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Brexit and State Aid: A Sad Story or Freedom from Bureaucratic Constraint?

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About The Author

Alexios Ektor Koursopoulos (Former Private International Law Editor)

Alexios is a law graduate from Sussex University. Soon after completing his LLB, Alexios began working on his own medical start-up. Alongside his LLB, Alexios has successfully managed promotion companies in Brighton after working his way up the ladder, managing over 100 people at times. Outside the law, Alexios kick-boxed for a few years in Greece and still enjoys the odd training session when his schedule allows it.

This article is part of the 'Brexit' series, edited by Matt Bogdan.

With the upcoming referendum on the UK's membership of the European Union, the Brexit series intends to explore key issues surrounding Brexit, particularly what effect EU law currently has on the UK, and what would be left with it gone.

Other articles from this series are listed at the end of this article.

At the current moment, the legal implications of Brexit are almost impossible to predict. Debates continue to rage over the future role of the European Court of Justice (the CJEU) and the extent to which UK courts can have regard to its case law. Underpinning this, and other points of contention, seems to be the fact that the UK’s future relationship with the EU – particularly in relation to its access to the Single Market – is not yet conclusively decided.

Another area of EU law which, because of the lack of resolution as to the UK’s future relationship with the EU, has an uncertain future is that of State aid. Because State aid is an area which is – at present – controlled by the European Commission with the aim of preventing distortions in competition across the Single Market, the form which the UK and the EU’s future relationship takes could have a major and revolutionary impact on this area of law.

In light of this, this article will attempt to provide educated estimations of the likely impact of the different Brexit models on State aid law, assessing the extent to which they represent a change from the status quo and the degree of impact they could have upon business.

The Legal and Regulatory Framework

State aid can be simply defined as an advantage, of any form, that has been given selectively to an undertaking – held by the CJEU in Höfner and Elser v Macrotron GmbH [1991] to be any entity engaged in economic activity, regardless of its legal status and the way in which it is financed – by national authorities.

The rules governing State aid are outlined in Article 107(1) of the Treaty on the Functioning of the EU (TFEU), which are subject to derogations outlined within Article 107(2)(3) of the TFEU. These provisions require Member States to notify the Commission before granting State aid to an undertaking. This allows the Commission to rule upon its lawfulness, which will intervene as per EU law where the advantage granted may distort competition and is likely to affect trade between Member States.

Section 4.2.1. of the Commission’s Notice on the Notion of State Aid – drawing on case law such as Cityflyer Express v Commission [1998] and Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen v Commission [2003]explains in detail the ‘Market Economy Operator Test’ used to identify when a State measure will classify as State aid. According to this test, if the measure puts a burden on a public authority or the State itself when a rational market operator or investor would have acted otherwise – thereby not implementing the measure – and when the measures favours specific undertakings, it will constitute State aid.

Two further conditions are imposed: competition must be distorted - in these cases, by strengthening the market position of the receiving undertaking – and trade between Member States must be affected to some degree, with Regulation 1407/2013 crucially denying the application of a de mininis threshold. These two conditions, commonly referred to as the negative ones, were considered by the CJEU in Alzetta Mauro and others v Commission [2000] to be ‘inextricably linked’. They are therefore easily established by proving that the measure:

[S]trengthens the position of an undertaking compared with other undertakings competing in intra-Community trade.

One of the most important aspects of EU State aid law is that it is procedural. Article 108 of the TFEU requires Member States to notify the Commission about any intended State aid and – by this notice – commence a negotiation period in which the Member State must convince the Commission to approve the measure. Throughout it all, Member States are expected to be as transparent as possible: during that initial notification procedure all depositions, facts and documents must be disclosed. In fact, even in cases where the monetary value of the aid does not meet the threshold for notification, openness in key; in Corsica Ferries France SAS v Commission [2012], the CJEU confirmed that Member States must publish every single granting of State aid exceeding half a million euros.

