State Aid Asymmetries and the Covid-19 Outbreak- An Update and an Offer
At the end of March, my colleague José Luis Buendía and I wrote a post on this blog (also here and here) pointing to the risk of massive distortions to the internal market caused by the asymmetric national responses to the Covid-19 outbreak. We put out there a proposal to mitigate these distortions that we think would be legally feasible.
This was not a prominent debate at the time. After all, there appeared to be more pressing issues, and pointing to this one was uncomfortable, and even politically incorrect. Things, however, have changed, and this debate is gaining prominence (see below for a list of recent pieces touching on it). President Von der Leyen and Commissioner Vestager have now also warned about the dangers of what’s happening. The consequences of what we decide to do on this subject might be felt for generations.
What was politically incorrect only two months ago has now become almost the consensus. To put it mildly, almost everybody recognizes now that may be witnessing the greatest competitive distortion of our lifetime. Having a correct diagnosis does not cure the illness but is at least a first step in the right direction. It is certainly much better than denying the existence of the problem.
We put a possible solution on the table that we think is legally feasible, but you might have other ideas about variants or alternative models that could also do the trick. We are confident that if the community of competition lawyers and economists puts its creative juices to work we might be able to contribute to the solution. After all, we can get really creative when it comes to market definitions and theories of harm…
If any of the readers of this blog has other ideas or suggestions on how to prevent, mitigate or correct these competitive distortions, we are happy to offer you a space in this platform.
For more on this see, for example:
-. Von der Leyen warns state aid ‘unlevelling the playing field’ in Europe (The Guardian, 13 May)
-. Vestager: Discrepancy in state aid distorts single market, hampers recovery (Euractiv.com and Reuters, 18 May)
-. EU Members clash over State aid as richer countries inject more cash (Financial Times, 1 May)
-L. Hornkohl and J. van‘t Klooster, With Exclusive Competence Comes Great Responsibility: How the Commission’s Covid-19 State Aid rules Increase Regional Inequalities within the EU, VerfBlog (29 April)
-M. Motta and M. Petz, EU state aid policies in the time of COVID-19 (18 April);
–Macron: “We are at a moment of truth” (Financial Times, 17 April)
– JL. Buendía, Editor’s Note: Editor’s Note – State Aid in Time of Cholera (European State aid Law Quarterly, Vol 19, Issue 1 (1 April)
Chillin'Competition 
Hi Alfonso, I can understand your frustration (I guess our first names give away our respective nationalities). And there are certainly lots of things I find wanting about the European approach towards corona state aid, including that of my own country. (This includes the fact that I see little reason for state aid to bail out the stock market.)
That said, I also find you draw conclusions quite quickly on this being “the greatest competitive distortion of our lifetime”. (In bold text, adding “to put it mildly” for good measure.)
I have no interest in defending the specific measures taken by the German government. Nor do I want to defend their legality under state aid law (which I know too little about). But I find you quite easily swipe over a central point: sensible fiscal policy is anti-cyclical.
I.e., you avoid taking on new debt in ordinary times, so you have a spending buffer to leverage up sharply in a downturn, to avoid Keynesian market failures associated with recessions. That’s the efficient government response to the inevitable recurrence of crises over the cycle.
That approach in itself is hardly objectionable. What should Germany do: avoid a responsible government response against a drastic external shock, because other Member States are not able to act appropriately due to own fiscal constraints?
Put differently: if country A corrects market failures, whereas country B does not, because it pushed up debt during periods of growth, should A then be stopped from preventing avoidable damage for its citizens for creating a competitive distortion?
State Aid law is there to protect European Member States from inefficient subsidy races that favor own industry. It’s not there as a fiscal redistribution scheme to help poorer countries to have more money to correct market failures (whatever the merits of such redistribution may be—competitive or otherwise).
Personally, I have significant sympathy for such redistribution from northern to southern Member States, for various reasons. So, on substance, I might well agree with whatever outcome you ultimately have in mind. But your blog post has an accusatory tone which I don’t find helpful for the debate.
From the way you set up your post, you seem to claim this is an obvious state aid problem. And maybe it is, if those German aid payments are wasteful spending to subsidize inefficient firms that would not otherwise win on the merits. But certainly, you do not attempt to provide any indication that this is actually so.
I know we are all competition dudes, and to a man with a hammer, every problem looks like a nail. But could it be that what you are really asking for is not about efficiency but about redistribution?
