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A Moment of Truth for the EU: A Proposal for a State Aid Solidarity Fund

with 11 comments

EU Solidarity (@EUSolidarity) | Twitter

(By Alfonso Lamadrid de Pablo and José Luis Buendía)

The Covid-19 outbreak is putting societies, institutions, companies, families and individuals to the test. Like all major crises, it is exposing our strengths and weaknesses, our contradictions and limitations. A common threat of unprecedented scale has revealed, once again, that our societies are capable of the very best and the very worst. Over the past few days, we have witnessed inspiring examples of empathy and solidarity, but also prejudice, frustration and tension. We have the chance to show we are up to the task. How we collectively choose to react to this crisis will define our future.

Like all major crises, the Covid-19 outbreak is also straining the European Union, bringing once again unresolved tensions between Member States to the surface, and awakening dangerous currents of misunderstanding among citizens. Critics of EU integration have jumped on the occasion, failing to realize that the problem calls for more, not less EU. At the current stage of European integration, absent a fiscal union and with limited EU competences on public health, decisions remain mainly in the hands of national governments controlled by national Parliaments. Disagreements among EU Member States within the European Council are sometimes desirable, and sometimes not so much, but they are perhaps inevitable. It is not only a matter of attitude and prejudice, but also of institutional and political constraints. While we wait for consensus among national governments on a comprehensive political response, other constructive and complementary solutions must be explored.

The European Commission can be the driving force in the pursuit of EU solidarity. Unlike national governments, the Commission is entrusted with safeguarding the general interests of the Union as a whole. President von der Leyen has committed to exploring any options available within the limits of the Treaties. The Commission has both the responsibility and the power to take decisive action, and to shape the reactions of Member States to the crisis in line with the general interest. The Commission cannot require Member States to ignore or work around existing constraints, but it can impose proportionate ones.

Indeed, while the Commission’s powers may be limited in certain areas, they are strong and decisive in others. Notably, the Commission enjoys the exclusive competence to control, under State aid rules, the measures adopted by Member States to support economic operators. Over the past few days, the Commission has made a significant effort to exercise these powers swiftly and responsibly, adopting a Temporary Framework and authorizing a considerable number of national measures to support the economy in the context of the pandemic. As we write, the Commission has announced an imminent amendment to the Temporary Framework aimed at enlarging the categories of permitted aid.

The unquestionable necessity of allowing the speedy authorization of Covid-19-related national measures should, however, not blind us to their inevitable negative side-effects. The “full flexibility” recognized by the Temporary Framework applies in theory to all Member States. In practice, however, it mostly benefits deeper-pocketed Member States with the means and the budget to spend the greatest resources. Note that the Member States that benefit disproportionately from this policy are also the champions of austerity Member States that, rightly or wrongly, oppose other solidarity instruments like corona bonds. Under the current Temporary Framework, all Member States enjoy the same freedom to unleash their economic arsenal, but some may end up using bazookas, while others are stuck using slingshots.

Massive capital injections by only certain Member States might lead to massive distortions of competition. Companies and sectors from wealthy Member States may enjoy much more support to weather the crisis than their competitors established elsewhere in the EU, regardless of where the ongoing crisis happens to hit harder. Under the current circumstances, this could trigger the market exit of companies that would have normally survived, and vice versa. Competitive asymmetries deriving from State aid would moreover be exacerbated should national governments fail to reach an agreement on mutualizing budget risks.

This scenario is not inevitable. It is within the power of the European Commission to ensure sure that State aid is awarded in a way that minimizes any distortions of competition and, by the same token, fosters EU solidarity. The Commission itself recognizes in the Temporary Framework that a coordinated effort will make the measures adopted more effective and may even foster a quicker recovery. The Framework also emphasizes that this is not the time for a harmful subsidies race.