The EU’s limitations on State aid are as controversial as they are unique – no other jurisdiction has comparable rules – because they can be viewed as preventing democratically elected governments from subsidising and investing as they see fit. Furthermore, blocking State aid can also undermine an effective tool for achieving EU Common Interest objectives, such as developing energy, transport and research and development networks. And, as was demonstrated by the financial sector following the crisis of 2008, State aid can also assist in a market’s immediate recovery, as well as enhancing its functionality and competitiveness in the long-run.

However, the EU’s strict State aid rules can be justified on the grounds that they protect one of the key goals of the EU – the creation and maintenance of the Single Market – from distortions of competition. They constitute an indispensable part of the EU market integration: as the Commission explains in its ‘State Aid Action Plan’, State aid control helps maintain a level-playing field for all undertakings within the Single Market without regard to their Member State of origin.

Indeed, State aid is not always beneficial. State aid measures, which can be unwarranted and discretionary, may lead to an increase of an undertaking’s market power such that barriers to market entry for other undertakings are created. This can reduce competition in a market which ultimately lead to less innovation, higher prices for consumers and lower quality of goods and/or services. Crucially too, State aid never comes without a price, for it is taxpayers who are financing State aid measures, the value of which could otherwise have been used to benefit other policy areas. Ultimately therefore, the EU’s controls on State aid are a recognition of the need for Member States to prioritise their actions and investments, and to act in a transparent manner when doing so.

State Aid in the Post-Brexit Era

It is well-documented that there are a number of possible post-Brexit arrangements into which the UK and the EU could enter, ranging from those which follow other European countries – such as the ‘Norway’ or ‘Switzerland’ models – to others which are perhaps more generic – such as relying on the regime prescribed by the World Trade Organisation (WTO). Each possible form of relationship would have differing implications on the extent to which State aid is controlled by the UK.

The EEA/EFTA Model

Where an agreement is concluded between the UK and the EU such that the UK retains its access to the Single Market, often referred to as a ‘Soft Brexit’, the UK is likely to follow the European Economic Area (EEA) model.

The rules of EU State aid outlined in Article 107 of the TFEU are effectively repeated within Article 61 and Article 62 of the EEA Agreement, with the European Free Trade Agreement (EFTA) Court replacing the CJEU and the Commission’s role assigned to the EFTA Surveillance Authority (ESA). Article 62(2) of the EEA Agreement expressly states that ‘the [EU] Commission and the (EFTA) Surveillance Authority shall cooperate’ in regards to surveillance in the field of State aid.

Though some parallels therefore appear to exist, there are substantial differences between the State aid models applied by the EEA and the EU. Firstly, unlike the EU’s model, the EEA Agreement was held in Karlsson v Iceland [2002] not to have direct effect (though this is arguably vitiated by Guidelines drawn up by ESA requiring EEA signatories to codify into their law an obligation not to grant State aid that has not been approved by the ESA). In addition, unlike under the EU model, States within the EEA are liable to compensate third parties affected by a breach of that obligation, with the ESA’s Guidelines confirming that most of such breaches will result in a duty to compensate.

A further difference between the two models is that the opinions provided by the EFTA Court following a reference from an EFTA State are of a pure advisory nature; they do not share the binding nature of the ones produced by the CJEU and the national courts of the EU Member States. One final substantive differences lies in Article 4 of Protocol 9 of the EEA Agreement, which holds that fisheries and agricultural products do not fall within the EEA Agreement’s scope.

The WTO Model

Where no comprehensive deal between the EU and the UK at the end of the negotiation period has been struck, the UK’s relationship with the EU will automatically fall back to relying upon the rules of the WTO. In this scenario, the applicable State aid rules will be those outlined in the Agreement on Subsidies and Countervailing Measures (ASCM).

This would provide for significant changes to the current applicable scheme: for one thing, the ASCM applies only to the trade of goods. Furthermore, governments are prohibited from granting import and export-substitution subsidies, while other subsidies which are found to be damaging to other countries are considered ‘actionable’ and can therefore be challenged.

There would be some continuity, however, as the EU’s State aid scheme seems to overlap considerably in relation to the WTO’s concept of subsidy: the definition of the concept within Article 1 of the ASCM and Article 107(1) of the TFEU both include market-based tests regarding benefits granted by the States, both feature questions about whether the measures are imputable to or taken by a government and both make reference to selective or specific measures. Furthermore, pure regulatory measures in nature are found by both to be outside the scope of both schemes.