Hans
20 May 2020 at 1:10 am
Hi Hans, and many thanks. Lots of stuff in there and too late for a full reply, but I’ll just clarify one thing for now:
There truly is nothing accusatory about the German mesures. If you read our original proposal, we do make that very clear. Everyone does what they can, and it’s entirely justifiable that whoever can do more does more. I think the German government has actually done things very well on this and many other fronts so, truly, don’t take my words as a criticism on anything Germany might be doing (that is, if we leave aside a certain Judgment, but that’s -for the most past- a different story).
What you see in the tone (and in the underlining, etc) is a way of pointing to the asymmetry between the importance of the issue and the attention it receives in competition law circles.
Will be back on the substance tomorrow!
Alfonso Lamadrid
20 May 2020 at 1:33 am
Many thanks for your reply, Alfonso. I should also make clear that I agree there is a problem. And I also do think there is a responsibility for Germany and other northern Member States to engage in transfers (for a number of different reasons). Will be interesting to hear your view on the state aid angle specifically!
Hans
20 May 2020 at 1:43 am
Now on substance… We imagine that huge amounts will be spent through general measures (i.e not State aid, and not depicted in any graph), and we have no (legal) issue with that. That’s not what we are talking about. So the point we are making is really not a matter of redistribution. It’s really about having State aid rules play their role in relation to the measures that do constitute State aid (Eur 1.95 tn so far…).
As you know, Member States can only grant State aid if the Commission authorizes them to do so. According with EU Law the Commission should undertake a proportionality analysis, balancing its positive effects versus its negative effects on competition in the internal market. Our previous post simply remind everybody that proportionality can be ensured, not only by limiting the amount or the intensity of the aid, but also by requesting compensatory measures.
We certainly (and consciously) did not attempt to question the legality of any particular measure. That’s a debate we would rather avoid. We simply observe that the aid at stake has been authorized under a rather flexible proportionality standard. We can easily imagine the outcome if the Commission had applied instead the stricter proportionality standard advocated by some Constitutional Courts … 😉
Jose Luis
20 May 2020 at 3:06 pm
Hi Jose Luis, many thanks for the clarification. That makes sense!
I guess a key question is the counterfactual to which one compares state aid measures under the proportionality principle (and I don’t know enough about state aid to judge what is legally “right” here):
Assume country A corrects a market failure through state aid that is intrinsically sensible. (Say, the measure is such that A would do it even if it was the only country in the world.) Suppose country B cannot afford to dish out state aid as liberally, even though it would theoretically be sensible if it could. Your proposal then seems to imply that even in such benign scenarios, A’s state aid grant should only be permitted if A pays a “remedy tax” to do in country B what B would ideally want to do, but can’t.
It sounds difficult to me to have such a legal construction, where the sensibility of state aid is judged against fiscal constraints in other countries. For one thing, it chills incentives to engage in socially beneficial measures in A, because sensible activities are taxed. Moreover, it will be extremely difficult to link concrete measures in A to concrete measures in B that benefit from the tax. It is also highly difficult to gauge how high such a tax should be, depending on the fiscal situation of B (and other member states).
Even leaving aside the moral hazard effect on B’s incentives, it would seem more logical and workable to me to have a policy consisting of the following two things:
(a) Making sure that A’s state aid amount is indeed intrinsically justifiable (i.e., would make sense for A even absent the negative externality on firms in B).
(b) Have structural redistribution from A to B through means such as the EU recovery fund to aid countries like B to apply appropriate measures themselves.
But, again, this is just me thinking out loud, as I am not an expert on state aid. Best, h
Hans
20 May 2020 at 5:14 pm
Hi Hans, José Luis engaged with the substantive issues instead of me because I had my third son that same night! My points were exactly the ones he made (better than I would have), so the debate didn’t really miss anything.
Alfonso Lamadrid
26 May 2020 at 8:53 pm
Congratulations:))) very happy for you guys!
Hans
26 May 2020 at 8:59 pm
Look likes a very practical solution to provide upfront compensation – once the subsidies are a priority in this scenario – to timely and effectively remedy distortions.
The scale and circumstances are far from similar, but in essence it reminds me of a proposal I came across when I was studying ‘Harmful Tax Competition Between States in Brazil’: the creation of a National Fund of Regional Development to alleviate the absence of fiscal uniformity and distortions caused. Such a measure would suppress the appetite of States to grant subsidies and renounce revenues in order to achieve local goals while at the same time being ‘selectively’ (an irony when it comes to State aid) distributed and thus fostering the reduction of regional inequality. Unfortunately, there hasn’t been enough political consensus to make that happen there. It would definitely be great to see it happen here, especially during these challenging yet creative times.
