Brexit and Labour’s 2017 Manifesto II

In my article “Brexit and Labour’s 2017 manifesto“, and on my wiki article, “Stability & Growth Pact”, I talk about the reasons supporters of Labour’s 2017 manifesto might believe that they need to leave the EU to run fiscal deficits, nationalise critical businesses and offer state aid. I had come to the conclusion that our current terms of membership allowed the UK to pursue whatever macro-economic policies it chose and to be able to pursue its nationalisations. There would seem to be some questions on state aid and some people have raised the issue of the Railway Directive and its possible impact on the single market and nationalisation. A campaigning comrade of mine, from Southampton Itchen CLP has researched these issues and produced the following report, overleaf,  which he also published on Facebook wall.

He concludes, the notion that all EU activity is driven solely by Neo-Liberal ideology is in my opinion a mistaken assumption. In many instances there are additional rationales underpinning the EU rules that go beyond mere market obsession. The EU has pressed for more open networks in telecoms and energy but open access across national energy networks is critical for renewable energy production being made viable on a grand scale. Whereas in the water sector, where it is not feasible to create overlaying pan-European services, the EU has never shown any interest in legislating for open networks.

I would not go so far as to suggest the EU does not have an over optimistic view of the market system or tend to assumptions about private sector performance vs public sector that are not sustained by the economic models relied upon and it is possible to have a good discussion about Ricardo’s theory of comparative advantage.

On the other hand, free market supremacy is a pretty widespread assumption in the modern western world. The victory of the Neo-Liberal ideology has been to shift public perceptions to accept the ‘private good, pubic bad’ mantra as a gospel truth. That human beings in the EU broadly accept the same mantra is not really a surprise. The challenge to us as socialists is not just to reshape the UK economy to provide for greater equality and justice but to begin to reshape the underlying assumptions about human and market behaviour that underpin much of the capitalist economic system.

On state aid

It is true that the EU does have rules on state aid and can restrict its use. It is not correct that it has an absolute bar on state aid. The relevant rules are in the Treaty on the Functioning of the European Union (TFEU).

At Art 107:

1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.
2. The following shall be compatible with the internal market:
   1. aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;
   2. aid to make good the damage caused by natural disasters or exceptional occurrences;
   3. aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council, acting on a proposal from the Commission, may adopt a decision repealing this point.
3. The following may be considered to be compatible with the internal market:
   1. aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation;
   2. aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;
   3. aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;
   4. (d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest;
   5. (e) such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.

Clearly the EU rules do allow state aid in certain circumstances. To summarise them:

1. Economic development of poor or high unemployment areas;
2. projects in the common EU interest or to remedy serious disturbance area (e.g. Northern Ireland during the Troubles);
3. economic development of activities or areas;
4. promote heritage/culture;
5. others as specified by EU Commission.

That is quite a wide area and set of justifications of possible state aid intervention. The idea that all state aid is automatically restricted by EU rules is just not accurate. The rationale behind the control of state aid in my opinion is not fairly described as being only to promote a particular Neo-Liberal outlook of the free market. It actually dates from the creation of the EEC in 1957. Some of the founding ideas of Neo-Liberalism were not mainstream at this time, Ludwig von Mises published ‘Human Action’ in 1949, and Friedrich von Hayek published ‘the Road to Serfdom’ in 1944 and Ayn Rand published ‘Atlas Shrugged’ in 1957.

The purpose of the Treaty of Rome 1957 was to create a common economic space within which the mixed economies of Europe could prosper and where the economic drivers considered to have fuelled the rise of populist dictators could be prevented. State aid rules were designed to meet both these ends. The greater economic space was intended to create a larger market that would generate increased opportunities for specialisation at firm level and the exploitation of national comparative advantage. State aid rules were intended to ensure that individual states would not try and free-­‐ride on this larger common market by providing aid to national companies at the expense of unsubsidised rivals in other member countries. At its core the rationale is to create a common market that operates in a mostly fair way amongst the nations of the EU. This does not preclude state aid where other social or economic rationales justify it and the EU rules explicitly allow for just that.

There was a mention in the debate of Italy having been sanctioned for state aid. This was in relation to direct grants of €44 million from the Italian national budget to the Port Authority of Naples.The grants were used to renovate the dry-docks rented out by the Port Authority of Naples to Cantieri del Mediterraneo (CAMED), a ship-building and ship-repairing company, on the basis of a 30-year concession.

Public interventions in companies are free of State aid within the meaning of the EU rules when they are carried out on terms that a private investor operating under market conditions would have accepted (the market economy investor principle). The Commission found that the Port Authority of Naples benefitted from State grants, i.e. non-refundable financial support with no financing cost. In the market, such a financing instrument would not be available to the Port Authority of Naples this gave both the Port Authority of Naples and CAMED an unfair economic advantage over their competitors.