Our proposal is that the Commission amend the Temporary Framework in order to make the compatibility of State aid conditional on the provision of compensation for the competitive distortions that they necessarily create. This compensation would take the form of a contribution to the support of companies established in other Member States. The contribution could be equivalent to a percentage (for example, 15%) of the public resources involved in the measures at issue. Each Member State would be able to propose specific ways to channel these contributions in a way that minimizes competitive distortions. The Commission would assess their sufficiency prior to authorizing the aid, and it would also ensure that most of the compensation is received by those who need it the most.

In order to speed up the approval process, the Commission could also predetermine ex ante that contributions to a “European Solidarity Fund” would be presumed an acceptable compensation in this regard. The Fund could be initially established by some Member States as a vehicle allowing financial solidarity among them, but would be open all  Member States. The Fund itself should also be notified under State aid rules and could obtain Commission approval as an “Important Project of Common European Interest” (IPCEI).

We see no EU law impediment to implementing this proposal. Making the compatibility of State aid measures subject to compensatory conditions would not in itself entail any deviation from the Commission’s standard assessment. The rules adopted by the Commission to manage the support to financial institutions in the context of the past crisis were accompanied by strict conditions aimed at minimizing distortions of trade and competition. To be sure, while requiring direct compensation from the State which granted the aid would constitute a novelty, this innovation would be justified. Indeed, the current circumstances do not permit the use of traditional safeguards, based on limiting the amounts of aid granted.

Several national measures have already been authorized, but it is not too late to take action. Public support measures are here to stay and are likely to materialize in unprecedented volumes of aid. Failure to prevent further asymmetries would only make matters worse. Under this proposal, Member States would retain the ability to support their national economies, subject only to the condition that they contribute, proportionately to their means and to their measures, to minimizing distortions to the internal market. This way, State aid policy could better contribute to the solution, rather than the problem.

Important details should be ironed out following an urgent consultation with Member States. Some version of this formula would not only be sensible and feasible, but also indispensable. It would mitigate serious distortions and contribute to levelling the playing field. In the absence of a political agreement between Member States, it would create a proportionate legal obligation to prevent harm to companies established in other EU countries, easing ‘rich’ Member States’ task of justifying their solidarity efforts to their citizens and parliaments. It would show precisely what the European Union is for and would restore citizens’ trust in the ideals of European integration. Let us not forget that, as empathically stated in Article 3 of the TEU, one of the main tasks of the EU is to promote ‘economic, social and territorial cohesion, and solidarity among Member States’.

This proposal is not a silver-bullet, but it is an important step towards solidarity based on legal mechanisms. As proclaimed in the Schuman declaration, the EU “will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.” The European Commission has now the opportunity, the unique ability, and the historical responsibility to fulfill its mission.

Written by Alfonso Lamadrid

31 March 2020 at 3:13 pm

Posted in Uncategorized

11 Responses

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  1. Thanks for this. It is unquestionably a very commendable and well designed proposal, wihch I would support firmly now and for the future. However, it entails a disgourgement of funds from bazooka Member States to those using slingshots, in a way which is even more direct than through corona bonds or other means of (attenuated) mutualization of new debts among Member States. In light of this, I wonder whether, politically, it wouldn’t be easier to obtain compensation for wealthy Member States’ aid schemes by means of corona/euro bonds rather than through conditioning direct State aid to direct disbursement to an European Solidarity Fund (or else). I of course agree that it may not make much difference in the substunce, but eurobonds or coronabonds seem to me more efficient tools, and even more politically “marketable”, than introducing a compensation condition to national State aid in this situation of emergency and urgency. It’s just a thought however and I may miss something. For instance, I do not see more obstacles in EU law to recour to corona/euro bonds compared to your proposed mechanism, though I’ve not looked so far into this and may be mistaken. Thanks again for any feedback and take care!

