Labour’s brexit quandary: do EU rules allow renationalisation?

This piece was originally published on Scottish international affairs site Cable. Unfortunately, Cable has since closed and the published article is therefore unavailable. Below is the original, unedited version of the same article. 

When Jeremy Corbyn’s Labour party congregated this autumn for their third annual conference under his leadership, the mood was notably different than those previously. Buoyed by an impressive general election performance and increasing popularity in its aftermath, Shadow Chancellor John McDonnell took to conference floor to announce a suite of radical policies including the nationalisation of the rail, energy, water and postage industries. But while such bold rhetoric would usually grab headlines easily, much coverage focused instead on what was notably absent from the conference: a vote on the party’s Brexit position.

An eleventh hour emergency motion ultimately did see delegates voting to back the party’s stance in favour of single market and customs union membership for a transitional period of four years. But the decision did not put to bed a growing impatience with Labour’s lack of clarity on Brexit. Why was the party’s leadership so keen to avoid a vote?

The true answer may lie in the compatibility of Labour’s bold nationalisation agenda with European Union rules around state aid and European competition. In line with Labour leaders before him, and with socialist movements throughout history and across the world, Corbyn’s Labour advocates for the state ownership of key public services on the grounds of both social and economic responsibility. The UK’s major public utilities have a colourful past in this regard, with the majority having been placed into public ownership in the post-war 1940s and 50s, only to be returned to the private sector under Margaret Thatcher’s Conservatives throughout the 1980s. A large-scale nationalisation programme is therefore seen as symbolic of Labour’s recent lurch back towards their socialist roots, which emerged in a pre-EU economic context. Announcing these policies, McDonnell stated in no uncertain terms: “building an economy for the many also means bringing ownership and control of the utilities and key services into the hands of people who use and work in them. Rail, water, energy, Royal Mail: we’re taking them back.”

But for as long as the United Kingdom is still a member of the EU and its single market this might be news to its colleagues, who largely see themselves as part of a union explicitly designed to create as even a playing field as possible amongst its member states. It is because of this that the structure and governance of the union is such that mass state ownership of this type is seemingly actively opposed within it. While the EU does not overtly ban public ownership or take any position on the legal formation of companies within its member states, the very design of the single market and the rules which govern it can instead be seen as operating to do exactly that: if the single market is founded on the principle that competition remains the most efficient method of economic governance, then state ownership would certainly seem to be in contravention of its philosophy if not its rules. And indeed, relevant Articles within the EU’s treaties do exist for precisely this purpose, namely to prohibit member states from “distorting competition” by inflating their public sectors with government money at the expense of potential EU-wide competitors. While some exemptions are built into the rules to cater to specific circumstances, regulations state that members must seek approval from the European Commission before granting any such state aid.

Where, then, does this leave Labour’s commitment to large-scale nationalisation of industry amidst sustained pressure for them to clarify their brexit position? Interpretation of the relevant EU treaties varies and not all analyses see them as entirely incompatible with state ownership. In a report released in September 2017, Dr Andrea Biondi, Professor of European Law, and Dr Andy Tarrant of the People’s Pension, conclude that single market membership “does not provide any obvious barrier to the implementation in the UK of the measures contained in Labour’s 2017 election manifesto”. Their argument, though, is based in part on a belief that the bulk of Labour’s proposals would fall under exemptions which have not necessarily been widely tested within the EU: while state ownership does exist throughout the Union, the vast majority of relevant companies have never been removed from public ownership, thus creating a different context to that of the UK, where Labour propose to return to public ownership industries which have already been bought out, and to do so on a grand scale. Where competition has previously been introduced to a market, and EU providers potentially already embedded in the supply chain, removing it again is a more challenging prospect.

Across the EU, not many test cases exist as to the feasibility of this type of nationalisation agenda within the single market. Where other examples of state ownership exist, it tends to be either excused under the agreed exemptions or to have already been remoulded under pressure from the European Commission. France’s Emmanuel Macron, for example, this year renationalised a shipyard, thwarting an Italian firm’s takeover bid – but military infrastructure remains exempt from competition rules. The publicly owned German bank KfW predates the formation of the EU but still had to reshape in 2002 under its pressure, splitting its commercial lending arm into a separate legal entity explicitly to stop the distortion of competition. Similarly, the nationalisation of the UK’s banks following the 2008 financial crisis required the permission of the EU, who soon became restless with the arrangement and asked that various parts were sold off.

Perhaps the most compelling comparison to an imagined Labour government’s programme is the case of Greece, whose socialist Syriza government in 2015 rejected an EU bailout offer contingent on the implementation of an austerity programme, proposing instead to solve the country’s financial crisis with large-scale nationalisation. Despite this rejection of the EU’s terms being backed by a nationwide referendum, Syriza’s attempts at state aid were ultimately blocked by the troika of the European Commission, International Monetary Fund and Central Bank. To this day the country remains in a precarious financial situation and with widespread unemployment and poverty, calling into question the effectiveness of the economic model that the EU remains committed to.

It is in this context that many proponents of ‘lexit’, or left-wing Brexit, argued for a clean break from a neoliberal EU in which richer, bigger powers are seemingly able to walk all over poorer nations who, failed by its economic ideology, seek to propose solutions which threaten it. The EU is a structurally capitalist institution, so goes the argument, and socialism can never truly thrive within it. If recent polling which shows the majority of the country to be simultaneously in favour of both a Labour government and continued membership of the EU is to be believed, then this might be uncomfortable analysis for many. Is there any way forward for a UK led by a socialist Labour government inside the EU?

The internal politics of the EU suggest that the reform needed to overcome such barriers would not be easily won. The EU as an institution considers the four freedoms of movement, people, trade and capital to be non-negotiable guiding principles, and rules around competition and state aid definitively exist to protect these. The necessary changes would be large in scale, requiring the revision or amendment of EU treaties themselves which is not only an arduous process but one unlikely to secure the support required. While countries like Greece or Spain who may have general sympathy for state-funded programmes might support any hypothetical reforms, newer member states such as those in Eastern Europe, who see their developing economies as benefitting from EU competition as it exists, would be likely to oppose them. Ironically, this scenario potentially sees the very governance designed to stop larger and traditionally more powerful members from dominating, work to prohibit radical reform within the EU.

The UK Labour party’s predicament, then, may be best placed somewhere between a rock and a hard place. A radical and optimistic policy platform has seen a surge in their support, but it has come at a time when support for a second EU referendum is at its highest and public support for leaving the EU at its lowest since the referendum result. With ‘I will always love EU’ and ‘EU’re the one that I want’ placards still flying high at pro-EU protests, it may also be fair to assess that the rhetoric emerging from referendum campaigning has flattened much of the complexity out of any debate about the EU and the UK’s possible place within it, creating an electoral context in which it seems nearly impossible for any Labour party case about pro-socialist reform within the EU to land.

Against the backdrop of a debate that has polarised opinion so extremely, those who support both EU membership and socialist Labour policies will likely find themselves uncomfortable about a conundrum which has no obvious heroes or villians. Jeremy Corbyn has faced more challenges than most throughout his tumultuous leadership – but navigating nuance against a cartoon strip political backdrop might prove to be his toughest yet.