The central pillar of the EU’s Brexit strategy is crumbling. Brussels can no longer plausibly pretend that Europe’s state aid and competition regime is sacrosanct.
The last six weeks have seen massive distortion and degradation of the single market. Or to borrow from Thucydides, “the strong do what they can, and the weak suffer what they must”.
Michel Barnier cannot repeat with a straight face that European commerce is uniquely governed by level playing field principles and that Britain must therefore submit to the EU’s legal structure under the writ of the European Court.
Personally, I think that Europe’s “DG Comp” has always been one of the best elements of the EU apparatus, an outpost of Anglo-Saxon free market thinking in a social market culture. Precisely for that reason it was long viewed with suspicion by France and her dirigiste allies.
It is why Nicholas Sarkozy sought – and secured – a key dilution to competition law in the Lisbon Treaty. (Yet another reason why Lisbon was such a crucial turning point on the path to Brexit.)
But it was always more aspirational than real. The pandemic has exposed just how little is real. State aid rules were suspended almost entirely as soon as Germany flicked its fingers.
North and South are today pursuing radically different policies, according to their economic means, and this will lead to radically different outcomes when Europe emerges from the Covid-19 depression.
“It destroys the argument that the EU is rule-compliant. It hits that narrative on the head,” says Prof Lorand Bartels, an expert on trade law and Brexit at Cambridge University.
It is also poisonous for the EU project itself. As matters stand, Barnier’s negotiating demand is that Britain must swallow the whole acquis of competition and state aid law – and future acquis through “dynamic alignment” clauses – as a condition for a normal free trade agreement (FTA) with normal global access to EU markets.
It must also swallow “level playing field” clauses on the environment, labour, and taxation. This extra-territorial demand over how we run our society as an independent state is extraordinary.
Level playing field clauses are of course normal in FTA deals. They are an assertion of general principle. They are nothing like the Barnier variant.
The FTA agreements with Canada, Korea, Japan, or Singapore obviously did not include such conditions (those countries would have walked away) and nor did the EU dare to utter such notions in its TTIP talks with the US (the Americans would have laughed).
“The EU knows that it is an impossible ask but since Theresa May was willing to give away everything, they think they can keep trying with Boris Johnson,” says Shanker Singham, head of Global Vision and a Brexit trade advisor.
It was and is a pure power play, an attempt by a larger economic bloc to pressure Britain into giving up normal sovereign prerogatives. It is speciously justified by the claim that this island economy is too big and too close to the EU to allow for any other settlement.
It is also irritatingly dishonest. Germany is the biggest abuser of the existing state aid and competition system, censured 67 times over the last two decades for breaches of state aid law. France has had 29 infractions. Britain has been the shining example with just four. The British have historically deployed subsidies on a far smaller scale than the Franco-German core even where permitted.
Eight weeks of economic implosion have now rendered the Barnier demarche almost surreal. The issue is not that the EU has suspended state rules to prevent systemic bankruptcies. It would have been a policy crime to do otherwise.
The relevant point is the way in which the national, sauve qui peut, free-for-all approach – without a joint fiscal support mechanism to offset it – has shattered equity within the EU itself. The level playing refrain has become a sick joke.
Germany is drawing on its AAA-rating and deep fiscal pockets to bail out Deutschland Inc with €1 trillion of credits, guarantees, and emergency spending. It accounts for 52pc of the €1.9 trillion of the EU’s state aid approvals since Covid-19 hit.
Those of us who covered the eurozone austerity crisis from 2010-16 note with weary cynicism how rigidly EU budget law was enforced during that episode (when it suited the northern creditor bloc) and how quickly state aid law is being waived this time because it suits Berlin.
The Club Med bloc can only dream of German largesse. The Spanish are spending hardly anything. Italy’s direct fiscal support – as opposed to theoretical guarantees – barely covers two weeks of actual economic damage. The result is that southern Europe will suffer a flood of avoidable insolvencies.
Viable firms and industries will collapse. There will be lasting structural damage and hysteresis. Club Med recovery will take longer. The shrinkage of nominal GDP – and lack of a V-shaped rebound – will cause debt dynamics to turn toxic.