Alvaro Ummen Almeida
20 May 2020 at 3:25 am
Dear colleagues,
I congratulate you for having had the courage and the wisdom to be politically incorrect when it is necessary and for launching a proposal as judicious as the one you have launched. I am glad that it has led many to reflect on the real problem that it brings to light and for calling oall of us to think together.
In this line I allow myself an initial and complementary reflection. Still immature and therefore, improvable. Thank you for allowing us to participate in your initiative and join us in your reflection..
I have firmly believed that any administrative activity must respond to the basic principles of necessity, justify itself in a cause of general interest and be the most appropriate for the legitimate purpose pursued by it, always opting for the decision that among the possible is the least restrictive , in our case, from the perspective of free competition. That same decision procedure is required of the administrative activity of granting state aid.
For this reason, it is necessary to adopt this dynamic of action in this matter, counting with the specialized and independent collaboration of the Competition Authorities, in their corresponding fields of action and always collaborating with each other.
For making possible Competency Authorities to be a useful instrument, they must be truly independent and endowed with the necessary human and technical resources and design a procedure that allows contrasting the different interests and perspectives that must be evaluated.
Whether or not their expert and independent opinion is binding, their prior intervention will make possible to verify a posteriori that in the granting of any public aid, the principles that should govern any action of the public powers have been valued.
In this way, its impact on competition can be minimized, the necessary compensations can be evaluated previouly, the impact of those erroneously granted state aid can be limited, and at the same time, the reality of its granting can be redirected to the rules that must govern any action. of the public powers. Empowering national authorities with effective capacity in the process of granting state aid at the national level, as in such Wy is proposed by the Competition and Market Authority, is a step in the best possible direction.
JARM
20 May 2020 at 1:37 pm
Hello again Hans. Let’s keep in mind that all State aid distorts competition in the internal market; that is the reason why the Treaty entrusted the Commission with the mission of controlling it. The so-called “good aid” (aimed at correcting a market failures or at other positive social objectives) is as distortive of competition (if no more) than bad aid (at least if we see it from the perspective of a competitor of the beneficiary). It is like fire and smoke: one cannot have only to the positive effects of the aid without getting also negative externalities. That is why EU Law requires a balancing exercise between both sides of the equation. In an ideal World, we should have measured very carefully the positive effects of the aid pondering those versus its negative effects in each sector, defining aid intensities and limits accordingly. It is obvious that such a careful sector-by-sector exercise was impossible to fulfill here in view of the urgency but this has not at all prevented the authorization of 1,95 tn in State aid. Requiring at least some compensatory measures in such a context would have equally possible and – in our opinion – would made a lot of sense. If the lack of accuracy in the design were a problem, this same problem should have prevented the approval of all these aids and it hasn’t. Last but not least, don’t forget that State aid rules are not only aimed at protecting competition between companies but also at limiting competition between Member States in attracting/retaining investments. Our proposal fit this equally important dimension of State aid control. If EU State aid control makes sense – and we certainly think it does – we can hardly imagine a more appropriate moment for applying it!
Jose Luis
20 May 2020 at 7:03 pm
Many thanks for this interesting debate.
In order to alleviate these competitive distortions, I think that the Commission could adopt specific sectorial communications to review the State Aid provided to those sectors which are more affected by the crisis (airlines, tourism operators, etc.), and thus more in direct need of aid.
As such, these sectorial communications would be based, similarly to the 2008 Banking Communication adopted in the context of the financial crisis, on the principle of non-discrimination on the basis of the nationality. This would mean, in a nutshell, that access to the State Aid should be open to all the EU players which operate in that State irrespective of the nationality.
For instance, in the airline sector, the Commission would supervise that the aid scheme of each Member State is accessible to all the EU airlines which fly to or from that State (i.e., which offer flights whose origin or destination is in the territory of that State) irrespective of their nationality. Of course, the amount of the aid provided should be proportional to the air traffic generated by that airline for that State during the last year – I have published a short article (unfortunately, only in Spanish) on this here:
https://www.expansion.com/juridico/opinion/2020/05/12/5ebac4d9468aeb25518b4609.html
I tend to think that this approach could help to maintain, to a certain extent, the level playing filed in those sectors within the single market. That said, I note, of course, that this sector-by-sector approach could have been difficult to be applied due to the urgency of the crisis, and that it would not totally eliminate those distortions – national companies from the ‘deepest-pocket’ States would be likely still to receive more aid than the rest.
Pablo González de Zárate
21 May 2020 at 8:01 pm