European Union ends relocation subsidies

This isn’t actually news, but it’s news to me, and it’s something you need to know. Greg LeRoy sent me an article by James Meek in London Review of Books (20 April 2017) that he’d been sent by a friend, documenting more EU-permitted job piracy by Poland that preceded the case I discuss at length in my book, Investment Incentives and the Global Competition for Capital. There, I criticized the European Commission’s Directorate-General for Competition for approving a 54.5 million euro subsidy for Dell to move from Ireland to Poland in 2009. During my January 2011 book tour, I took a lot of flak from DG Competition when I presented there, with several staff pushing back on my criticism of this decision.

As the LRB article pointed out, this was another case involving Poland, where Cadbury received state aid of about $5 million (14.18 million zloty when the zloty was worth about 0.35 USD) in November 2008 to move from the Somerdale, United Kingdom, to Skarbimierz (the LRB gives a much bigger number, but from unspecified “Polish government figures,” so I cannot find a way to compare it with the EU’s case report). This case is only listed in the EU’s Official Journal, where it is reported as having been notified under the General Block Exemption Regulation. As this regulation is intended for uncontroversial cases, that makes it evidence, though hardly proof, for a relatively smaller rather than larger aid amount. For my purposes, the amount is less important than the fact that we have another documented relocation subsidy.

What’s the big “news”? In Meek’s article we read, “In 2014, too late for Somerdale, the EU recognised its error and banned the use of national subsidies to entice multinationals to move production from one EU country to another.” Just like that.*

Okay, I’m abstracting from the political process. But it’s pretty clear what happened. As I reported in Investment Incentives and the Global Competition for Capital, when Dell moved to Poland, all of Ireland was up in arms, including government officials and Members of the European Parliament. The European Parliament made its displeasure known. What the Somerdale case shows us is that there was at least one other country on the wrong end of a relocation subsidy, strengthening further the political pressure for state aid reform.

As I said, Commission staff believed they made the correct decision in the subsequent Dell case, and the rationale would have been exactly the same for Cadbury. The move sent economic activity from somewhere with high per capita income to a place with a far lower per capita income. They saw this as an overall increase of efficiency within the European Union. As I argued, though, even if that were the case, the decision wasn’t good for intra-EU solidarity, and it undermined support for policies promoting the growth of the EU’s poorer regions (“cohesion” policy in EU-speak). In light of the 2014 policy change, we know that arguments aligned to mine were the ones that carried the day politically.

This shouldn’t come as any surprise: People generally don’t like job piracy when they know about it. If you’ve read Chapter 5 of my book Competing for Capital, you know that it’s basically not allowed for states to use federal funds (Community Development Block Grants, Small Business Administration, etc.) to engage in job piracy. But in each program’s case, the reform happened only after one or more such incidents (many of them reported to me by Greg LeRoy during my research) had taken place, leading to demands for change.

Moreover, individual states know how to prevent job piracy within their own state. As of 2013, 40 states had shown their ability to write anti-piracy rules (p. iii). But they don’t hesitate to use relocation subsidies when it comes to raiding other states. They can’t seem to help themselves since they all need investment, and nothing stops other states from providing incentives. In fact, all multi-state anti-piracy agreement in the U.S. have failed, and even the most promising recent attempt (Kansas/Missouri) failed to get off the ground.

Only the federal government can stop states from stealing jobs from one another, but don’t hold your breath on it happening anytime soon even though the negative-sum nature of inter-state border wars is easy to see. It’s heartening to me to see the European Union has finally changed its policy, given that I have written mostly positive things about state aid control over the years. It’s great for the glaring exception to be gone.

 

*For the technically inclined, this is embodied in a ban of relocation subsidies under the General Block Exemption Regulation, and in the Guidelines for Regional Aid 2014-2020, which classifies a relocation aid (paragraph 122) as “a manifest negative effect,” “where the negative effects of the aid manifestly outweigh any positive effects, so that the aid cannot be declared compatible with the internal market” (paragraph 118).

Cross-posted from Middle Class Political Economist.

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