state aid proposals are the worst of all worlds, 2 December 2019, available at: https://www.prospectmagazine.co.uk/economics-and-finance/the-conservatives-new-state-aid-proposals-are-the-worst-of-all-worlds and: https://uksala.org/conservative-plans-to-replace-the-uk-state-aid-regime/.  See also House of Lords EU Internal Market Sub-Committee, Greater clarity needed on the government’s subsidy control policy, 2 April 2020 at: https://committees.parliament.uk/committee/340/eu-internal-market-subcommittee/news/145815/greater-clarity-needed-on-the-governments-subsidy-control-policy/

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