Implications Of Brexit For State Aid: (1) The “Iceland To Turkey” Options

11 Jul 2016

As an area that has been a key EU competence, Brexit can be expected to have a considerable impact on competition policy.  That point applies in spades in the area of State aid, which is entirely based on the EU Treaties and which is centrally enforced by the European Commission.  As a matter of law, as soon as the United Kingdom ceases to be party to the Treaty on the Functioning of the EU, State aid law simply vanishes.

Or does it?

Over the next couple of weeks, David Unterhalter SC and I will blog about State aid post-Brexit.  In this piece, I will cover State aid control in Europe outside the EU – in what Michael Gove, during the referendum campaign, described as the “free trade zone stretching from Iceland to Turkey that all European nations have access to, regardless of whether they are in or out of the euro or EU” – a zone in which he promised the UK would stay. In a second piece, David will explain WTO anti-subsidisation rules.

The obvious unknown element in thinking about the post-Brexit future of the State aid rules in the United Kingdom is the attitude the UK Government will take to those rules.  In general, the United Kingdom has been strongly supportive of the State aid rules: and no UK Government since that of Mrs Thatcher has been in favour of State support to business in the absence of a good case for market failure.  The United Kingdom has an excellent record of compliance with the State aid rules.  Further, the consensus of responses to the Coalition Government’s review of the balance of competence between the EU and UK was that:

3.27 … there was broad agreement in principle on the current balance of competence on State aid, but some expressed concern about its limits, about real or apparent extension of EU competence into areas of domestic policy, and about the way State aid controls are exercised.

On the other hand, during the referendum campaign the Leave campaign argued, in relation to the problems affecting Tata Steel, that out of the EU the United Kingdom would have a free hand to grant subsidies on energy costs to support the steel industry.  It may perhaps be pointed out that some of those making that argument were not generally known for their support for interference with the free market: but it should also be noted that the current leader of the Labour Party (though in favour of remaining in the EU) stated that “There are certainly problems about EU state aid rules, which need reform.”  And the present author is aware that a number of Ministers in the present Government have seen the application of the State aid rules as an obstacle to projects that they wish to promote.  And, finally, the comment at the end of the paragraph quoted above refers to business concerns that the State aid rules can be taken too far, particularly in the area of taxation (with, perhaps, the current tax ruling cases such as Starbucks and Fiat in mind).

So it cannot be certain that the new Prime Minister – who it now seems certain will be Mrs Theresa May – would necessarily want to accept continuation of the State aid rules.  However, although this risks straying into political matters, the present writer considers that the new Prime Minister – given that she will be from a party that generally believes in the free market – is likely to regard accepting control on State aid as a relatively easy “give” in negotiations with the EU.  A further point is support of the “give” is that the State aid rules serve the useful purpose, within the United Kingdom, of controlling the ability of the devolved Governments – and in future, city regions exercising devolved powers – to grant State aid and of preventing ultimately futile “subsidy races” between different parts of the United Kingdom seeking to attract investment.

Moreover, a quick glance at the various arrangements between non-EU European states (from Iceland to Turkey) and the EU shows that State aid control is likely to be a  sine qua non of any agreement that can be described as providing access to the single market.

To start with Iceland.  Iceland, along with Norway and Liechtenstein, is party, as an EFTA State, to the EEA Agreement with the EU.  Article 61 of the EEA Agreement provides that:

61. Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.

2. The following shall be compatible with the functioning of this Agreement:

(a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) aid to make good the damage caused by natural disasters or exceptional occurrences;

(c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division.

3. The following may be considered to be compatible with the functioning of this Agreement:

(a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;

b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of an EC Member State or an EFTA State;

(c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

(d) such other categories of aid as may be specified by the EEA Joint Committee in accordance with Part VII.

Resemblances between that provision and Article 107 TFEU – the TFEU provision on State aid – are entirely intentional: the provisions are more or less mirror images of each other.  The only difference that cannot be described as “mutatis mutandis” is the absence, in Article 61(3) EEA of an equivalent to Article 107(3)(d) TFEU, dealing with culture and heritage conservations (which was originally inserted into the EU State aid rules by the Treaty of Maastricht in 1993).  However, even there, the EFTA Surveillance Authority (“ESA”) has stated that it “acknowledges that state aid measures may be approved on cultural grounds on the basis of Article 61(3)(c) of the EEA Agreement”¹ .

Moreover, it is clear from the decisional practice of the ESA and the jurisprudence of the EFTA Court that Article 61 EEA is to be read in precisely the same way as Article 107 TFEU: and the EFTA Court will have regard to the jurisprudence of the CJEU in relation to such questions as what is an “undertaking”²  and as to selectivity in tax measures³.