UBS says Italy’s debt-to-GDP ratio could blow through 175pc in a protracted downturn with failed containment and second lockdowns (more than a remote tail-risk). Jefferies estimates that even France’s debt could top 140pc.
Monetary union as currently constructed will not be viable if this happens. Hence Emmanuel Macron’s furious outburst against the northern bloc in an interview with the Financial Times, and hence the near daily warnings by finance minister Bruno Le Maire that the euro project is in existential peril and risks disintegration without fiscal union, i.e the perennial French agenda, l’Allemagne paiera.
Specifically, their gripe is with the German state development bank KfW. Berlin is using this giant lender to funnel €100bn of free money to German companies. This keeps private business intact through the downturn. It also means that these companies will be able to pick through the corporate ruins of the South, acquire productive plant on the cheap, and entrench northern dominance of the EMU system. It repeats the austerity episode.
Who bought up Greece’s airports when the Troika forced Athens to sell off state assets for a pittance? Just guess.
This alleged plundering of countries in distress is the eurosceptic refrain of Italy’s Lega strongman Matteo Salvini. His rallying cry is that monetary union is a conspiracy by mercantilist corporate Germany to subjugate vulnerable corporate Italy. (He is wrong, but not entirely wrong).
Thierry Breton, the French EU industry commissioner and former head of the technology group Atos, said the EU system is unworkable if Germany is spending €100bn to help its companies to fight Covid-19 while France is spending €20bn.
“It is in the interest of every member state that the single market does not break apart,” he said. Well, yes, but the French government itself is rescuing Air France-KLM jointly with Holland for €10bn – while Germany is preparing a €9bn bail-out for Lufthansa – so where does that leave Irish-based Ryanair competing for European traffic in the future? Or indeed easyJet in the UK?
It has been a sorry saga. First the EU single market buckled when Germany imposed an export ban on medical kit, and in doing so severed the internal supply lines that everybody took for granted. Now the EU competition regime is disintegrating under pressure.
The antitrust commissioner, Margrethe Vestager, is trying to play herself back into the game. She has begun to make a symbolic stand, balking at German attempts to water down EU state aid rules yet further to save the Mittelstand. This is shadow boxing. Germany will not let its family firms go to the wall whatever EU law and doctrine says. Nor should it.
But then what remains of Barnier’s demarche? The EU is fully justified in asking that the UK does not pursue a predatory Chinese-style subsidy policy to undercut European companies and gain market share (very different from the supposed “Singapore-on-the-Thames” model).
The UK is happy to oblige since it has no intention of going down that route. It has agreed to set up its own anti-subsidy regime. “That ought to be the end of conversation,” said Mr Singham.
I can’t resist noting the parallel spectacle in EU environmental policy. The new guidelines for ESG sustainable disclosure exempts oil and gas from the definition of fossil fuels. Does one detect the hand of the German Gazprom lobby and the diesel fraternity in that farce?
The German BDI industry federation wants to roll back the EU’s CO2 targets. Armin Laschet, the front runner to succeed Angela Merkel as Chancellor, is a closet climate denialist who opened a new lignite coal plant in January. The UK has essentially stopped burning coal.
Britain’s environmental, labour and competition standards are on balance higher than EU standards, although one should be wary of such illusory hierarchies, often invoked as a screen for protectionism.
The Labour party erred gravely last year in demanding that the UK submit fully to the EU’s legal regime. In doing so it was stating that the EU should have the power to set future British laws without any democratic consent from British voters.
It is beyond me how anybody in the Labour Party could conclude that an EU system run in the interest of the commercial exporting elites is the apostolic defender of worker rights. Nor can I think of a lower moment in the history of the great patriotic Labour movement.
What would Keir Hardie have thought of a party that wished to strip itself of powers to exercise government for ever? The political weather has changed profoundly since that sorry episode. Britain is less divided.
The EU is in another of its endless crises – the result of its internal contradictions as a constitutional confederacy trying to run a federal monetary union. You have to be a true believer these days to take either its supremacy or moral claims at face value.