    EnzoMarasà

    31 March 2020 at 4:14 pm

  2. […] This article is published by kind permission of the authors and the Chillin’ Competition Blog, where the text was originally published and available here. […]

  3. Dear Alfonso and Pablo,

    Ok, wow. Some thoughts in no particular order: First, kudos for creativity. Second, I totally agree that this is a moment for the EU as a whole (MS included) to step up or step down. Third, your economic arguments are convincing. Fourth, your legal arguments seem at least defensible (it would be novel indeed but who knows).

    But now the buts: First of all, it would not be enough. Why? (a) only 15%; (b) at least for now, the “slingshot states” (I hope I’m not offending anybody) are the worst hit and their economies will presumably need, in relation, more aid than the “bazooka states”; (c) many of the funds disbursed in the “bazooka states” won’t even qualify as State aid – e.g. possibility for all companies to reduce working time for idle employees during the crisis to zero (or almost zero) while the state covers the wages, regular unemployment other benefits). Btw, this would probably trigger huge arguments about whether some measures involve State aid or not . That being said, of course 15% of all actual aid would still be a lot of money and better than nothing. All the more so if it is combined with other measures like Corona bonds. Anyway, “but no 2”, which is my main point:

    Politically, I think it would be suicide for the EU to force something like this on the “bazooka states”. Even more so if you would want to turn it up to the levels necessary if other measures are rejected. In my humble experience and opinion, trying to force someone to show “solidarity” is a recipe for desaster. If everyone (or at least almost everyone) agrees to such a solution politically and EU State aid control is then just a mutually acceptable mechanism to implement EU solidarity? Great!

    But if not? Terrible. The moment anyone tries to force this I’d predict that the narrative/discussion will – at least in a country like Germany – change from “shouldn’t we help our friends and partners?” to “we are being robbed by [add not very nice descriptive here]!” and from there to “This is unacceptable, we have to resist as a matter of principle!” (Germans love their principles and as soon as a matter of principle is invoked, expect extreme stubborness and ferocious resistance way beyond the point of reasonability). Which would then possibly trigger a major constitutional crisis where the “bazooka states” might just ignore EU State aid law alltogether. It would in all likelyhood also shatter any chances to agree on solutions that definitely need common accord like Corona bonds.

    In other words, IMHO we shouldn’t force Member States to help, but convince Member States (and their electorates) that showing solidarity in this unprecedented crisis is the right thing to do (it is!). Because on a political (and plain human) level, it doesn’t only matter what you ask for, but also how you ask for it.

    Best,
    Moritz (originally from, you might have guessed it, Germany)

    Moritz

    1 April 2020 at 1:52 pm

  4. An additional thought stimulated by later comments: the proposed mechanism based on State aid may work as a last resort tool, or ultimate negotiating stance. Should the EU not reach an agreements on corona/eurobonds or similar instruments (which is no unlikely), and things were directing straight towards irreversable disgregation of the EU project (from which Bazooka countries would not come out stronger, rather the contrary), at that point the Commission (assuming its President and commissioners have the political will and strenght) may use its powers to impose such compensation mechanisms to State aid without formal or informal consensus of Member States. The effects of such an “maverick” (though perhaps perfectly legal) move from the Commission would leave no choice to Bazooka Member States other than either compromising on eurobonds (which might somehow substitute the compensation mechanisms in State aid) or blatantly breach and defeintely terminate the EU trieaties. It would be a very brave (almost suicide) move, which might make sense as an ultimiate negotiating stance when there is nothing left to loose. As sort of: “take it or we are all going to go downunder”, which indeed expresses my feelings right now..

    EnzoMarasà

    1 April 2020 at 4:06 pm

  5. This is an intriguing proposal – and one aimed directly at building solidarity. I wonder though – and with real respect for its authors – whether we might be using the State aid toolbox in an attempt to fix a massive macro-economic problem that has its origins in the politically contested issue of what it is to be European.

    It might be tempting to immediately jump into the technical issues. Already, one commentator has asked why 15% and not more? Similarly, how would we measure with any accuracy the size of distortions so as to be able to quantify it in monetary terms? Need the amount tendered by the funding Member State bear any necessary relationship to this?

