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Nationalisation Is Not Against EU Law

02/10/2015 14:19 | Updated 01 October 2016

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Sorry Nigel but EU law will not prohibit a properly handled nationalisation of energy utilities.

Nigel Farage thinks EU law prevents nationalisation. Ironically he seems to have got this from a recent post on Left Futures by Westminster University's Danny Nicol. Professor Nicol argues that the Treaty on the Functioning of the EU (TFEU) and EU liberalisation directives prohibit renationalisation of energy utilities, as proposed by Jeremy Corbyn.

Professor Nicol raises an important point. The EU probably encroaches on the sovereignty of member states to its most egregious degree when it comes to market liberalisation. Art. 176 TFEU commits member states to the expansion of markets.

I have a lot of respect for Professor Nicol and recommend his excellent book. But I can't help but feel that, in this instance, he has reduced a complex area of law to a zero sum conclusion. There are many forms of "nationalisation" that would never be touched by the TFEU (such as taking utilities into municipal control, as has happened in Germany). Furthermore, EU law wouldn't prohibit the sort of nationalisation proposed by Mr Corbyn.

Let's be clear, the Corbyn plan isn't for complete nationalisation. Mr Corbyn wants to nationalise the grid (the infrastructure that transports gas and electricity from generator to supplier), the "Big Six" energy companies and the railways.

EU law explicitly protects the right of member states to nationalise industries. Art. 345 TFEU states "The Treaties shall in no way prejudice the rules in Member States (MS) governing the system of property ownership." In his book Professor Nicol argues that this provision has recently been ignored by the ECJ. This is largely correct but it does not justify the conclusion that it will always be ignored.

Art. 345 remains in the treaty. It is possible to generally promote liberal markets and operate some industries as national monopolies. Arts. 176 and 345 are not mutually exclusive. The ECJ has often been tolerant of member states accused of violating the treaties if their actions are "proportionate", i.e. for a legitimate aim (which would include one endorsed by the electorate) and effective, but not excessive, in achieving that aim. Assuming that nationalisation was prominent in Mr Corbyn's manifesto, conducted on a transparent timetable and proper compensation was paid, Mr Corbyn would have a strong case based on Art. 345.

But even without Art. 345 EU law would not prohibit the Corbyn plan. Professor Nicol relies heavily on Art. 106 TFEU. But this provision doesn't ban nationalised industries. It simply regulates how they can behave in relation to other enterprises. In essence, enterprises with a dominant position in the market due to state action cannot use that position to behave unreasonably. The ECJ will only intervene if Art. 106 is breached.

Professor Nicol argues in his book that the ECJ now presumes that a government supported enterprise will always breach Art. 106. But this is based on a case in which the enterprise in question acted truly outrageously. It's not clear that the decisions in this case would apply across the board. It almost certainly wouldn't apply to the railways as these are already operated by government subsidised monopolies. If there's only one player in the game it doesn't make the market any more or less competitive if his name is Corbyn or Branson.

Even the court decides Art. 106 has been breached, the treaty includes exceptions allowing a state supported entity to operate without or with limited competition if it is necessary in the national interest.

This gives the Corbyn plan two defences. It could ensure that its nationalised enterprises cohere with Art. 106 ab initio (for example by writing a duty to respect it into the Act of Parliament). Or it could argue that it qualifies for an exemption.

The latter argument would be stronger if the new enterprise was to focus on green energy. Energy suppliers themselves have argued that taking the necessary steps to respond to climate change is too difficult in the existing energy market. Yet EU law purports to take climate change very seriously. The Corbyn government could argue that nationalisation represents an essential (and legally mandated) response to climate change.

Professor Nicol also argues that EU directives on electricity and gas will prevent nationalisation. It's true that both directives require that third parties have access to the national grid. This seems to prohibit a monopoly. But it wouldn't prohibit nationalisation of the grid. The grid is inevitably operated by natural monopolies (it would be absurd to have competing grids) and this reality is accepted in the directives long as third parties can access the grid. Nationalising the grid would make no difference to the current dynamics of the market.

There are over a hundred energy generators and suppliers in the UK. The Corbyn plan only involves nationalising the "Big Six". Clearly this wouldn't prevent "third party" access to the grid. In France over 90% of the market is dominated by state owned or backed entities. Allowing third parties access to just 20% of the market was sufficient for France to discharge its obligations.

We should also remember that the directives must be applied in the spirit of the treaties. This brings Art. 345 back into the mix. It would be difficult for the ECJ to overturn a proportionately conducted, partial nationalisation considering that the fundamental law of the EU recognises the rights of member states to do just that.

Finally it's worth noting that the energy industry already receives significant state aid. It would be difficult for opponents of nationalisation to sue based on an unfair competition argument when it's by no means clear that the previous situation was any better.

In summary, the Corbyn plan may well face a challenge in the ECJ. But so might almost any piece of legislation. EU law would by no means, immediately prohibit a properly handled nationalisation. This is important. Debate about progressive ideas can too often be choked off by assertions of illegality. Those of us who care about the environment (or just about our energy bill) should fervently hope that doesn't happen here.