MNI SOURCES: State Aid Key To Brexit As UK Bets On Germany

Upcoming British proposals for a state-aid framework could make or break a Brexit deal, well-placed sources told MNI, adding that the UK would be wrong to bet that Germany, whose own pandemic subsidies to industry have raised eyebrows among its EU partners, can be prised away from the bloc's joint position.

The UK hopes the EU's German presidency will put last-minute pressure on other member states to avoid a no-deal Brexit by making concessions over level-playing-field rules and fishing rights, areas in which so far there has been almost no progress, EU officials told MNI. But Berlin is unlikely to break ranks with the bloc's agreed position and risk the integrity of its single market, they said, adding that the key to negotiations will be proposed industrial subsidy rules the UK says it will provide at some time in the autumn.

Should these prove unacceptable to the EU, a no-deal Brexit on WTO rules will loom, they said, adding that any free trade deal would have to be agreed by October.

"Does the UK go with the EU's rules-based approach, something less rules based or opt for a totally different approach?" said one Brussels-based official, "If the UK goes for the last, that would be a real game changer."

STATE AID RULES

Sectors of the British government, including prime ministerial advisor Dominic Cummings, want maximum flexibility for industrial aid, to help reduce regional differences and drive high-tech development. But southern European member states are already resistant to Germany's circumvention of EU state aid rules and do not wish to see special treatment for the UK, noted another source. Germany's support for its industry amounts to 52% of EU state aid during the Covid-19 pandemic.

"The UK is continuing to contact member states all the time and trying to have bilateral contacts at all levels, asking where is the landing zone?" said one source in Brussels. "The German presidency has been clear that the Brexit talks will stick with the agreed mandate."

Even should Germany attempt to forge compromise, the outcome of recent talks on the bloc's budget and a pandemic recovery fund show the eurozone's largest economy no longer has the sway to force through politically difficult decisions on its own, a source said.

France in particular is concerned level-playing-field concessions might grant UK companies a competitive advantage, a Brussels source said, adding that Paris, traditionally more favourable to protectionism, is unlikely to buckle to pressure from Berlin.

OFFSHORE ISLANDS

Germany's presidency will also have other issues to deal with, including finalising legal and operational details of the Recovery and Resilience Fund as well as the next long-term EU budget.

British arguments that the level playing field was not a great consideration in the EU's trade deal with Canada are irrelevant given the UK's geographical proximity to the bloc, Brussels officials said.

Failure to reach a deal, prompting a WTO regime from Jan. 1, 2021, would send negotiations back to the drawing board, with no chance elements agreed so far would be adopted in a 'bare bones FTA', EU officials said. While negotiations with the UK would continue next year, urgency would be gone.

"The longer that process went on – the more disintegration there would be and the less urgency there would be as a result of trade diversion and businesses and exporters adapting to the new reality," a Brussels official said.

Negotiations will restart on Aug. 17, with the last round finalised so far scheduled for Sept. 7. More strategic weekly meetings between EU negotiator Michel Barnier and UK's David Frost may also resume.