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Why State Aid Has Become a Stumbling Block in Brexit: QuickTake

Dec. 11, 2020, 5:43 PM

In theory, the system of free trade driving the world economy is supposed to provide a “level playing field” for all. In practice, countries have long complained that rivals unfairly dish out aid in the form of state-backed subsidies to boost favored companies -- often as they themselves do the same. State aid has become a key sticking point in the U.K.’s protracted talks on shaping its future relationship with the European Union, which tightly controls state subsidies within its borders. With additional pressure from the pandemic forcing governments to mount huge rescue efforts for their economies, the fragile set of rules that aim to keep state support in check is under threat.

1. What’s state aid?

It’s government support to key manufacturers or industries, typically in the form of cheap loans, tax breaks, contracts or direct subsidies. The idea is to give homegrown corporations an edge over outside competitors to create jobs, drive exports and fuel economic growth. Sometimes the state acquires partial ownership. Though aid can be modest, it attracts attention when it lasts for decades or drives the deliberate creation of dominant firms celebrated as “national champions.”

2. What’s it got to do with Brexit?

The EU made a level playing field a condition of any trade deal with the U.K. The issue is what the U.K. must do to meet that demand. The EU initially said the U.K. would need to abide by the bloc’s state-aid rules, even if they change over time. In July, the EU’s chief negotiator, Michel Barnier, indicated the bloc was willing to compromise, saying that “consistency, or some kind of equivalence” was what mattered. The two sides discussed the U.K. making its own state-aid decisions but with independent oversight. In early December, the U.K. blamed the EU for making new demands, including for so-called ratchet clauses that would bind Britain to EU labor and environmental standards as they evolve over time, according to a person familiar with the British position. An EU official denied that the proposals were new. The U.K. has said it won’t lower environmental standards but doesn’t want to have to follow European rules. Talks were also stuck over an EU demand that Britain establish a regulator for state aid that could rule against measures before they come into force, rather than after the government has handed over money.

3. How has the virus made this more complex?

The U.K. in July made financial assistance available to a wider range of businesses hit by Covid-19. The 27-nation EU has also been under pressure to better protect its local industries and repatriate supply chains after the global pandemic caused the steepest recession in almost a century. In June, EU Competition Commissioner Margrethe Vestager unveiled plans to protect local industries from the potential threat of takeovers and unfair competition by companies bankrolled by foreign states.

4. What’s wrong with a little help?

It’s a question of fairness, and about who gets to pick winners. There’s also concern that governments may be supporting unviable “zombie” companies, choking innovation and wasting money. Before the pandemic, Italy’s repeated bank rescues raised hackles, while the U.S. and Europe have feuded for decades over support for rival planemakers Boeing Co. and Airbus SE. Under President Donald Trump, the U.S. sparked a trade war partly over accusations that China’s subsidies created unfair competition for American firms. State support can fuel battles between places vying for jobs and investment; Ireland and Luxembourg became targets of EU regulators for the low tax rates they charged Apple Inc. and Amazon.com Inc. respectively.

5. Is state aid on the rise?

The pandemic may be sweeping aside any pretense of restraint. For years, European leaders struggling with rising populism and competition from big Chinese firms wanted more leeway to act. Then the virus crisis drove governments and central banks to unleash waves of state assistance. While much of it preserved jobs and businesses economy-wide, other efforts were more targeted. The EU relaxed curbs on cash injections and other support. Airlines around the world were rescued with offers of multibillion-dollar loans and job support packages. France provided funds to carmaker Renault SA and the aerospace industry, while Fiat Chrysler Automobiles NV secured a loan to support its operations in Italy. The U.K. and Canada also pledged to step in. Germany put aside frugal traditions and unleashed a strategy to help key industries and promote local suppliers. The government’s $10 billion bailout of Deutsche Lufthansa AG resulted in Germany taking a 20% stake.

6. Who’s complaining?

One regular voice of outrage is the chief executive officer of budget airline Ryanair Holdings Plc, Michael O’Leary, who says state assistance for his rivals amounts to governments “selectively gifting billions of euros to their inefficient flag carriers.” Deep-pocketed Germany has been showering firms with aid that debt-ridden Italy can’t match, prompting calls for more fairness. To ensure weakened companies don’t become easy prey, the EU is rewriting competition rules to restrict takeovers by foreign entities that may be receiving state aid. China’s HNA Group Co., which shot to prominence by spending more than $40 billion on acquisitions across six continents starting in 2016, has become one of the biggest corporate casualties of the pandemic. China began assuming control of the debt-laden firm in March.

7. Who keeps score?

Institutions such as the World Trade Organization try to keep the peace by adjudicating state-aid spats. But there’s plenty of scope for discord. Member states created a system for handling subsidies but left plenty of wiggle room for the nations to provide support. Since the U.S. paralyzed the WTO’s appellate body in 2019, defendants can veto rulings by appealing them into a legal void. Meanwhile the U.S., Japan and the EU have been trying to work together to forge new subsidy rules for China. Policing state aid is also a cornerstone of the EU, which regulates Europe’s vast free trade area known as the common market, home to almost 450 million consumers.

8. Does state aid work?

Yes -- or there wouldn’t be fights about it. Helping companies and creating jobs serves a political purpose; whether there’s an economic benefit to aiding coal, steel or autos is harder to say. But there’s a broad perception that having companies that can compete globally has powered exports in the U.S., South Korea, Japan and China. Bailouts of banks and big companies during the 2008 crisis rescued the global financial system and most loans were repaid, though they also created resentment about the use of taxpayer funds.

The Reference Shelf

  • It doesn’t matter who deserves bailout cash if it’s to save the economy, says Bloomberg Opinion’s Jonathan Bernstein.
  • The EU’s antitrust chief cites Europe’s uneven Covid subsidies as a problem, warns the EU not to get hooked on “painkiller” state aid and says France was topping Germany on Covid aid league tables.
  • Bloomberg Opinion’s Chris Bryant says Ryanair is right about “crack cocaine” bailouts.
  • Bloomberg Opinion’s Andreas Kluth on the ugly side of Germany’s $1.5 trillion stimulus.
  • A European Commission study on banking crisis aid.

--With assistance from Birgit Jennen, Arne Delfs, Bryce Baschuk, Iain Rogers, Richard Weiss and Chris Reiter.

To contact the reporter on this story:
Aoife White in Brussels at awhite62@bloomberg.net

To contact the editors responsible for this story:
Edward Evans at eevans3@bloomberg.net

Guy Collins, Laurence Arnold

© 2021 Bloomberg L.P. All rights reserved. Used with permission.

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