What is European Union state aid - and why it is threatening to derail Brexit negotiations?

The European Union has rejected a pitch by Boris Johnson to end the Brexit deadlock with a set of proposals limiting state aid to British companies.

The UK made a last-minute decision to hand over five new proposals “in a bid end months of stalemate”, but were “rebuffed” by EU negotiator Michel Barnier, the Daily Express says.

A Brussels source told The Guardian that Johnson offered to lay out a series of “principles” on controlling state subsidies as part of an effort to end the logjam over what has become the “most contentious of the outstanding issues” in the negotiations.

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What are EU state aid rules?

State aid rules are set of laws dictating how governments can subsidise businesses.

State aid takes the form of state-backed financial assistance given to private companies, either in the form of direct cash grants or indirect aid such as tax credits, in a manner which could distort market competition.

The EU enforces rules which state that member countries of the bloc are allowed to provide state aid only with approval from the European Commission. But EU rules do not allow governments to give money to save failing companies, for example companies that made recurrent losses in recent years.

Why is it a Brexit sticking point?

Throughout negotiations, the EU has “pushed for the UK to accept the bloc’s state aid rules”, which “do not allow unfair subsidies to be granted”, The Guardian says. But Brussels eventually “made a major concession during the summer, dropping its demand that Britain should continue to follow” its rules directly, The Irish Times adds.

Instead, the EU is now asking the UK to lay out what its state aid rules will look like after 31 December, when the Brexit transition period officially comes to an end.

The bloc also wants London to “outline the terms on which an independent, domestic regulator would operate, and to agree a robust dispute-resolution mechanism with the EU” in the case of allegations of unfair market competition, the paper adds.

This has become a major point of contention, with EU officials warning that any agreement on managing state aid would need to be taken “at the highest level” because it clashes with the bloc’s original trade proposals, The Guardian reports.

Will there be a breakthrough?

UK ministers last week told The Times that they “believe that a deal can be reached on state aid” in which Britain would agree to meet some “baseline rules” over its use. Chancellor Rishi Sunak also thinks that Britain is “likely to get a deal and has been working on proposals for Britain’s post-Brexit state aid regime”, the paper adds.

But while the UK is looking to enter intense talks to seal a deal by the 15 October EU summit, the EU has warned that this will only happen if there is significant movement on the part of the UK.

If Britain does not move towards the EU’s position on state aid, there will be “no deal and the end of the transition period will bring serious disruption to the British economy”, The Irish Times says.

“It will hurt EU member states too, including Ireland, but the biggest cost will be borne by Britain, where a no-deal outcome would hurt the parts of the economy which have been least affected by coronavirus,” the paper adds.