Nonetheless, further substantive differences needs to be stressed. While under Article 107(2) and Article 107(3) of the TFEU, the Commission can ex ante approve categories of justified subsidies, the SCM does not provide for such option. Furthermore, unlike the TFEU provisions, the commitments arising under the WTO Treaty do not have direct effect and – where they are implemented on a domestic level – are not justiciable before national courts.

Another crucial substantive difference concerns the enforcement mechanisms: the EU’s State aid model provides for a far more comprehensive mechanism than the WTO scheme. Indeed, alongside the Commission’s ability to commence enforcement proceedings upon the granting of State aid, private enforcement proceedings before the EU courts are also available under EU law. In contrast, under the WTO’s regime, affected private parties have no standing before the WTO and must therefore bring their claims before their national courts.

The FTA Possibility

The possibility of a Free Trade Agreement (FTA) between the UK and the EU raises a number of interesting considerations. Indeed, the conclusion of an FTA agreement with terms that favour the UK’s position may encourage other Eurosceptic countries to attempt an exit from the EU.

The UK could attempt to conclude a FTA with the EU, the contents of which would be similar to Canada’s recently concluded Comprehensive Economic and Trade Agreement with the EU. This does not entail any specific State aid control provisions, meaning that the UK would not be bound by any EU State aid rules; the impact on its businesses would therefore be very similar to that under the WTO model.

At the UK level, legal and commercial uncertainty would likely increase as a newly-created court (or indeed, if it is decided that the ESA should handle disputes) would be significantly less experienced in handling State aid issues considering that the Commission. Furthermore, under this model, the UK – which would be ‘without a seat at the table’ – would lose a significant amount of influence over the further development of State aid rules.

Impact on Businesses

The impact of Brexit on businesses has been heavily discussed in many forums. Crucially, for UK undertakings active in the EU’s Single Market, the impact would be rather limited because their continuing access to the Single Market would be predicated on their continuing to abide by EU law. EU undertakings operating in the UK will also be in a similar position.

In circumstances where the EU’s State aid model did not bind the UK – the WTO model or where an FTA agreement was concluded which did not contain a specific provision on the matter – any State aid received by undertakings operating solely in the UK would be considered separately. It follows that the UK government would have the theoretical freedom to grant aid to UK businesses.

5114.pngWhether this would see UK businesses receiving more by way of State aid is however debateable: data shows that the UK government has rarely been inclined to grant high levels of aid per capita. As the graph (which excludes State aid granted to railway companies) shows, the amount per capita spent on aid on average by the UK government is approximately €90, a figure significantly lower than the average per capita spending of France, Belgium and Germany, which varies from €170 to €240.

There are two further disadvantages to UK business worth noting: UK businesses would lose the ability to receive state aid from other Member States and would also lose the ability to complain to the Commission over illegal state aid granted to their competitors in other Member States, even when they are the ones suffering a disadvantage as a direct result of the grant.

Conclusion

It is impossible to predict accurately the outcome of the Brexit negotiations between the EU and the UK and every single post-Brexit model provides for different advantages and disadvantages as regards to the control of State aid. Furthermore, identifying the model that should be considered preferable depends on whether the laws governing State aid are viewed as an important mechanism or a bureaucratic constraint.

It is submitted that controls on state aid should be celebrated: they provide a carefully crafted (if not complex) tool that attempts to retain equality between competitors in a way that ultimately benefits consumers via the promotion of innovation and betterment of services and goods from both a monetary and a qualitative perspective.

It follows from this argument that, if one post-Brexit model is to be favoured purely from the perspective of State aid, it is the EEA model. Because the EU’s current State aid regime – which is widely considered to be effective at providing pro-competitive benefits – is essentially repeated within the EEA Agreement, this continuity would provide businesses with the least amount of legal and commercial uncertainty. And, given that this model also provides almost full access to the Single Market, businesses will benefit from a smoother transition as the UK heads for the exit door.  

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