    Undoubtedly, our economist friends may well be able to model all of this – they rarely admit to anything not being susceptible to modelling (!) – but frankly, I think that this element would be near impossible. At present, the magnitude of the distortion of competition affecting trade is not quantified. Moreover, Member States would have an obvious incentive to confer non-cash State aid, and while we have some experience of deemed monetary values, the issue of the magnitude of the distortion is of course distinct from the quantification of the amount of aid, itself often quite a challenge.

    In essence, this is a proposal for a Federal tax intended to restrain (through a cost incentive) Member States distorting competition massively by subsidising their industries and businesses. Framed that way, and although agreeing that it is probably legally permissible, I think this reveals the true nature of the measure; its purposes being both clear and vital. However, the proposal embodies a crucial objective perhaps better achieved by other means, to echo the More Economic Approach.

    As others have pointed out, the better delivery mechanism for admittedly political reasons is a Corona bond, albeit one that is designed with the legitimate objections of certain Member States respected to a degree. In this regard, the Dutch response – albeit that there have been some regrets expressed in the Hague – should be dissected. Although understandable, the initial response from the Netherlands appeared to disregard the constitutional implications of the Treaty put in place following the financial crises – and at the urging of Germany. In effect, and somewhat messily, they bring about economic and monetary Union in a way that was foolishly omitted when the Euro was introduced first. The net result is that assuming compliance with the rule of law, we have created a system where there is now a solid constitutional basis for significant macro-economic solidarity.

    It seems that it is time for Corona bonds, but possibly created on the basis that each Member States assumes a portion of the liabilities that it is intended to cover on their own but with the majority in effect mutualised. That would bring essential relief to countries such as Spain and Italy who are suffering so grievously the benefits of German level interest rates for a significant chunk of Covid-19 related liabilities. For Germany in particular, we need to be realistic about the political challenge – but Merkel is still in situ – mindful that an export led industrial economy needs a resurgent Europe to generate demand. The massive stimulus package that Germany has itself announced of course reflects to a significant degree the unique benefits to it that the Euro has delivered: but now, it is time to give something back, in the process showing the way on solidarity.

    To wrap up this overlong response, it is against such a transformed macro-economic landscape that State aid policy will definitely need to set a new course. As a tool for mitigating government failure, there is much good that it can do. The fact that this may be an ancillary benefit of a policy intended mainly to prevent a subsidy war does not really matter. We need to use the best weapons for the biggest targets.

    Jarleth Burke

    2 April 2020 at 9:14 am

  6. This is a smart and creative proposal (beautifully written, by the way). I agree that it is feasible under EU law, but I agree with other commentators that there may not be political courage to implement it.

    Hans

    2 April 2020 at 2:32 pm

  7. A nuclear weapon in the hands of the Commission, by the way.

    Enzo

    2 April 2020 at 3:11 pm

  8. Thanks to all of you for your support and for your frank and useful comments. We are equally grateful – if not more 😉 – to those among you that are more skeptical. We wanted to trigger a debate and it seems that, at least on this front, we are succeeding.

    We agree that the underlying asymmetry between Member States could be solved by other means, like the Council agreeing on “coronabonus” and/or on other instruments. However, since we can do little about those, we prefer to focus on what we know best: State aid Law. The fact is that, as of today, the asymmetry between Member States is there and, from a legal standpoint, it must be factored in the State aid analysis.

    Under EU Law, the analysis of compatibility is about measuring the positive effects of the aid vs. the negative ones while keeping a minimum balance between both sides of the equation. Nobody denies in the current circumstances that aid would (hopefully) bring positive effects into our economies. The problem is that it would also bring negative externalities affecting competition in the internal market as a whole. Our proposal aims at reducing this imbalance.

