The “Lexit” myths and why single market rules don’t prevent rail nationalisation

Lexiteers, happily aped by Nigel Farage, claim that EU rules prevent nationalisation. This is simply wrong, as any reading of the law would reveal.

Taking the practical step of observing the wide extent of state ownership in member states other than Britain confirms it. In rail, for example, in only three EU member states does the nation not own companies providing rail freight services and in only one does it not own companies providing passenger services. In every country in the EU, the state owns the rail network.

Pressed on these points, Brexiteers fall back on three main arguments:

(i) the EU does not make member states privatise historically-owned companies but it would stop nationalisation of already privately owned companies in the future;
(ii) it does not legally prevent nationalisation but “open access” rules to utility networks would allow private companies to cherry pick profitable customers and make nationalised companies unprofitable;
(iii) EU rules for open access are “neo-liberal” and ideological rather than in the general interest.

Taking these arguments in turn:

Single market rules don’t prevent nationalisation of already privatised companies or the setting up of new ones

The argument that the EU freezes the current form of ownership and that Britain is “stuck” because of its previous privatisation experience is wrong. The EU has no rules which prevent the state from either taking over an existing company or setting up a new state-owned company. Recent examples of this in Britain include Railtrack and the National Employment Savings Trust —a mass workplace pension scheme now serving almost five million members – both created under recent Labour governments.

EU rules allow the state to prevent the private sector “cherry-picking”

The suggestion that private enterprises can cherry-pick, taking the profitable customers and forcing the state-owned operator to become uneconomic because they are left with the rump of unprofitable customers is also incorrect. Unsurprisingly, the member states of the EU, with their large number of state-owned enterprises, did not agree regimes which could bankrupt their own enterprises and worsen their national fiscal positions.

Instead, the EU utility regimes allow members – if they so choose – to either force private enterprises to share a requirement to offer a service to uneconomic customers, or to divide up the costs of the state-owned enterprise serving uneconomic customers and make private enterprises contribute to the costs of the state-owned enterprise.

Are EU open access utility rules preventing national monopolies “neo-liberal” or designed to support continent wide economic production?

One feature of utilities is that they are typically network industries which support a much wider and economically more significant mass of industrial activity. Any socialist or social-democrat proposing a return to national public sector utility monopolies because they were a good idea in 1945 needs to deploy the good Marxian tool of examining economic structures.

In 1945, British manufacturing production was entirely domestic and its exports were orientated to a captive imperial market that was forced to buy British. In 2017, British manufacturing and services are highly integrated into EU supply chains.

Rail freight provides a good example of the general pattern described above. EU rules have begun to require national railway operators to make access available to track and other railway systems so that railways operators can piece together trans-continental freight services over the top of the patchwork of national rail track systems.

Why was this sensible? Because restricting rail freight services to a series of national monopolies was killing it off as a service: rail freight generally only becomes competitive with the far less environmentally-friendly road haulage at distances of around 600km and routes of this length are typically cross-border.

What this example tells us is that opponents of access are those that are being ideological – willing to kill a potential industry and the jobs in it in order to maintain fidelity with a nationalist past.

Similar benefits from open networks apply in telecoms and energy and open access across national energy networks is absolutely critical for renewable energy production being viable on a grand scale. It is worth noting that in the water sector, where it is not feasible to create overlaying pan-European services, that the EU has never shown any interest in legislating for open networks. If the EU were the ideologically driven neo-liberal organisation its detractors claim, then we ought instead to have seen legislation in this sector too. British government attempts to push water privatisation at EU-level were always seen by other governments and the EU institutions as pointlessly ideological.

In practice what Lexiteers actually want is to exit is the way that Britain has run utilities in the last 30 years. There are many very valid criticisms to be made of the latter. However, by not properly assessing the actual causes of British privatisation failures – which have little or nothing to do with the EU – Lexiteers risk unwittingly doing a great deal of damage for no purpose.

Dr Andy Tarrant has worked in the public and private sector as an EU competition and regulatory lawyer for telecoms. He has also advised Labour’s shadow ministers for pensions and Europe and currently works for a not-for-profit workplace pension provider. 

Busting the Lexit Myths is published today by Open Britain and Labour Campaign for the Single Market.