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Brexit: Can the state subsidy row blocking a EU-UK trade deal be resolved?

“No government in Europe have fought more resolutely against subsidies, state aids to industry and protectionism.”

These words were uttered by Margaret Thatcher 30 years ago in a eulogy to the UK’s role in Europe at the end of her premiership.

Many British Conservatives still idolise the former British prime minister for standing up to centralised European power in defence of the nation-state. Her stance inspired others to follow a path which ultimately led to Brexit.

But today’s Tories are less likely to quote her aversion to state intervention, which helped restrictions to subsidies become enshrined in European Union rules.

Indeed, Boris Johnson’s government is locked in a battle with EU negotiators, fighting for the right to lavish funds on British business, while still retaining access to European markets after the transition period expires at the end of the year.

The dispute over state aid is one of the main obstacles to a post-Brexit trade deal, along with overall fairness in competition, fishing rights, and a mechanism to enforce a deal.

Both sides now have their backs to the wall ahead of this week’s EU summit, with little sign of a breakthrough. Yet some experts in the field insist there is scope for compromise on subsidy policy, which could pave the way for an overall accord.

Level playing field — or slippery slope?

As part of the divorce deal that sealed the UK’s departure from the EU last January, both sides agreed to commit to a “level playing field” in future competition, covering issues such as state aid, social and workers’ rights, the environment, climate change and tax.

These engagements came in the Political Declaration on future relations, legally non-binding but seen as a framework for forming the basis for a post-Brexit trade deal. Both sides agree to “robust commitments” to prevent “unfair competitive advantages”.

Specifically, the EU wants more details of the UK’s plans to regulate state aid once the country leaves the bloc’s trade structures in 2021. The British government, however, does not want its hands tied, and in September said it would not divulge its detailed plan for state aid until next year.

To some observers, the conflict over policy on subsidies for industry is surprising. The UK has been relatively frugal compared to other European countries.

Thatcher’s view, fuelled by the UK’s struggle to save ailing industries in the 1970s, illustrates the traditional hostility to the practice on the political right, but it does not particularly chime with Conservative philosophy in 2020.

Fight for the right to spend

Boris Johnson’s government has promised to spend big to “level up” traditional Labour heartlands, which swung behind the Tories in last year’s election. His top aide and Brexit architect Dominic Cummings wants to free up the state to help make the UK technology sector a world-beater.

In September, the UK said it would cease to follow EU state aid rules at the end of 2020, in favour of less restrictive World Trade Organization (WTO) regulations from January.

Britain’s chief negotiator David Frost said in a statement on October 2 after the last formal round of talks that the EU needed to “move further” in allowing the UK to set its own rules on the level playing field, including subsidy policy, without constraints going beyond those appropriate to a trade deal.

But last week he gave a more upbeat message, telling a British parliamentary committee that both sides were going “further” than usual under a free trade deal to agree on a framework for subsidy policy. They were looking at “high-level principles”, giving examples of “commitments that we are willing to make”.

Lord Frost also said the EU had dropped its original demand for UK alignment with Brussels’ state aid rules. EU negotiators under Michel Barnier are reportedly calling instead for details of British regulation and enforcement plans.

EU and UK ‘not far apart’

Alexander Rose, a lawyer specialising in state aid law and subsidy control who has worked for both the British government and the European Commission, believes the two sides are not far apart but “not within touching distance” either.

He says an apparent agreement on overarching principles is encouraging, but the EU will be looking for more detail. “I think the key practicality is: will there be a regulator? And the second part is, how will the UK put in place the rules around those principles?” he told Euronews.

“Ultimately the landing zone was always going to be some kind of UK state aid regime… We now know roughly that we’re going to have a regime that’s going to ensure that distortions in competition are addressed. But there’s a very, very short time to put these rules into place.”

Last month Alexander Rose co-led a group of lawyers who sent an open letter to Boris Johnson offering to help design a post-Brexit UK subsidy regime.

A recent UK Institute for Government report said the UK had much to gain from a compromise on state aid with the EU. Far from tying its hands, the report argues that the UK would benefit from a strong domestic subsidy control system, regardless of whether a trade deal is struck.

It recommends that the UK adopts a “parallel” system in time for January — copying core features of EU state aid but with domestic oversight — before developing a new regime later.

State aid accord ‘could resolve Northern Ireland row’

Control of state aid policy is so important to the British government that the issue was put forward as one of the justifications for its “legal safety net” plan to override part of the EU divorce deal, breaching international law.

Under Article 10 of the binding Northern Ireland Protocol, the European Commission has jurisdiction over subsidies affecting trade in goods between Northern Ireland and the EU.

But the controversial UK Internal Market Bill gives British ministers the power to change EU state aid rules on subsidies for Northern Irish firms should no trade deal be struck with the EU.

It is still making its way through the British parliament even though the EU Commission has brought infringement proceedings, and MEPs have threatened not to ratify any trade deal while the bill is still alive.

The Institute for Government argues that a strong UK-wide subsidy control regime could provide a solution to this major source of disagreement between the UK and the EU.

“A compromise on state aid could make it possible to override the application of Article 10 without breaking international law,” writes the Institute’s Alex Stojanovic.

“If the UK can show that it has a strong domestic subsidy control regime, alongside a workable dispute resolution mechanism for contentious subsidies, the EU may allow for Article 10 to be superseded by the UK regime, solving a major headache for the UK and EU over the future application of subsidy control in Northern Ireland,” he said.

Would the UK lose face by compromising?

The Institute for Government report argues that an agreement with the EU on subsidy control would enable the UK to challenge future attempts by European governments to use state aid.

Lord Frost admitted last week that the UK could benefit from a dispute resolution process on the matter: “I can see us being ready to use them just as much as the EU in future,” he told the parliamentary committee.

Lawyer Alexander Rose says the principles outlined by the chief negotiator bring the UK position close to the declarations set out in the divorce deal’s Political Declaration.

“I think from a Brexiteer point of view, they should feel pretty happy about the result,” he told Euronews.

“I think that ultimately, they have avoided having EU state aid rules, these principles will cut both ways, so therefore what they’re ensuring is that the EU system doesn’t become much more permissive, and they end up in a sort of race to the bottom, and finally these are principles that make sense for our subsidies.”

The UK’s chief negotiator has said he believes the most difficult issue left in the negotiations is fisheries, a reflection perhaps of his confidence that the state aid conundrum is close to resolution.

EU leaders and officials have continued to warn that despite some signs of progress, large gaps remain over the main issues. The European Council President Charles Michel last week called for the UK to “put its cards on the table”.

For his part, Boris Johnson warned last month that the UK would walk away from the talks if no deal was done by mid-October. With Brexit deadline looming, the coming weeks, or possibly even days, will tell whether an agreement is possible, or not.

Every weekday at 1900 CEST, Uncovering Europe brings you a European story that goes beyond the headlines. Download the Euronews app to get an alert for this and other breaking news. It’s available on Apple and Android devices.

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