    Ideally, the Commission should measure the positive impact of the aid in each market before approving the aid. The same market by market analysis should also be done with regard to its negative effects. Under the current circumstances, however, urgency does not permit a detailed analysis.

    More importantly, don’t forget that State aid is not only about downstream competition between undertakings, but also about upstream competition between Member States in attracting and retaining investment. The compensatory measures that we propose are directly aimed at this second dimension that is equally important, if not more, than the former.

    Let’s assume that, legally speaking, no Member State has an absolute “right” to force their partners to behave in a solidarily. Wealthier Member States, however, don’t have an absolute “right” to grant aid to their companies either. All Member States renounced to this unilateral right by becoming members of the EU, and all of them entrusted the Commission with the task of controlling them. The Treaties make crystal clear that the Commission’s approval of national aid measures is dependent on a balancing exercise that must take into account both the positive and the negative sides. We are therefore not proposing a “robbery” or a revolutionary expropriation of a non-existent national right; we are just proposing that the Commission applies the existing Treaties in a logical and proportionate way.

    We also agree that the perception of the citizens is very important and that this perception may be vary a lot across different Member States. More empathy is probably needed – in both directions. For instance, the citizens of the wealthier Member States must realize that – by getting a Temporary Framework that allows such a high volume of aid – they are getting a very advantageous treatment, to the detriment of their less wealthy partners. We would not dare to qualify this situation as a “robbery” or to said that it goes against EU “principles”; we simply propose a way to enable Member States to take all necessary actions while contributing to minimizing negative effects.

    Our main intention is to make the point that the Commission is entitled to use its State aid powers in order to mitigate the negative spillovers of the aid and that, in our opinion, it could and should do it. We fully appreciate that doing this would be difficult and would require special political courage. However, not doing it might prove to be worse.

    We hope that our proposal may contribute, even if a tiny bit, to a more rational debate among all of us. If we want to honor the “Union” name, we must find a way out of this labyrinth and we must do it together.

    José Luis Buendía

    2 April 2020 at 6:53 pm

    • Dear José,

      First of all let me apologize that I got your name wrong in my first response. Must be some side effects of prolongued self-isolation.

      Secondly, to be clear, I really agree with a lot of what you are saying on the substance. Actually, more like all of it. I also want to stress that *I* don’t think it would be “robbery” or against EU law principles. You make some pretty sound arguments – eventually the legal question would be decided by the Court, and if I would have to make a bet, I’d say there’s at least a 50% chance that the Court would back the Commission up if the Commission would do it. If not more. All I’m saying is, that while the average State aid lawyer may understand and appreciate your reasoning, I have extreme doubts as to whether the average German or Dutch voter would appreciate such a move without being “taken along gently”. This is not a technical issue. It would have huge political consequences. I don’t want to see a crushed economy in Italy or Spain, but I don’t want to see Mr Höcke or a soulmate of Boris Johnson as successor to Ms Merkel either. I don’t want to make a judgment about what would be worse (I guess that perspective depends a lot on where you live), I just hope that we can come to a solution where we may avoid both scenarios.

      That being said, I completely agree that as State aid lawyers, we should think about what solutions State aid law may contribute to help in this crisis. This is definitely an idea worthy of discussion – in particular if it would be implemented on the basis of common acceptance among the Member States. Thank you for coming up with it!

      Moritz

      2 April 2020 at 8:28 pm

      • Dear Moritz. Thank you again for your constructive comments, to which we largely agree. We fully share your concerns about the potential political consequences at national level of any EU action (or lack of action). This risks exists but not only in one Member State. Sadly, populism is as contagious and as nationality blinded as Covid-19. No country should consider itself immune to it and no country should try to prevent it by taking care of himself only. Best

        José Luis Buendía

        2 April 2020 at 11:31 pm

  9. […] not be revoked. Instead, some kind of compensation is in order. The Commission could create a state aid solidarity fund that transfers a percentage of aid provided to competitors in other member states. The Commission […]


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