Brexit and Irish State Aid

Dr Vincent Power, Partner, A&L Goodbody wrote a short article in Public Affairs Ireland on whether Ireland should liberalise its State aid laws because of Brexit:

Be careful what you wish for, it could come true. Some commentators have suggested that Ireland should seek an exemption from the European Commission to relax some of the EU State aid rules that would allow Ireland provide more aid to Irish businesses because of Brexit.

Easing the EU State aid rules would allow Ireland to provide more assistance to businesses in dealing with the effects of Brexit. That looks positive, but there are two features that have not attracted sufficient attention in the debate.

First, relaxing the EU State aid rules means that it is Ireland (not the EU) that is allowed to pay more of its own money as aid. So easing the State aid rules means that Ireland must raise the taxes and/or cut expenditure to fund the State aid. Even when Ireland raises the money and provides the aid, the country is faced with the reality that other Member States are also seeking to fund their native businesses to overcome the challenges of Brexit. Ireland is therefore faced with others who could compensate their businesses even more generously. For example, Germany, the UK, France and Italy are the world's fourth, fifth, sixth and eighth biggest economies, respectively. If Ireland decides to assist businesses using its own resources, Irish businesses could find themselves faced with competitors who are supported by countries with even deeper pockets. This could mean that Ireland would simply not have enough resources to counter the aid from other States, be it the UK or remaining Member States.  If you play at the State aid casino then don't try to outplay those with deeper pockets.

Secondly, businesses that receive State aid usually (but not always) tend to be less competitive and efficient than those who have compete in the open competitive market. Sometimes State aid is necessary (for example, during the financial crisis or in the context of pursuing innovation and R&D) but there are times when State aid is used to prop up businesses that ultimately fail – there are some steel plants and a few airlines across Europe that prove the point. In reality, State aid is often (but not always) used to pick losers, not winners.

So, Ireland has to be very careful that the State aid provided by Ireland is necessary, proportionate, targeted and achieves its purpose. State aid could also be divisive within a country – how do you measure the level of support that businesses in, say, Dundalk, Dublin or Dingle need because of a "hard" border? How do you measure how much more a Dundalk business needs over one in Dingle? Competing businesses in Ireland could find that some businesses are propped up while others are not.

How does Ireland, and Irish business, overcome these issues?

• First, Ireland needs to look for some EU funding. This is reasonable. Indeed, some of the negative effects of Brexit will flow from the hardness of the deal imposed by the EU on the UK under Article 50 of the Treaty on European Union negotiations, despite any objection by Ireland. Therefore, it seems fitting that there would be EU funding to counterbalance, at least in part, those negative effects. It might be argued that, in part, the EU support would come from the price that the UK would be paying to leave the EU. However, whether that is so or not, there is a need for EU funding and support because of the disturbance to the Irish economy.
• Secondly, Ireland should seek some easing of the State aid rules to allow it the flexibility to respond to developments. Ironically, the legal basis would probably be the same as that used in the Banking Crisis – Article 107(3)(b) of the Treaty on the Functioning of the European Union, which provides that aid "to remedy a serious disturbance in the economy of a Member State" may be authorised by the European Commission as compatible with the EU's internal market. As aid must usually be authorised (unless it is covered by an automatic exemption – and 95% of aid is now covered by a block exemption according to EU Competition Commissioner Vestager) before it is granted, Ireland probably needs to accelerate applications to allow Ireland to address any surprise or shock.
• Thirdly, any system for the granting of aid needs to be streamlined and sophisticated. The bureaucracy should not outweigh the benefit, but the regime needs to be rigorous enough to avoid aiding the forlorn or the undeserving.

Should Ireland stay away altogether from providing State aid? Shouldn’t businesses suffer and survive without State aid?

There could be a purist view that all State aid is wrong, but that would be as extreme as it is unrealistic. Not only would businesses suffer but, more importantly, employees, consumers and citizens would suffer from a blanket ban on State aid. Selective and smart support is therefore sensible – the right balance needs to be struck. The Brexit shock is so great that it is unrealistic to assume that there will be no State aid. Getting the right balance – the "Goldilocks Challenge" of not too much and not too little but just the right amount – will be a key test for all concerned , regardless of whether they be businesses seeking or challenging aid, Government providing aid or the European Commission considering proposed aid.

But it will not be enough that Ireland provides aid, there will also be a need to have EU support the effect on the Irish economy and trade flows post-Brexit could be very significant.

For more information, contact  any member of the Brexit team at A&L Goodbody.

Date published: 15 January 2018