Chillin'Competition

Teaching State aid at LSE is a particularly enjoyable experience. I will have to wait an academic year, alas, to do so again. I tell myself it is a sensible arrangement (even if not one I chose): 12 months from now the module will have become either a niche irrelevance for most students or an exciting window to explore an emerging legal regime (in the UK, that is).

The background story is well known. The EU has consistently insisted on the importance of a system for the control of subsidies and similar measures in any EU-UK trade agreement. State aid is the most salient feature of the so-called ‘level playing field’ provisions deemed necessary as part of the future relationship between the two sides.

The UK government is not inclined to remain bound by the substantive or institutional aspects of the EU system (and is very public about it). The idea of setting up a technocratic body that would constrain public authorities’ discretion to award subsidies and similar measures is resisted (see here). From a substantive standpoint, the UK government does not seem keen to make its domestic regime revolve around Article 107(1) TFEU (as interpreted by the Court of Justice over the years).

I was inspired to prepare this post after realising that the logic of the EU’s position does not come across very clearly on this side of the Channel. It is true that there are frequent references to the protection of the ‘integrity of the internal (single) market’. However, something tells me that these references sound so abstract that they are probably seen as suspicious pretexts to constrain the UK’s regulatory freedom post-Brexit.

The truth is that it is difficult to see how the EU State aid system would survive if the UK were allowed to depart from it in any significant way. For the same reason, one can understand why Member States may believe that giving up their own internal State aid regime is too high a price for a trade agreement with the UK.

State aid: a remarkable (and fragile) achievement of integration-by-law

My guess is that anybody who is reasonably familiar with the EU State aid regime marvels when thinking about the remarkable achievement it is (even if one disagrees about its pertinence).

A group of States decided to give up their discretion to award subsidies and similar measures and entrust a supranational authority with the task of deciding when they are in the interest of the community as a whole (as opposed to the interest of its individual members).

What is more, the boundaries of the system – the definition of what State aid is – are defined by law, not discretion. It is ultimately for the Court of Justice to decide whether a measure falls within the scope of Article 107(1) TFEU – a central question, for instance, in the recent Apple case, discussed by Alfonso here.

It is so unusual to see States agree such a regime that no similar system exists even within the US (see here). And precisely because it is so unusual it is also uniquely fragile. The temptation to abandon it and/or relax the rules is always present – every now and then, Member States float the idea of ‘decentralising’ State aid control (which is code for loosening it).

Can the EU State aid regime survive if the UK departs from it?

Hopefully the above gives an idea of why the Commission, and EU Member States, insist so much on State aid in the context of the EU-UK trade agreement. If the UK obtains a deal without an ex ante regime that is in essence similar to that applying within the EU, it will achieve what some EU Member States have always secretly – and not so secretly – wanted.

In other words: the one State leaving the bloc would enjoy greater leeway to engage in regulatory competition than EU Member States themselves. I find it difficult to imagine how the EU State aid system, as we know it, would survive in such circumstances. The pressure to abandon it, or to change it beyond recognition would be too strong. (And no, the issues raised by the trade agreements concluded with Canada and Japan are not comparable in this regard.)

Some may argue that the EU regime may need to change – there are commentators that claim that the notion of State aid is too broad and encompasses too many measures that fail to affect trade. Even if one assumes that this view is correct, it is probably not wise to amend the system to make sure that a trade agreement is reached with the UK. The impetus would have to come from within, not from an external stressor.

No easy way out

The above was an attempt to give an idea of what I believe are the reasons why State aid is seen as so fundamental from an EU perspective. It is not so much about emotions or curtailing the UK’s freedom as it is about making sure the EU’s own State aid regime survives the trade negotiations with the UK.

One may take the view that the EU is asking too high a price for a trade agreement and that the UK may be better off with no agreement and the regulatory freedom that comes with it. It is certainly a defensible one. On the other hand, I do not believe the EU’s demand is unreasonable, as sometimes suggested. It is reasonable to protect one’s fragile supranational arrangements.

If one takes account of the above, it becomes clear there is no obvious solution to the current situation. It makes no sense to try and anticipate the future, given the many issues at stake and given that both sides know that it is in their interest to reach an agreement (which is why they may both be prone to making compromises that would have seemed implausible ex ante).

In any event, I very much struggle to imagine a trade deal in which the UK does not agree to set up a regime that essentially mirrors the acquis on Article 107(1) TFEU and is enforced by an independent agency with powers comparable to those of the European Commission in the field. We will soon find out whether a compromise can be achieved.