In comparison the EU Commission has approved under EU State aid rules Italian plans to prolong two motorway concessions and impose a cap on their tolls. This will involve around €8.5 billion of investments going ahead.

The issue of Italian underinvestment in infrastructure and the plan to spend for that purpose has problems within the EU because Italy is a member of the Eurozone. It is also signatory to The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG). This restricts the amount of the deficit a Government can undertake to 3% of GDP. In Italy’s case it has one of the highest debts of any EU nation at €2.3 trillion or 131% of GDP. This has meant the EU is pressuring Italy to reduce overall debt.

It is not the case that the EU is restricting Italy because of state aid rules it is part and parcel of being in the Euro. The UK is not a signatory to the TSCG treaty and I would hope will never join the Eurozone.

I don’t for one minute suggest the EU is perfect and there are questions around Capital controls, and some competition policy in my view. Equally though I just don’t believe it is accurate to characterize the EU as simply a Neo-Liberal goliath that stops all state aid. The reality is more complex.

On Railways:

The other issue that arose in Itchen CLP was railway nationalisation. The major concern was the directives in the 4th Railway Package, this has the objective of establishing a Single European Railway Area. The package comprises six legislative proposals, three of which comprise the technical pillar with the remainder making up the market pillar.

The market pillar proposals are:

1. opening of the market for domestic passenger transport services by rail
2. award of public service contracts
3. single European Railway area
4. opening of the market for domestic passenger transport by rail and governance of railway infrastructure
5. common rules for the normalisation of the accounts of railway undertakings.

Some of the history to the 4th Railway package is that in 2010 the EC took 13 member states to the European Court of Justice (CJEU) for failing to fully enact EU railway legislation. However, the CJEU rejected the EC’s case against Austria and Germany, ruling that neither The 1st Railway Package nor any other EU legislation required compulsory and complete separation between Infrastructure managers and train operations. This case also confirmed that infrastructure managers existing within a holding company structure could be regarded as independent.

In a European Parliament plenary vote on the first reading of the six legislative proposals of the 4th Package in February 2014, MEP’s introduced amendments giving member states greater flexibility in the choice of governance model. The result of this was that the market pillar of the 4th Package allows retention of infrastructure and operational functions within a single vertically-integrated holding company (variants of which exist in France, Germany, Austria, Italy, Slovenia and Luxembourg) but with safeguards to ensure independence of the infrastructure manager, particularly in relation to capacity allocation and track access charges. There is no provision for mandatory unbundling.

Britain’s railways are arranged in a 3 part system: the infrastructure manager, the train service operators and the train leasing companies. Network Rail is the public body responsible for track maintenance and investment. Train service operators are a mix of subsidiaries of other European national rail companies and private companies. They run train services, earn money from tickets sales, pay a track usage fee to Network Rail, and hire the trains from a train leasing company.

Britain’s railways use a competition-for-the-market model which means that instead of competitors running the same services alongside each other and vying for passengers, the competition is to win the contract to run part of Britain’s railway network for usually 5 to 10 years. The repeated collapse of the East Coast mainline franchise highlights two key flaws with Britain’s rail model: it incentivises overestimating to win bids and the government ultimately holds all the risk.

The 4th Railway Package only requires infrastructure to be independently managed and allows some public service routes to be directly awarded, specifically where a direct award would lead to better quality or cost-efficiency. This is how many regional services are run by other European national operators. On all other routes the operator is to be determined by competitive bidding.

So whilst it is correct that under the 4th Railway Package it would not be possible to recreate a universal national rail service, like British Rail, it is possible to increase public provision of rail services through different bespoke models.There are 2 main european models in use currently:

1. two separate state-owned companies (one for track, one for trains), which is used in Spain and the Netherlands.
2. separate companies within a state-owned group of companies (a parent company with a subsidiary company for infrastructure, and others for different train services). This is the model used in Germany and Italy.

The rationale underpinning the 4th Railway Package is the EU’s desire to provide a more integrated continental railway freight system. EU rules have begun to require national railway operators to make access available to track and other railway systems so that railways operators can piece together trans-continental freight services across the patchwork of national rail track systems. This has been necessary because restricting rail freight services to a series of national monopolies was killing it off as a service: rail freight generally only becomes competitive at distances of around 600km and routes of this length are typically cross-border. This opening up of rail freight allows for potentially greater competition with the environmentally more damaging use of road haulage.

It is therefore not strictly accurate to say that EU rules in the 4th Railway package will entirely prevent railway nationalisation. What it will most likely mean is a degree of restriction in the form that any nationalisation can take. This could though be a blessing as a return to 70’s style national monopoly state providers is likely to be politically less palatable anyway. The use of smaller integrated cooperative ventures may be more effective and create conditions for greater democratic worker and passenger control.