With just a few months left to agree a new trade relationship, the UK and EU appear no closer to striking a deal than they did at the start of the year. If anything, they may be further away.
Reports overnight claimed that Number 10 believed the chances of avoiding a no deal to now be somewhere between 30pc and 40pc.
James Forsyth, the political editor of The Spectator, said, above all else, one issue was proving particularly contentious. It wasn’t fishing rights or EU passporting. Instead, state aid rules had emerged as a major sticking point, one which could, Forsyth said, threaten to derail the talks entirely.
Many are watching closely. Should Britain refuse to provide an equivalently robust state aid regime to the EU’s, a deal could be off the table. “It will be a white knuckle ride until the end of December,” says Jonathan Branton, the head of EU competition at law firm DWF.
The Government has so far appeared to be unwilling to publish its own proposed rules to the EU, something critics say signals a desire to assert its independence from the bloc. But, there are further things to concern the EU. A UK regime may also prove much more lax, threatening EU businesses who have access to less easy capital.
This is because, under EU state aid rules, there are restrictions on how money can be funnelled into firms. For the technology sector, this can prove particularly arduous. Under what are known as “undertakings in difficulty” rules, governments are not allowed to provide support for loss-making companies, ruling out the backing of many innovative, but investment-heavy, firms.
This clause has been a source of consternation for the UK for a while. Back in 2018, Britain’s biotech companies were bearing the brunt.
At the time, sources suggested the UK’s innovation arm Innovate UK was being forced to toughen its stance on dishing out grants to early stage startups. The entity was being urged to more strictly enforce rules to bar companies whose accumulated losses equal more than half of their share capital from receiving any state funding.
Innovate UK had had to seek “legal counsel” regarding the clause amid growing EU pressure, sources said. Innovate UK had said it “funds the best new ideas that create jobs and growth and drive up productivity”.
“Securing Innovate UK funding is a highly competitive process, and just because a company has been funded previously, there is no guarantee that they will be funded subsequently.”
Yet the Covid-19 crisis has changed the situation. In June, the EU decided to temporarily relax its state aid rules to allow struggling companies to access government support schemes. In the UK, this was borne out in the form of the Future Fund, which as of last month, had allocated almost £600m to start-ups. Ultimately, due to the fund, the Government is set to end up with stakes in hundreds of loss-making ventures.
The UK had already seemed to be moving towards this direction. It has for years been allocating taxpayer cash to funds through its British Business Bank arm, to then invest into early-stage businesses. More recently, it has been looking at “co-investing” alongside these funds in the most promising business, and its first direct investment into a start-up expected to come within the next few weeks.
Such moves are perhaps unsurprising. For years, the UK has been looking at how it could provide more capital for its tech firms, amid growing concern over foreign swoops on Britain’s brightest companies before they can become multinational players.
Dominic Cummings, Boris Johnson’s adviser, has written extensively on the subject in the past, citing the case of DeepMind’s takeover by Google as a company which sold “for trivial money without the powers-that-be in Whitehall understanding its significance”. In this vein, he championed the creation of a new innovation agency, ARPA, which could funnel more cash into moonshot ideas.
With additional funds to invest into early stage funds, the hope is that British firms will be able to compete on a global stage, backing hundreds of potential future unicorns. The UK could create what the Government has previously described as a “modern system for supporting UK businesses in a way which fulfils our interests”. Experts warn, however, that it is fast running out of time to consult with industry and establish such a regime.
They say the existing EU regime has enough flexibility in it to allow for more state investment by the UK. “The bottom line is it has been a conscious decision from the UK Government not to spend a lot of public money on business,” says Anton Spisak, from the Tony Blair Institute. “They can change this in the future within the constraints of the rules of the EU. It wouldn’t be a problem”
The next few months will likely prove difficult. The EU does not want a “rogue UK that is able to basically lowball them in competitions for international inward investment”, says DWF’s Branton.
“The EU is clearly worried about them undermining competition,” Spisak agrees. “But, Downing Street would say that the UK would be independent and sovereign and therefore there’s no reason they should be subject to these rules in future.”
Time is, however, running out for such discussions. With only a few months until the transition period comes to an end, there is still much to be decided. Britain may be eyeing up a future where it can back as many innovative firms as possible – but some would say, it always had that power.