Ice Age of state aid law?

Andrea Biondi addresses some of the thorniest legal issues raised by a post-Brexit state-aid scenario – are the rules, principles and rights set for extinction?

In the post-EU referendum age, state aid law has had the dubious privilege of being singled out as one of the specific areas of EU law that should be, or could be, easily dispensed with. A sort of cross-party agreement had identified the rules on control on granting aid to undertakings as an excessive interference in national industrial and fiscal policies. Leaving aside the political wisdom of this position, this article addresses some of the thorniest legal issues raised by a post-Brexit state aid scenario.

A word of introduction is, however, necessary. Despite current distaste, the United Kingdom has traditionally been one of the most loyal in applying, and smartest in using, EU state aid law rules of the 28 member states. Obviously the level of public spending in the UK is definitively lower than in other European countries (although the financial crisis has made this assumption a little less accurate than it once was) but the state aid provisions have always been duly and diligently applied. I cannot recall many, or hardly any, recovery actions for unlawfully granted aid against the UK. The British government has also always been very efficient in using the procedure imposed by the treaty requiring an ex ante notification to the European Commission of any plan to grant aid. Most of the UK’s notifications have also been approved by the European Commission, making the UK one of the biggest winners in the state aid arena.

Radical regime change ahead?

That having been said, as things currently stand it seems that radical changes for the EU state aid law regime are unavoidable. As is well known, before the general election the UK government proposed the introduction of the Great Repeal Bill, which will domesticate the vast body of existing EU law. It is obvious that this process of domestication cannot simply be extended to the entirety of EU law, as – to quote the White Paper of March 2017 – certain laws or rights ‘refer to the involvement of an EU institution or be predicated on UK membership of, or access to, an EU regime or system. Once we have left the EU, this legislation will no longer work’.

One straightforward example is that of state aid control, an essentially supranational regulatory enforcement model. The EU system contains an absolute presumption that any intervention of the State in the market that fulfils certain criteria contained in Art 107(1) of the Treaty on the Functioning of the European Union (TFEU) is prohibited. Art 107(2) and (3) TFEU contains, however, a series of grounds that may render the aid compatible with EU law; such as a subjective test to be carried out exclusively by the European Commission. The effectiveness of the Commission’s control is then ensured by Art 108 TFEU, which provides for a notification mechanism under which member states have a duty to inform the Commission of any new aid measure – a mechanism reinforced by the so called stand-still clause under which member states are prevented from granting the proposed aid before the Commission has made its assessment.

Is Brexit therefore the Ice Age for EU state aid law? Are the state aid rules, principles and rights set for extinction? Not so fast. First of all, despite the very distinctive supranational features of state aid control, there are indeed some domesticated features, such as the areas of public spending that are excluded from the duty of notification contained in the Block Exemption Regulation that could still be applicable in a purely national context. Further, there are indeed many, let’s call them ‘external’ and ‘internal’ constraints, which may militate against such a gloomy future (at least for us state aid fans). As for ‘external’ constraints, it is now widely accepted that provisions – with different degrees of intensity – on control of anti-competitive national spending policies are an essential component of free trade relationships.

An EEA model and the free trade relationships

If the European Economic Area (EEA) model is adopted (although this is not likely at the moment, it may become a possibility following the general election) the rules will essentially stay the same. Article 61 of the EEA is nearly identical to Art 107 TFEU, and the European Free Trade Association (EFTA) Court has interpreted it consistently and in light of the case law of the Court of Justice of the European Union. In addition, the EFTA Surveillance Authority carries out supranational enforcement functions, very similar to those exercised by the European Commission. The ‘fall back’ World Trade Organisation (WTO) option offers more ‘flexibility’, because in this scenario, the provisions of the Agreement on Subsidies and Countervailing Measures (SCM), would be applicable. These are much more limited in scope as they only apply to trade in goods, and they mainly relate to export and import-substitution subsidies.

In order to obtain a decision terminating the subsidy, the existence of ‘serious prejudice to the interests of another WTO member’ as well as the impairment of market access, needs to be proven. However, companies’ private operators are completely cut off from the procedure. In contrast to the EU state aid regime, the WTO rules apply ex post, that is, once a claim file before the WTO Dispute Settlement Body for breach of the SCM Agreement is opened between states. As for remedies, no recovery of the unlawful aid can be ordered, only retaliatory measures can be taken by the victorious party. In particular, the subsidised industry's product will be subject to countervailing measures (higher tariffs), or the member state will be subject to a prospective recommendation to remove the adverse effects of the subsidy. It should also be added that a full process under the WTO, tends to last for many years. The attractiveness of this model, for private actors in particular, appears questionable.

Finally, it is now abundantly clear that the EU will not give up on state aid law in the impending negotiations on the EU-UK Withdrawal agreement. The European Council guidelines for the Brexit negotiations of 29 April 2017 state that any future free trade agreement ‘must ensure a level playing field, notably in terms of competition and state aid, and in this regard encompass safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices’. In a recent interview, the EU Competition Commissioner, Margrethe Vestager, reiterated that any future deals will have to include rules which prevent the British government handing out subsidies to favoured industries in a way that would tilt the playing field against European competitors.

Wresting back UK control with a domestic solution

As far as ‘internal’ constraints are concerned, it is my view that it would be in the interest of the UK and its industries to retain some form of control on state aid. There are at least two reasons; fairness and competitiveness. As for fairness, public spending comes from many different sources (central government, regional authorities, local councils and metropolitan authorities) and money is spent for many and varied reasons (such as welfare, pubic services, innovation and to attract business). The existence of rules on the transparency and accountability of spending decisions contributes to ensuring geographical solidarity between the different areas of the UK.

Furthermore, a modern economic and industrial model requires not just efficiency and technological advances, but fairness whereby all the different players compete on the basis of the same rules. State aid provisions are essentially about preventing alterations to the level playing field of the market. As for competitiveness, it is in nobody’s interest to enter into a war on subsidies, in which the EU and UK would try to outspend each other. In addition, the lack of any provisions on state aid control would deprive British companies of an effective way of monitoring what the other EU member states are doing. Although it could be argued that UK companies could retain their rights to complain and signal to the European Commission possible instances of illegal aid, they would lose, entirely, their right to challenge the Commission’s decisions before the EU courts, which could affect their interests.

If control on state aid is therefore necessary, replacing the EU enforcement model is not an easy task. Bacon, Peretz and Taylor, in a recent paper, suggested that the best solution would be to leave state aid control to the Competition and Markets Authority (CMA) (Bringing State Aid Home: Could an Effective Domestic State Aid Regime be Devised for the UK? bit.ly/2sD69s9). This is certainly an attractive proposal that has the merit of being able to rely on the expertise and the prestige of the UK authority, as well as to dispel any fear of regulatory or political capture. However, in my opinion, such a decentralized model of state aid control would still need to be coupled with some form of supranational control, in the guise of a possible future EU-UK joint Committee, or some form of cross-sectorial surveillance authority. This is because the many heterogeneous interests of British firms (and EU firms alike) might never be fully and adequately represented in a purely domestic context. An often-quoted example is the Association Agreement between the EU and Ukraine, which requires the EU and Ukraine to report annually to each other on the state aid granted on each side. A perhaps more legally compelling obligation would probably be necessary, perhaps modelled more on the EFTA surveillance model. Of course, while I am writing, I realise that I am nearly advocating a return to state aid control as we know it currently, but after all, to quote T S Eliot, ‘the end is where we start from…

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Professor Andrea Biondi

Andrea is Professor of European Union Law, Director of the Centre for European Law at King’s College London and Academic Associate at 39 Essex Chambers in London.