In fact, the only real difference is that, in the EEA/EFTA States, State aid to the fisheries sector is dealt with in a separate regime (in Article 4 of Protocol 9 to the EEA) which requires the abolition of State aid to the fisheries sector but which is not subject to the enforcement powers of the ESA.

Subject to that fishy caveat, the enforcement powers of the ESA in the EEA State aid system are effectively the same as those of the Commission in the EU system.  The mechanism is, however, a bit more complex.  So, Article 62 EEA requires “constant review” of existing and planned measures in the EEA to ensure compatibility with Article 61, a task which in the EEA/EFTA States is allocated to the ESA.  The ESA then has, under Article 5 of the Surveillance and Court Agreement (“SCA”), the general duty to ensure the compliance of the EEA/EFTA States with their duties under the EEA Agreement, and Article 24 SCA then enumerates compliance with the State aid rules as an aspect of that duty and points to Protocol 3 SCA.  That Protocol effectively incorporates the equivalent provisions to Article 108 TFEU: it provides for the duty to notify new aid (Article 2), and an obligation not to put that aid into effect before clearance by the ESA (Article 3).  Other provisions of Protocol 3 SCA reproduce the main provisions of Council Regulation 659/1999 (the EU procedural regulation) as originally enacted providing, in particular, for recovery orders, suspension injunctions, limitation periods and information-gathering powers.  It is not yet clear whether the amendments to that Regulation (now consolidated into Council Regulation 1589/2015) will be adopted.

If the UK joined EFTA and successfully applied to become party to the EEA, therefore, little would change in the United Kingdom in relation to State aid apart from some re-labelling and the replacement of the Commission and ECJ by the ESA and EFTA Court.  There might even be some advantage in terms of speed, given that the EFTA Court is able at the moment to hear appeals much more quickly than the General Court (and to the relief of monolingual Brits, operates in English – one reason for its relative speed).

However, for various reasons the Government may decide that the EEA is not an option for the United Kingdom.  What is the position in relation to other agreements entered into between the EU and other European countries?

Mr Gove’s speech also referred to Turkey, at the opposite end of Europe to Iceland.  The key point to make about Turkey, in the current context, is that the 2007 Accession Partnership agreement between the EU and Turkey requires Turkey to adopt State aid rules and to set up an internal enforcement mechanism for them.  Indeed, that obligation dates back to the 1995 Customs Union agreement with Turkey.  Turkey’s compliance with those requirements has, to date, been less than entirely satisfactory .  But the obligation is clear.  Similar obligations are included in accession partnership agreements with Macedonia, Albania, Montenegro, Serbia, and Bosnia and Herzegovina.

So it is likely that any preferential trade agreement with the EU would involve the UK’s acceptance of at least an internal mechanism for controlling State aid.  There would, however, be a number of practical and constitutional issues to be resolved in setting up such a mechanism.  It would be possible to have an Act of Parliament binding all devolved administrations and public bodies not to grant State aid, and providing for enforcement by, say the Competition and Markets Authority.  But serious issues would arise where State aid arose as the result of primary UK legislation, particularly in the field of tax: the idea that the CMA could hold that UK tax legislation was invalid to the extent that it granted State aid and that it could order recovery against taxpayers benefiting from a tax break granted by statute would be, to put it mildly, a constitutional innovation.  Moreover, there might well be some resistance to the idea that the CMA should apply ECJ/EFTA Court jurisprudence into which the United Kingdom would have no continuing input: it is one thing for States on their way in to the EU, or EFTA States, to accept such a condition, but quite another for the condition to be accepted by a former EU/EEA Member State on the way out.

Nonetheless, as argued above, the United Kingdom is likely to find that the EU insists on a State aid provision in any agreement going beyond the WTO framework and that this is a relatively easy “give”.   The likelihood of the “give” is reinforced by the point that, as David will explain in his forthcoming piece, even the “WTO option” also contains obligations that bear some resemblance to State aid rules.

¹ See §87 of its Decision on the financing of the Harpa concert hall in Reykjavik.

² See, e.g., Case E-5/07 Private Barnehagers v ESA (which referred, inter alia, to CJEU case-law on what is a “service” under free movement of services provisions).

³ See e.g. Joined Cases E-17/10 and 6/11 Liechtenstein and VTM Fund Management v ESA, at §§74-75.

4 Turkey 2015 report accompanying the EU Enlargement Strategy Communication, SWD(2015) 216 final, bottom of page 33.