A "Swiss Solution" to Break the Brexit Stalemate Over State Aid

Brexit

A "Swiss Solution" to Break the Brexit Stalemate Over State Aid

Commentary
Posted on: 30th September 2020
Anton Spisak
Policy Lead, Trade and Productivity

If the Brexit negotiation were a Beckett play, it would now be in its final act. Mired in mutual misunderstanding, both sides say that they want to move towards final resolution, but neither moves. The EU insists that it is now waiting for the UK to show more flexibility. Britain, by contrast, says that a deal is possible only if Brussels “scales back its unrealistic ambitions”. Theirs is a “a kind of prayer, a vague supplication”, as Beckett put it, that the other does something to end the deadlock.

The truth is that there is one issue which prevents progress more than all the others – state aid. Fortunately for the negotiators, buried in the fine print of the recently agreed EU-Swiss ‘institutional framework agreement’ is a ready solution on state aid. It is a compromise that respects the Swiss sovereignty, while also giving the EU assurance against undermining the single market. It is a solution which can help Britain break the stalemate too.

Flexible on the outside: Switzerland’s state aid offer to the EU

In Switzerland, there is no single, centralised state aid control regime. The 26 cantons and municipalities have wide discretion to grant industrial subsidies insofar as they abide by federal competition rules.

The lack of state aid control has long been a problem for the EU, not least because of the differential way in which the cantons offer tax benefits to firms. In tortuous bilateral talks, which took place for four years and concluded at the end of 2018, Brussels initially asked the Swiss to adopt EU state aid rules in much the same way as it did Britain. After much resistance from the Swiss negotiators, the EU abandoned its ask.

The eventual compromise asks the Swiss to establish a new federal framework at home – which will be enforced by a domestic supervisor – but it gives the country discretion over the precise shape of that framework to suit its domestic priorities.

Crucially, this set of commitments is reciprocal, which means that it not only ties Switzerland to a subsidy control regime at home but it also asks the EU for the same.

At the heart of this compromise are three core elements:

  1. Agreement on broad principles governing domestic subsidies. The EU and Switzerland both committed to following broad objectives in their regimes, broadly mirroring Article 107 of the TFEU.
  2. An effective regime for supervision. The IFA sets up a “two-pillar model” whereby the EU’s obligations are monitored by the Commission in its usual way, whilst the Swiss are asked to establish a domestic “supervisory authority” enforcing their rules.
  3. A channel for ongoing cooperation. There are provisions asking the Swiss side to publish state aid decisions and “maintain an equivalent transparency” as the Commission’s regime.

Brussels hopes is that, following the unsuccessful Swiss referendum to halt free movement of people last Sunday, the Federal Government will swiftly ratify the deal. Any future bilateral market access agreements are envisaged to be subject to new state aid rules.

The Swiss solution could help break the Brexit stalemate

The delicate compromise that Switzerland found with the EU holds three lessons for the ongoing Brexit negotiations.

The first is that it vindicates UK negotiators in saying that the EU’s demand for Britain to follow EU rules has been unreasonable. In the Swiss negotiations, Brussels moved away from its maximalist position to a more reasonable compromise.

Rather than having Britain follow the same rules, the EU’s true interests lie in knowing that there will be adequate domestic safeguards against subsidised British firms without having to impose protective tariffs on UK exports. If the UK were prepared to commit to a rules-based system at home, with an independent supervisor, there is a deal to be done.

The second lesson is that a compromise doesn’t mean giving up much-prized sovereignty. Any commitment can be reciprocal, locking in equal protection for both sides, while giving Britain enough domestic policy space to design a regime that works for its own priorities.

The final is a lesson in negotiations. It demonstrates that, after the EU sets its mind on certain fundamental principles, it is unwise to expend negotiating capital challenging it on the points of principle. The EU will not give them up, so it is better to focus on finding resolution that accommodates its stated principles with a flexible technical solution.

The landing zone for state aid is clear, but not how to get there

Undoubtedly, Downing Street would argue that Britain is not Switzerland. Rather, it is a sovereign equal to the EU that seeks to depart from the single market, not come closer to it. As such, UK officials would respond, any concessions might revolve around the baseline WTO subsidy rules, but not beyond them.

Britain might seek to extend the WTO subsidy rules to services, make these rules enforceable under dispute settlement, and use tariffs as a safeguard against potentially harmful subsidies. The text tabled to the EU this week reflects this position. So does the statutory instrument introduced to Parliament to remove EU state aid regulations from UK law after December.

Downing Street is, strictly speaking, right in its premises. A thin deal focused on eliminating tariffs doesn’t require the same protections as Switzerland’s close integration in the single market for goods. Nor is there any inherent need for Britain to bind itself to an obligation in an international treaty if it doesn’t intend to uphold it.

However, this view misses the big picture. Britain has several offensive asks that go beyond a standard FTA, from more flexible ‘rules of origin’ rules to mutual recognition of professional qualifications. If the prime minister compromises on state aid, he might be in a position to secure concessions elsewhere, allowing him to demonstrate to the country that his deal is a meaningful one.

What remains unclear is whether Brussels has given any consideration to the grand bargain that it might strike with Britain in this instance.

Moreover, having clear state aid rules applying to Britain would prevent the EU from seeking to use the broad state aid clause in the Northern Ireland protocol for future subsidies granted to GB firms. This would allow the government to ask Brussels to clarify the meaning of Article 10 of the protocol in light of the bilateral FTA, resolving the key dilemma that has led to the controversial UK Internal Market Bill.

Until Britain internalises this reality, or the EU chooses to drop its demand for robust state aid guarantees, the two sides will be unable to see eye to eye.

In Beckett’s play, Endgame, one of the two characters cannot stand and the other cannot sit. Trapped in a perpetual loop that never allows for closure, they curse their situation but cannot change its course.

We are now in a similarly absurd situation in the Brexit talks: both sides are unable to move to a compromise while the solution to their problem lies just in front of them. Their intransigence risks not just a disastrous no-deal, but also further excruciating negotiations in the new year. Unlike a Beckett play, however, theirs is a choice.

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