In response to a recently published report, Reuben Bard-Rosenberg takes apart some of the arguments made by the Labour Campaign for the Single Market

There has been an upsurge in activity from the Labour Campaign for the Single Market. A couple of weeks ago the centrist-dominated group convened in parliament and released a report entitled Busting The Lexit Myths – which claimed to demolish the left-wing case for leaving the single market. A radical Labour government, so the authors claimed, would not be prevented from pursuing an active industrial strategy by rules that come with membership of the single market. Conversely, the authors argued, leaving the single market would make Britain poorer but would not offer substantially more scope for radical redistributive policies.

Before scrutinizing the content of the report itself, it is worth saying a bit about what is at stake here. Particularly on the left the idea of an “active industrial policy” is invoked far more than it is fleshed out. The idea is an important one. The latest stats show that unemployment is down but wages are still stagnating. The dearth of good jobs – especially outside of the new economy hot-spots – is one of the fundamental problems facing the UK economy. This is not something that can be dealt with simply by reversing austerity. Nor can the millions of good jobs we need simply be regulated into existence – important as it is to raise the minimum wage and crack down on zero hours contracts. A radical industrial strategy would mean the government becoming actively involved in the question of what we produce and how we produce it, in order to address the slow burn jobs crisis. This could mean anything from directing investment towards green tech to nationalising stricken industries in order to protect jobs.

EU State Aid Rules

Over the past four years thousands of steel workers have lost their livelihoods as the industry has been brought to its knees by plummeting prices. To many a sane observer, subsidising the industry, or nationalising it at a loss would be a small price to pay compared with the social and economic damage that has been wrought by rapid industrial collapse – though it is a solution that sits uneasily with EU strictures against state aid.

In Busting The Lexit Myths, Nick Donavan claims to demolish the “myth” that “the single market’s rules on state aid restrict the ability of the UK government to provide support to key industries”. “Germany, Spain and Italy all support their steel industries within state aid rules  through loan guarantees, taking public stakes or offsetting energy costs.” he argues, “it’s just the UK government chooses not to”.

He is right that the Tory Government must take its share of the responsibility for the job losses in steel. Yet, what the author doesn’t mention is that here too the EU has intervened to limit state aid, and that the permitted level of intervention has been insufficient to avert a Europe-wide jobs crisis in the industry. Just before Chistmas, the EU concluded its investigation into two life-line loans totalling €700m that were made to major Italian steel producer, ILVA. These were made in 2015 and backed by government guarantees (assurances that the lenders would get their money back from the government if the business failed). The commission concluded that these constituted illegal state aid.

As a consequence, ILVA will need to pay back €84 million “the difference between the terms of the loan and guarantee in favour of ILVA and appropriate market terms.” The logic here derives from EU law under which the “market test” is applied. A sector or a firm which accesses resources under terms that are more favourable than those which would have been available on the open market is deemed to receive an “unfair advantage”. What this effectively means it is left to bond-traders, rather than elected governments, to determine what options are available for managing the future of organisations upon which thousands of people depend.

Importantly, this market test applies not only to private businesses but also to state-owned enterprises. To stick with the example of steel, if the government had nationalised the industry to avert it going under this would mean that,  in the immediate term, the government have had a large loss making enterprise, and the responsibility for thousands of livelihoods upon its hands. If it were to act as anything other than other than  an asset stripper it would need to invest a substantial amount of money into New British Steel in order to turn it into something viable. But would it be allowed to? The answer is, within the single market, probably not.

Under EU law, a government investing in its own enterprises potentially breaches state aid laws if “fresh capital is contributed in circumstances that would not be acceptable to a private investor operating under prevailing market conditions” – that is to say, if the government makes an investment decision that would not have been contemplated by a profit-seeking financier.  This is held to be the case “where the financial position of the company… is such that a normal return cannot be expected within a reasonable time from the capital invested” or where for any other reason “the company would be unable to raise the funds needed for an investment programme on the capital markets”. In short, the limitations against government investment apply precisely in those cases where such investment is most necessary in order to protect working people from the vicissitudes of the market.

“Busting The Lexit Myths” seems to acknowledge this but fails to recognise its implications. “Investments in companies where there is a functioning market need to be akin to an investment that a rational economic investor would make” Nick Donovan writes. “However, this criterion does not apply where there is not a functioning market – then the state can act to meet social needs, including through subsidies and public ownership.” To say this is to confuse an industrial policy with public services. Obviously the government can, within or outside the EU, maintain a road system or run schools. Yet  it is the ability of government to intervene in, and invest in, the production of goods and services for which there is a market – everything from steel to transport services -  that will be crucial to addressing the long term crisis in jobs and incomes.

