• The EU, State Aids and a Labour Government

    It is a truism that one of the most important issues in politics – particularly for the left – is the extent to which the state can and should intervene in the operation of the free market. It is surprising, therefore, that the Labour Party has been so slow to recognise that the European Union takes a very particular and potentially damaging stance on that issue.

    The EU’s attitude towards the role of the state has always been one of its cardinal features. Paradoxically, one of the two fundamental building blocks of what was originally the Common Market was one of the largest state interventions ever put in place in a market economy. The Common Agricultural Policy was a major use of state funding and policy, designed to provide a huge benefit to inefficient French agriculture (and we shouldn’t forget that the German factory worker, with three or four dairy cows in his basement or barn, also benefited greatly).

    The CAP was regarded by President de Gaulle as so important that he maintained his veto on British membership of the Common Market until he could be sure that the CAP was set in concrete. I was personally witness to this in my work at the time on British relations with Europe in both the Foreign Office and our Embassy in Brussels.

    The corollary to the CAP, and the second leg of the Franco-German bargain on which the Common Market rested, was a guarantee that efficient German manufacturing could have unrestricted access to that total market. That Franco-German bargain was of course completely inimical to British interests – something that would not have displeased, and may even have been seen as payback by, the two countries that had no reason to love the British, having been in one case defeated by them, and in the other, rescued but only with their help.

    The bargain required Britain to forego access to cheap and efficiently produced food and raw materials from around the globe and instead to push up food prices to European levels, thereby negating the one competitive advantage enjoyed by British industry – the lower wages made possible by lower food costs. The Common Market also meant that the British market was opened up to direct competition from powerful German manufacturing – and British industry (with the help of home-grown policy mistakes) was duly (and literally) decimated as a result.

    It should come as no surprise that the question of state aid or otherwise should still be a live issue in the UK’s current and changing relationship with the EU. The customs union established by the EU regulates and prohibits the use of tariffs to inhibit or distort the operation of the free market; and the single market was put in place to ensure that state aids could not be used as an alternative means of gaining a competitive advantage for one member economy at the expense of others.

    The strict enforcement of these rules – commonly found as well in comprehensive trade agreements such as the TPPA and NAFTA – means that a major aspect of the state’s power to intervene in a free-market economy is removed. The effect, if not the intention, was to create in the EU a land, if not “fit for heroes”, at the very least fit for multinationals – an aspect of the EU that seems hardly to have registered with the British left.

    The issue of state aid or otherwise remains a live one as the UK attempts to extricate itself from the EU embrace (or perhaps “stranglehold” is more accurate). One of the difficulties created by the need to avoid a “hard border” on the island of Ireland is that the so-called backstop would require the UK, for as long as the backstop was in place, to comply with the rules of the single market and therefore with the restrictions placed by the EU on state aids. The problem would not end there; the EU, determined not to allow a competitive advantage to a non-EU member if they can help it, would retain the de facto power under the proposed exit agreement to dictate to the UK the extent to which state aids would be permitted, for as long as the transition period lasts.

    These provisions, to which little attention has so far been paid, at least by the left, would deprive a British government, and particularly a Labour government, of many of the levers and instruments which would be needed if a newly independent British economy was to function efficiently in its changed circumstances.

    In the modern world, an economy that wishes to remain competitive and efficient would certainly need the flexibility to keep pace with new developments and to take advantage of new opportunities. An economy, for example, that wished to protect the environment and to build a new and flourishing green economy would need to be encouraged and directed into such areas. The same can be said of any attempt to take advantage of new technologies, new materials and new skills, all of which would be necessary to the functioning of an efficient modern economy and which could best be encouraged and enabled by government policy and intervention.

    But the use of taxes or subsidies or tax relief to promote certain kinds of investment would fall foul of the EU’s prescriptive and restrictive approach – so, too, might state investment in important infrastructure projects – road, rail, airports, for example – that might be seen as improving the competitiveness of British industry.

    Such interventions would come naturally to a government of the left – and such a government would be rendered completely ineffectual if it were denied the chance to pull such levers. Yet, that is exactly what is now proposed by the EU. The British economy, perhaps struggling to adapt to a new trading situation, would find itself not only with perhaps reduced trading opportunities with the EU but also having to identify and secure new trading links elsewhere, and without the ability to adapt quickly to those new circumstances.

    A new Labour government in Britain would find itself, in other words, denied one of its principal raisons d’etre. It would face the new post-Brexit situation with one hand tied behind its back. Having given up membership of the EU, it would still be subject to the EU’s prohibitions on state aids and could well find itself frustrated in doing what it wanted to equip the economy to face new challenges.

    The solution to the problem is to defer the departure date until a new trade agreement for the future can be reached. That would remove the need for a transition period and avoid a hiatus during which the UK was still subject to EU prohibitions and therefore unable to take steps to protect itself in the new circumstances.

    Sadly, there is a powerful strain of opinion on the left that regards the quest for economic efficiency and success as somehow unworthy of the high-minded. Such bien-pensants appear to give priority to their dream of a European destiny and to disregard the interests of Labour voters. Those voters may not share their insouciance.

    Bryan Gould
    30 March 2019