Boris Johnson and Ursula Von Der Leyen gave their negotiators another month to reach a post-Brexit deal on Saturday, days after the EU Commission president announced she would begin legal proceedings against the UK for passing a bill to break international law. Analysts say that Johnson’s plan to jettison EU state aid rules is at the heart of this imbroglio – driven in turn by a desire to sweep away decades of economic orthodoxy.
Tory Europhiles have long seen a Jacobin aspect in Britain’s convulsive divorce from the EU. Characterising Brexit as an “unBritish” revolution, former Conservative Attorney-General Dominic Grieve noted in 2017 that the “trouble with revolutions is that you’re never quite sure what’s going to happen next”.
When Grieve set out his argument three years ago, few would have imagined a Brexit episode in which a Conservative prime minister proposes to violate international law in order to give Britain more leeway to dole out subsidies.
On September 9, Boris Johnson’s government signalled a radical break with four decades of British economic policy – announcing that Westminster would get rid of EU state aid regulations and follow the World Trade Organisation’s more lax rules after the transition period finishes at the end of 2020.
Then the Johnson ministry pushed legislation through the House of Commons on September 29 to contravene the withdrawal agreement he struck with Brussels last year. On October 1, European Commission President Ursula Von Der Leyen announced that Brussels would respond with legal proceedings against Britain.
Johnson ‘very serious’ about state aid
The prime minister’s internal market bill would breach the divorce deal’s Northern Ireland protocol by giving Westminster leeway to reinterpret a rule maintaining European state aid rules on trade between the UK province and the EU. The withdrawal agreement would ensure no hard border with the Irish Republic by keeping Northern Ireland in the single market for at least four years while establishing customs checks on goods flowing between the province and Great Britain.
“The government is keen for the UK not to follow EU state aid rules and to not have the European Commission say which subsidies are legal or not,” said Thomas Pope, a senior economist at the Institute for Government in London.
The Johnson ministry came up with the internal market bill, Pope continued, when it belatedly realised that Brussels’ rules could ensnare subsidies to companies operating across the UK, not just in Northern Ireland: “It’s a well-founded fear because Article 10 of the Northern Ireland protocol has a broad reach.”
“Johnson is very serious about this,” added Elvire Fabry, an expert on European politics and economics at the Institut Jacques Delors in Paris. “He has been consistent about wanting to subsidise companies more.”
The central architect of the European regulations preventing governments from tilting the playing field with subsidies was Margaret Thatcher. The decades after her 1990 departure saw many Conservatives go from opposing further European integration to campaigning for Britain’s withdrawal from the bloc. But EU state aid laws were never one of their bugbears. Eurosceptic left-wingers such as Labour’s ex-leader Jeremy Corbyn were the chief critics of these rules.
Breaking with that paradigm, Johnson has often described himself as a “Brexity Hezza”, referring to ex-deputy prime minister Michael Heseltine, one of few Tory economic interventionists to survive the Thatcher epoch. His top aide Dominic Cummings enthuses about mimicking the Cold War era US’s gigantic state-funded scientific programmes to boost Britain’s technology sector.
When they voted for Brexit, a “significant chunk of the country” wanted “more government intervention” and “this government is trying to respond to that”, noted Adrian Wooldridge, The Economist’s political editor and author of its Bagehot column on the UK.
EU state aid laws forbid distortive, unproductive subsidies in favour of technological investment. However, Johnson’s government wants “a more aggressive set of policies”, as well as thinking: “We should be in charge, not Europe”, Wooldridge said.
‘Fast track to 1970s misery’
To some observers the turn towards state aid prompts memories of Britain’s dismal economic performance in the 1970s, when many intertnational commentators called it the “sick man of Europe” – and subsiding ailing firms was a key plank of both main parties’ socialist economic strategy. Former Conservative chancellor Philip Hammond told the Financial Times “it would be a fast track to the misery of the 1970s from which a Conservative government rescued Britain in 1979” when Margaret Thatcher entered Downing Street.
“The recent history of Singapore is an interesting study in the state being used to invest in areas which help to create the future, and the history of post-war France been a successful story of successful state allocation of investment to certain sectors and companies,” Wooldridge said. “Britain has not been very good at doing this, for lots of cultural and institutional reasons.”
The UK’s commitment to hard Brexit will reduce the funds for largesse. By leaving the single market and customs union, Britain will squander some £130 billion in lost GDP growth, according to the government’s own Brexit department. Since that analysis last year, the coronavirus crisis darkened the outlook even more. The British economy shrank by more than 20 percent in the second quarter of 2020, the sharpest quarterly decline on record. Public debt reached 100 percent of GDP in May.
As if that weren’t enough, the economic consequences to Britain from a no-deal outcome would likely be “three to four times larger” than those of Covid-19, according to an analysis by Goldman Sachs.
On the other side of the negotiating table, EU leaders have long underlined their commitment to a “level playing field” on trade. “The full and timely implementation of the withdrawal agreement is simply not debatable,” EU Commission Vice President Maros Sefcovic told the European Parliament on Tuesday.
“Brussels has just beefed up its agenda on this issue because of concerns over China, so it cannot relax when it comes to the UK,” Fabry pointed out. “The EU would apply the same defensive instruments it uses against China and Russia” in response to distortive British subsidies, she continued.
This would be an extraordinary culmination of Britain’s break with the EU. But such is Brexit’s revolutionary momentum that many of its adherents are keen to take risks in the name of creative destruction. Cummings is fond of Silicon Valley’s “move fast and break things” mentality. Head of the Number 10 policy unit Munira Mirza is a former member of the Revolutionary Communist Party. Cabinet Office Minister Michael Gove claims twentieth-century Marxist thinker Antonio Gramsci as an influence.
“The group of people around Boris Johnson are basically revolutionary conservatives,” Wooldridge said. “They believe the current regime in Europe and Britain is so decadent that it needs a revolutionary push to make it fit for purpose. They do want to preserve the old order, to some extent – but they don’t think the old order is capable of preserving itself, so they think they need to borrow some ideas from revolutionaries in order to make it work.”