UK could gain Brexit trade deal ‘advantage’ by compromising on state aid, says leading think tank

Message comes as EU-UK talks extend into next week in last-ditch bid to find an agreement.
Hands hold bag of money

By Martin Banks

Martin Banks is a senior reporter at the Parliament Magazine

09 Oct 2020

The Institute for Government, a UK-based think tank, says Britain has “more to gain than the EU” by “compromising” on state aid, one of the main obstacles holding up the current talks between the two sides.

The message comes with the UK’s negotiating strategy coming under fresh attack on Thursday with former UK Supreme Court president Lord Neuberger, in an online debate with UK lawyers, describing the Internal Market Bill, which overrides the Withdrawal Agreement, as “quite extraordinary”, saying it was taking the UK down a “very slippery slope” towards “dictatorship.”

On Thursday, the two sides were continuing negotiations in London. Boris Johnson and Ursula von der Leyen met last Saturday and called for more “intensity” in the discussions.

A new policy paper by the Institute for Government sets out a “route to a compromise” on state aid which could be “advantageous” to the UK and unlock the Brexit stalemate.

Alex Stojanovic, from the Institute, accepted the EU and the UK positions on state aid are “far apart”, saying, “the EU wants agreement on rules to curb subsidy use but the UK is determined to resist any commitments that might tie its hands.”

The institute also says the Internal Market Bill has “raised the stakes.”

“There is no good reason to allow the issue of state aid to lead to No Deal. The UK could gain an advantage from a compromise, even if the current government appears not to recognise that this is a possibility” Institute for Government Policy Paper

However, the Institute’s paper “Beyond State Aid: The future of subsidy control by the UK”, argues that the UK has “much more to gain from a compromise” on state aid than the EU and, “would be wise” to have its own system of subsidy control after the transition period ends, regardless of any agreement with the EU.

The UK has not made much use of subsidies in the past in comparison to other EU Member States, spending just 0.4 percent of GDP on state aid in 2018. This compares to an average of 0.8 percent across the EU as a whole, with 10 Member States including Germany having spent over one percent of GDP on subsidies.

Stojanovic said, “The UK government wants the freedom to use subsidies more actively. However, encouraging a subsidy race with what will still be its largest trading partner would be bad for both sides, and, given the larger size of the EU, especially bad for the UK.”

He says that if the UK can demonstrate it has a “strong domestic subsidy control regime, alongside a workable dispute resolution mechanism for contentious subsidies”, this could solve a “major headache for the UK and EU over the future application of subsidy control in Northern Ireland.”

The Institute says, “There is no good reason to allow the issue of state aid to lead to No Deal. The UK could gain an advantage from a compromise, even if the current government appears not to recognise that this is a possibility.”

Meanwhile, German Greens/EFA Group MEP Terry Reintke, said she still hoped a resolution to state aid and other outstanding matters such as the trade level playing field can be found in time for the 15 October EU summit, the fast-approaching deadline set by the EU for any trade deal.

"The UK government wants the freedom to use subsidies more actively. However, encouraging a subsidy race with what will still be its largest trading partner would be bad for both sides, and, given the larger size of the EU, especially bad for the UK” Alex Stojanovic, Researcher at the Institute for Government

The two sides have agreed to extend their talks into next week in a last-ditch bid to meet the deadline. The EU set a mid-October deadline so as to give the European Parliament a chance to review any deal.

Reintke told this website, “I fully support the continued quest to find a comprehensive agreement. But not only are there still gaps on important issues, there is also a general lack of trust in the UK government's willingness to stick to agreements. If the UK already plans to break the just agreed deal, how can we have trust when ratifying each other?"

Further comment comes from French Renew Europe MEP Pierre Karleskind, who chairs the European Parliament’s influential committee on fisheries – another key issue for the two sides - who said avoiding annual negotiations over access and quotas was one of the parliament’s “red line” issues. He added that there could be no annual fishing quota negotiation in a trade deal with Britain.

Meanwhile, Italy’s Prime Minister, Giuseppe Conte, speaking earlier this week, urged the British government to come good on a Brexit deal but admitted it was currently “difficult to feel optimistic.”

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