Labour, Brexit vs State Aid

The Labour leader gave an interview in the Guardian on 21 December which has largely been covered as his endorsement of leaving the EU. Howls of anguish from Labour remainers have been the response – not surprisingly.

What is more interesting, is his focus on the restrictions EU state aid rules would place on Labour’s economic plans and in particular a future Labour government’s policy to support industry. Corbyn’s comments make clear his belief that state aid rules would block some of Labour’s plans and therefore it is preferable to leave the EU to achieve these policy objectives. I find it fascinating that there has been no coverage of this issue in the press, although one could also argue that there has been little analysis of the divisions within Labour on Brexit generally.

So why is this? One would assume that Corbyn and the Labour Brexit minister Keir Starmer have reviewed the interaction of state aid with the Labour manifesto and agree on this interpretation, but is this actually the case? If it is, the question this poses is why Starmer is such a strong advocate of a second referendum and Remain, when the consequence according to his leader would be that some of Labour’s key economic policies could not be achieved? As former Attorney General and after many meetings with Barnier, one would have to assume Starmer has reviewed this issue and has an answer – the question is why hasn’t he made the position clear, do state aid rules stop any of Labour’s policy commitments and if so which? It is unusual for Mr Starmer to slow in coming forward.

My experience of state aid policy during the work on the Energy Tax Directive, was that DG Competition take a very broad interpretation of their remit and that it outranks other EU policies and Directives. As an example, they maintained that measures to achieve environmental aims could be challenged under state aid rules – an interpretation which would surprise many.

Which Labour policies could be challenged under State Aid Rules?

First Rail Nationalisation. Labour’s 2017 manifesto pledged to bring passenger rail services back into public ownership as rail franchises expire and repeal the 1993 Railways Act, which privatised UK railways. This continues to be Labour policy. The Fourth EU Package of Rail Liberalisation Directives contains an identical competitive structure to the 1993 Railways Act introduced in Britain, in order to open up domestic public rail services to compulsory competitive tendering across all EU member states and regions by December 2019.

Public operators may continue to operate passenger rail franchises under EU rail liberalisation rules, but only on the basis of competitive tenders. This would appear to rule out reconstruction of a coherent, integrated public monopoly responsible for passenger and freight services, rail infrastructure and public accessibility, such as British Rail.

Second a National Investment Bank. EU single market and state aid rules would restrict Labour’s key proposal to create a national investment bank. Such a bank would meet single market rules if it were to follow the objectives of the German Kreditanstalt fur Wiederaufbau (Credit Institute for Reconstruction) KfW national bank. Labour’s manifesto does describe the aims of the national investment bank in broadly similar terms to KfW, in part to provide finance to SMEs failed by the British banking sector and if the national investment bank’s is confined to funding infrastructure spending and SME lending it might pass EU single market tests.

Labour’s manifesto talks of Britain’s economic problems extending beyond a failure of finance for SMEs and embracing wider failures of corporate behaviour, related to short-termist financing and the dominance of the City of London.

Labour’s manifesto envisages the national investment bank playing a more ambitious strategic role in repairing broken supply chains, building national champions for export industries and stimulating economic redevelopment. It is this national strategic agenda which would be scrutinised under State Aid rules. All plans would have to be submitted to the Commission for approval and would probably face legal challenges from competitors if they could show that it was conveying selective advantage, distorting competition or affecting trade between member states.

Any project of building national champions to compete in global markets would come under intense scrutiny and the Commission would take into account not the needs of the British economy, but the comparative advantage obtaining to British firms in the single market and any distortions of competition.

These State Aid issues encapsulate the dilemma which Labour has. Does it follow its new, metropolitan membership and make Remain its primary rationale, or does it follow its traditional membership and the economic policies it has outlined which conflict with EU policy. It would appear that Remain would restrict the scope of Labour to introduce some key economic policies?

 

The two options which divide the Labour Party appear mutually incompatible, Mr Corbyn has set out his priority to pursue policies which conflict with EU state aid rules – I respect this clarity. The interesting question is what will Labour Remainers do? Is Remaining more important than the economic policies in Labour Party manifesto for them? They can’t have their cake and eat it.

 

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