Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

“Member State” aid

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Let’s start this post with a disclaimer, just as our good Commission friends:

Disclaimer: I am a nobody on State aid law. I do not teach State aid. And I do not publish on State aid.

With this initial caveat, here is a rumination triggered by a discussion with a colleague:

The rationale for State aid control is disputed in the scholarship. On the one hand, some say that the DNA of State aid control is to limit “subsidies race” amongst Member States. Under this approach the effect of State aid on market competition is irrelevant. What matters is that State subsidies distort the natural allocation of resources in the internal market (e.g., investments). Our friend Jose Luis Buendia Sierra – aka “Mr State aid” down here in Brussels – is one of the proponents of this approach. A variant of this approach consists in viewing State aid as a tool of budgetary discipline.

On the other hand, some consider that State aid control seeks to eliminate the distortions of market competition caused by selective State subsidies. The idea is that when aid is granted to a market player and not to its rivals, the former benefits from an underserved competitive advantage (e.g. free fresh cash). Under this approach, the effect of State aid on market competition is of utmost relevance. To assess whether the aid is lawful or unlawful, one needs to run a full-blown competitive analysis, similar to that undertaken under Article 101 and 102 TFEU (market definition, competitive assessment, theories of harm, efficiencies, etc.).  This approach is generally the one supported by competition economists. This is why it is generally called the “economic approach” of State aid. Damien Neven, the former Chief Economist of DG COMP, has explicitly endorsed this approach.

For quite some time, I have been a buyer of the second explanation. After all, rules on competition should be applied consistently. So why draw differences accross 101, 102 and 107 TFEU?

But today, I had a revelation.

The wording of the Treaty on the Functioning of the European Union TFEU does not support the “economic approach“.

Take a look: Article 107 TFEU only covers “aid granted by a Member State or through State resources“.

If State aid was designed to eliminate distortions of competition in relevant markets, the instrument should also apply to State aid granted by non Member States – which it does not – just as Article 101 and 102 TFEU catch all conduct with anticompetitive effects in the EU, even if adopted by non EU firms.

In other words, under the economic approach, the nationality of the subsidising Member State should be irrelevant in the analysis, just as it is in standard antitrust proceedings. What should matter is that anticompetitive aid has been granted to a firm – EU or non EU – that does business in Europe. Full stop.

But the Treaty talks of aid granted by “Member States” only.

Of course, there might be a jurisdictional explanation to the fact that the Treaty only catches what I’ll call “Member State aid“.

Yet, to our knowledge, the Court could have decided to transpose Woodpulp and Gencor in State aid matters on the textual ground that Article 107 TFEU also talks of “aid granted through state resources” without explicitly requiring state resources to have EU origins.

The bottom line: with globalisation, non EU governments can freely dope national operators that do business in the EU, and distort competition in EU markets. This is prejudicial to EU domestic operators. The EU institutions don’t like people to say that. But this finding is inevitable. After all, if the EU institutions believe that France and Belgium can distort competition by granting subsidies in the EU, then the same reasoning should apply to firms financed by Chinese and Qatari subsidies (including sovereign funds).

The law as it stands thus creates a massive “discrimination à rebours“.

The European citizens (in France and Belgium at least) are well aware of this.

Their qualms with the process of EU integration – and more generally with globalisation – is in part attributable to the inability of Europe to protect them against the “unfair competition” of giant superpowers such as China or of wealthy oilocracies like Dubaï or Qatar.

The EU elites autism to this issue is a cause of (personal) concern, in particular with the upcoming EU elections next year.

Written by Nicolas Petit

1 August 2013 at 5:31 pm

3 Responses

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  1. Or perhaps the drafters of Article 107 had in mind comity considerations and wished not to condemn the actions of sovereigns that are not signatories to the TFEU?

    I need an even stronger disclaimer than yours, because I’m not even a European, much less in any way knowledgeable about European state aid law, but my other thought is that perhaps the concerns you are highlighting were meant to be the subject of other international agreements and processes (e.g., WTO).

    Adam Miller

    2 August 2013 at 8:53 pm

  2. Interesting thoughts, Nico, but the explanation is, I fear, and as you rightly point out, a quite simple and classic “International Public Law” one. At least for the time being, and without the intervention of a wider International Organization, such as the WTO, EU law may not apply by itself to Non-Member-States.

    Miguel Troncoso Ferrer

    6 August 2013 at 12:26 pm

  3. State aid rules apply to Member States, not so much to firms. In particular, under Article 108(3) Member States must notify aid in advance and refrain from paying out before the Commission authorised it. Ultimately, they may even be forced to recover the aid they paid and even to repair damages they caused to other firms. As Miguel and Adam implied, the EU treaties could not impose such an obligation on non-signatories of the Treaty.

    There’s another piece to the puzzle: EU subsidies. When EU subsidies (eg FP7 funds) are paid out to firms, this does not constitute State aid as it is not granted by Member States. Yet, the beneficiary of the aid receives a competitive advantage. So why is there State aid when a Member State subsidises a research project and not when the EU does the same? Perhaps because the intention of the Treaty is to prevent subsidy races between Member States rather than to stop firms from getting a competitive advantage through State funding.

    geof

    8 August 2013 at 12:31 pm


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