Donovan States that a National Investment Bank – a real centre piece of last Labour Manifesto – would be allowed under EU state aid laws. But the question is, what sort of investment bank? For such an institution to have any social utility, it would have make investment decisions on a different basis from a standard profit-seeking financier. If it was to do anything more than double up on the efforts of the market, then it would need to invest in projects that were not capable of generating sufficient private profit to be viable but which could be justified by their wider social and economic utility. And yet as we have seen, it is precisely the sort of investment that private banks would not make which falls foul of EU state aid rule. Thus in 2016 the public investment authorities in Belgium were ordered to recover E211m that they had invested in a steel plant on the grounds that “no private investor would have accepted to invest at the same terms” and the that investment therefore “distorted competition”.

The WTO Red Herring

The pamphlet also assails the idea of Lexit on the grounds that “there is no escape from state aid rules”. “Even the hardest form of Brexit” Nick Donovan writes” trading under WTO rules, means complying with WTO anti-subsidy provisions”. What he doesn’t mention is that WTO anti-subsidy provisions are a completely different kettle of fish from EU state aid rules – being far narrower in their scope, far less stringent in their implementation and fundamentally different in how they operate.

WTO rules start from the presumption that subsidies are permissible, whereas the EU starts from the presumption that subsidies are illegal. Hence, under WTO rules a government is free to subsidise state-owned enterprises or private businesses and it is up to other governments to demonstrate the subsidy breaks the relatively limited rules before action can be taken. By contrast, before any subsidy is granted within the European Single Market – including those that go to state-owned enterprises – the government in question is expected to put it before the jurisdiction of the European Commission.

Perhaps more importantly, WTO anti-subsidy provisions only apply where government aid can be shown to materially distort the pattern of international trade – by reducing another country’s exports or increasing its imports. By contrast, EU state aid provisions effectively apply to any good or service that can be bought or sold. Just as long as a public or private entity produces something which could be traded between member states, the subsidy is held to fall under the remit of EU state aid laws – regardless or whether or not the good or service is actually being exported or imported. Significantly, this can also apply to public services for which there is a market. It was on this basis that the lifeline ferry services operating between the Scottish Mainland and the Scottish Islands were deemed to fall under the remit of EU state-aid rules and were forced open to competitive tender – something that would have been unimaginable and impossible on the basis of WTO rules alone.

Meanwhile, even where government-aid is judged by the WTO to have broken the rules, it is dealt with a way that is far less stringent. That is to say, the WTO can order a government to stop or change subsidy. What it can’t do is apply its judgement retroactively and order the government to recover any money that it is so far given. By contrast, it is the norm, when government aid is found to be in breach of EU single market rules, for the government to be ordered to take back any aid it has so far given.

Finally, there are important differences with regard to who can take action. Under the WTO, a subsidy is treated as legal unless another national government brings a case.

In the single market, governments can be sued by private companies. That is to say, if a future Corbyn government invested in a private or national enterprise and a firm in Britain or elsewhere felt that their business opportunities had suffered, then that business could bring a case to the European Commission. SImilarly the unelected European Commission can itself take action against a subsidy, order to protect the hallowed deity which is undistorted competition, regardless of whether anybody at all considers themselves to be the injured party in relation to that subsidy.

A Moderate Trojan Horse

It is unsurprising that these days the right wing of the Labour Party are asserting themselves first and foremost in relation to the European question. After two leadership elections and the huge vote for Corbyn at the general election, all but the most swivel-eyed centrist dads have grasped that the appetite for liberal pro-status quo politics is now seriously limited. The appeal of Europe to labour “moderates” is that the issue appears to stand beyond the left-right spectrum, and hence it allows opponents of the labour leadership – who still dominate the PLP – to assail Corbyn and McDonnell from the right without looking as though they are doing so.

The reality, as we have seen, is that a future Corbyn led government is now a very real possibility,  and whether or not  Britain stays in the single market will be in influencing just how economically radical such a government might be. But the question of single market membership is also so much bigger than issue of what a specific government may do. It is a question about the scope of politics itself.

Those who followed the last US presidential election might remember that the question of trade was paramount. Established free trade policies – particularly membership of NAFTA – were attacked not just by Trump (who thus far has done nothing to upset the commercial status quo) but also, very powerfully, by Bernie Sanders who promised to protect workers from a never ending race to the bottom. Those who follow British elections will be aware that the question of trade policy – crucial though it is to jobs, pay much else – never comes to the fore at British elections. And that is because the question of trade been effectively removed from the remit of public politics.

This is because it is not elected politicians who decide to keep domestic workers in a state of unfettered competition with the world’s sweatshop-export economies, but Europe’s unelected trade commissioner Cecilia Malmstrom. In much the same way, bureaucratic prohibition against so many forms of public investment and government intervention contained within Europe’s state aid rules serves to keep this issues off the political table, and serves to stop the free-market status from resembling anything akin to a political choice.

If we wish to press forward with radical and progressive demands about how Britain’s economy and society is to be organised – for which there is surely right now a great appetite – then our starting point must be an exit from the single market.