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EU law is no barrier to Labour’s economic programme

Andy Tarrant and Andrea Biondi

22 September 2017

With Labour pursuing a more radical economic policy than it has done for many years, many voices on the left have argued that change on the scale demanded by the 2017 party manifesto would be incompatible with EU law. If this were true, it would pose a major problem for the party’s new stance of supporting continued membership of the European single market and customs union for a transitional period of up to four years. It would potentially rule out longer-term membership of the European single market, or any future return to full EU membership. Gaining clarity on the compatibility of Labour’s radical programme with EU law is therefore of crucial importance for the party’s debate on Brexit. Do EU state aid laws prevent a future Labour government from introducing necessary radical reform of the British economy?

With this question in mind, we have conducted a legal assessment with respect to each of Labour’s 26 specific economic proposals. We find that the effect would likely be negligible. Particular concern has been expressed by supporters of ‘Lexit’ concerning state aid rules preventing those parts of the Labour’s current programme which favour nationalisation. This is not the case; nor would Lexit in any event be a mechanism for avoiding State Aid laws, which are requirements of World Trade Organisation membership and also form part of the EU’s negotiating brief for any trade agreement with the UK.

The design of state aid rules is not intended to promote neo-liberalism, but the kind of ‘social market’ economy associated in particular with Germany, the Netherlands and Scandinavian countries. Developments in EU state aid law in the last few years have made it much clearer what national governments can do in terms of subsidizing domestic economic restructuring. 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.

Of the economic measures set out in Labour’s manifesto at the 2017 Election, most (17) do not even potentially fall within the scope of the State Aid rules. Of those that could, 7 are likely to fall within block exemptions: for example, infrastructure spending is not defined as an aid at all unless it directly competes with already existing privately funded infrastructure and in most cases there is unlikely to be any such infrastructure. This likely leaves only two measure which would even have to be notified: the state investment bank/regional bank proposition and the state funded regional energy suppliers. It is likely that both could be structured to be cleared.

This assessment is of course provisional, as the analysis depends on the precise content of Labour’s plans. Nonetheless, the provisional analysis suggests that Labour has plenty of scope to act in these areas without any impediment from state aid rules. In this context, it is worth noting that the UK would also have to more than triple the amount it spends on state aid to even match the proportion of GDP which Germany spends on aid.

Our report also draws attention to neglected progressive effects of European state aid law in preventing multinational corporations from extracting tax and other subsidies from national governments.  We show that ‘evidentiary’ characteristic of EU state aid control is an important corrective to the susceptibility of the modern state either to be held to ransom by multi-national corporations or to indulge the “corporate welfare state”. Without the EU framework obliging Member States to direct scare aid resources to impoverished regions or innovation, spending would likely be even more skewed to big corporations and favoured regions. Multinationals would tour national capitals demanding greater subsidies.

Our report also offers a detailed examination of the current state of public ownership and utility regulation in the EU. Political scientists have, incorrectly, tended to accept as a given that state ownership is disappearing in the EU. However, the reason for this may be that research has tended to consider the sale of shares as being identical to privatization. Sales of shares, however, do not mean the termination of State control. It is true that the State has often retreated from being the 100% owner of economic actors, but this may reflect the ability of states to achieve their objectives with lower levels of ownership while freeing up funds for other purposes. There are over 800 companies with state ownership in the EU and the relative lack of state ownership in the UK is unusual.

What proponents of the argument that EU rules prevent nationalisation actually tend to mean is that in certain sectors EU rules prevent Member States from granting national monopolies. This is correct. In many cases, however, there is a clear public interest in opening up access to public utility networks. For example, EU rules have required national railway operators to make access available to track and other railway systems so that railways operators can piece together trans-continental freight services over the top of the patchwork of national rail track systems. This enables rail to compete with road and air freight, which are significantly more damaging to the climate. Without the EU open access rules, rail freight would disappear as an activity within Europe. Similarly, the promotion of renewable energy requires that there is access to  continental “grid” (made up of former national monopoly networks) which allows the wide distribution of intermittent wind, solar and tidal energy.

As it develops its position on the UK’s future relationship with the EU, the Labour Party should not be held back by incorrect assumptions about the constraints imposed by single market membership on its economic policies. Neither EU state aid rules, nor other EU rules which are distinct from state aid rules but sometimes considered in the same bracket, provide any obvious barrier to the implementation in the UK of the measures contained in Labour’s 2017 election manifesto.

Dr Andy Tarrant is Head of Policy and Government Affairs at the People’s Pension, a not-for-profit workplace pension provider. Previously he was adviser to Labour shadow Europe and Pension ministers. He is an EU Competition lawyer by training and has held a range of corporate and regulatory positions in the telecommunications sector.

Dr. Andrea Biondi is Professor of European Union Law and Director of the Centre of European Law at King’s College London, and academic associate at 39 Essex Chambers

To download and read the full report, please click here (pdf). A version of the full report will be published as an article in the forthcoming issue of Renewal: A Journal of Social Democracy.

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