The impact of Brexit on the EU, the UK and the EEA

 

A short historical introduction

We are all aware of the complex relationship between the UK and the old continent. By way of example, the European Free Trade Association (EFTA), much talked about these days, has its root at the British reaction to the creation of the European Economic Community (EEC). The UK was worried and, in times coincidental with a transition phase for the Commonwealth, brought together Austria, Denmark, Norway, Portugal, Sweden and Switzerland to establish the EFTA in 1960. These countries sought the benefits of trade without full membership of the EEC. EFTA countries first lowered tariffs between themselves, and then signed bilateral Free Trade Agreements (FTAs) with the EEC from 1973 onwards. In January 1973 UK left EFTA, together with Denmark and Ireland to join the EEC.

20 years later, three EFTA countries (Norway, Iceland and Liechtenstein) and the EC Member States signed the EEA Agreement. Operational from 1994 onwards, it supersedes the FTA for the signatory countries, and extends the EU single market and free movement of goods, services, people and capital, together with laws in areas such as employment, consumer protection, environmental policy and competition. It does not cover the following EU policies: Common Agriculture and Fisheries Policies; Customs Union; Common Trade Policy; Common Foreign and Security Policy; Justice and Home Affairs (even though the EFTA countries are part of the Schengen area); or Monetary Union.

There is a question that has been discussed at length recently: will the UK leave the Union to join the EFTA family and/or sign the EEA Agreement to have access to the internal market?

 

State aid as one of the EU competences that interferes with the UK’s freedom

A company which receives support from the government gains an advantage over its competitors. This is why state aid within the meaning of the rules set out in the Treaty of the Function of the European Union (TFEU) is forbidden as a general rule. One of the conditions of qualifying government support as state aid is that it has as its object or effect the prevention, restriction or distortion of competition within the internal market. The basis for the state aid rules is therefore a part of the Rules on Competition of the TFEU (Title VII, Chapter 1). Although competition law is widely recognised, state aid law is a European uniqueness that serves to protect competition.

As any other Member State, the UK has to subject to state aid control by the European Commission any plans to grant or alter state aid and must await its green light before intervening in the economy in support of one or more undertakings.

 

BREXIT – what we know

On 24 June 2016, the results from a UK referendum were “clear” – the people had voted to leave the European Union by 52% to 48%. The referendum should trigger the frequently cited Article 50 of the Treaty of the European Union (TEU). The provision sets out that any Member State may decide to withdraw from the European Union in accordance with its own constitutional requirements. The Treaties will cease to apply from the date of entry into a withdrawal agreement. Without such an agreement, the Treaties will cease to apply two years after a notification unless it has been unanimously decided by the European Council to extend this period. It was indicated by Prime Minister Cameron that a notification within the meaning of Article 50 TEU would be triggered “straight away” if the referendum would go the way it did.[1] However, when this is written, no such notification has been made.

 

BREXIT – what we don’t know

There is a twofold uncertainty. First, it is not clear whether and when the UK will withdraw from the European Union.[2] Second, it is not clear what will come instead, if anything.

In the meantime, the state aid control will apply to the UK and support to undertakings in the UK (be it as public service providers, for R&D&i purposes, in the field of energy, to name a couple) reviewed by the European Commission. The question is whether they will apply after the withdrawal or whether they will remain in force in another form, or not at all.

 

A potential alternative – the Norway Model

One of the frequently discussed alternatives for the UK after its withdrawal from the European Union, is the “Norway Model” which implies joining the EEA Agreement. This alternative has for instance been endorsed by Christine Lagarde, the Managing Director of the International Monetary Fund as it would be more economically reasonable compared to other alternatives.

The Norway Model will basically mean the UK will sign the EEA Agreement that basically extends the internal market to the EEA EFTA States (Norway, Iceland and Liechtenstein) and thus provides for the extension of EU legislation on the internal market, competition and state aid rules. The signature of such an agreement requires the acceptance of the other parties, i.e., the Member States of the EU and Norway, Iceland and Liechtenstein. And, according to the statements in the press of the current EFTA Presidency,[3] the latter may not be guaranteed but rather the Brexit turmoil provide the framework for the end of the EEA Agreement.

Political and policy considerations aside,[4] if the UK would join the EEA EFTA States, the state aid rules will continue to apply to the UK. However, it would not be monitored by the European Commission but the EFTA Surveillance Authority (ESA). ESA enforces the state aid rules applicable in the EEA EFTA States, assesses compatibility of state aid and has the power to order recovery of unlawful state aid. Thus, ESA has powers that correspond to those of the European Commission. Moreover, the EFTA Court fulfils the judicial function of the EEA Agreement.

 

Another alternative – the Swiss Model

Leaving aside Angela Merkel’s statements regarding cherry picking,[5] a possible alternative that has also been debated these days is the “Swiss model”. Switzerland is in EFTA and Schengen but is not a member of the EU or the EEA. It has concluded around 100 bilateral treaties with the EU since the 1950s, amongst others in the areas of freedom of movement, coordination of social security systems, environment, taxation, insurance and others.

One major difference between the EU/EEA Directive and the bilateral agreements is the temporal nature of the latter. While EU law is flexible and constantly evolving through amendments and case-law, and accordingly so  is the EEA law, the agreements are comparatively static in what they provide. New protocols must be negotiated from time to time to amend them. Furthermore, there is no enforcement mechanism under the bilateral agreements.

 

Practical considerations for undertakings

These are times of turmoil and nobody can predict how things will evolve politically, legally and economically. But some considerations which are important for undertakings can be advanced.

For the moment, until the UK leaves the Union, the state aid rules remain in force and will have to be taken into consideration. The UK must notify state aid to the European Commission if it does not fall within the scope of exemptions. Moreover, the UK must adhere to the transparency obligations of the General Block Exemption Regulation which sets out that details of any aid granted under that regulation must be published.

Moreover, and important to undertakings, the UK must recover unlawful state aid if the Commission requires so by way of decision. Thus, private undertakings need to be conscious of this fact when receiving any kind of a potential advantage from the government, including grants, guarantees, loans, and tax rulings. Additionally, public undertakings need to be aware of potential scrutiny of their dealings.

If, after leaving the Union, the UK will want to keep its access to the single market, state aid control in some form will be unavoidable. Depending on the relationship with the EU post Brexit, the Commission or ESA might enforce such rules. It is not likely that the EU will agree to give access in one form or the other to the internal market without putting whatever form of control over the UK’s government intervention in favour of its own undertakings[6] as this would jeopardise the functioning of free competition which is at the core of the internal market.

 

Bibliography :

[1] The process for withdrawing from the European Union, Presented to Parliament by the Secretary of State for Foreign and Commonwealth Affairs by Command of Her Majesty, February 2016.

[2] See for instance http://www.ft.com/cms/s/0/83db8e6a-4124-11e6-b22f-79eb4891c97d.html#axzz4EBVBl1PZ

[3] http://www.visir.is/vidraedur-vid-breta-i-forgang-hja-efta/article/2016160719961

[4] See for instance https://eutopialaw.com/2016/07/05/the-eea-agreement-and-the-norway-option-integration-without-co-determination/

[5] See for instance, http://www.reuters.com/article/us-britain-eu-germany-idUSKCN0ZE0SC

[6] It is possible that the UK will adopt domestic state aid legislation enforced by a national authority. See in this respect Eugene Stuart, Iana Roginska, State Aid Regulation and Future Industrial Policy in Ukraine, European State Aid Law Quarterly Volume 15 (2016) Issue 1.