Relaxing whilst doing Competition Law is not an Oxymoron

Archive for February 14th, 2023

State aid’s Stress Test

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Jean Monnet, one of the EU’s founding fathers, famously stated “that Europe would be built through crises, and that it would be the sum of their solutions”. The EU was conceived at a time of crisis, to ensure the post-war reconstruction of Europe and prevent future conflicts, and since then has stepped up to face multiple crises. In recent years, in particular, the EU has been central in devising and articulating the response to the financial and Eurozone debt crisis, the migration crisis, Brexit, the Covid-19 health and economic crisis, and the crisis provoked by the Russian invasion of Ukraine. Other crises, linked to increasing global warming and geopolitical tensions, loom in the horizon, leading to expectations of a global “permacrisis”.

Each of these have put the EU, Member States, and society to a “stress test”, exposing tensions, strengths and weaknesses, contradictions and limitations. This has been true on many fronts, also in that of State aid. Indeed, EU State aid law sets limits on Member State sovereignty, fiscal autonomy, and expenditure with a view to minimizing distortions to competition between Member States and ensuring a level-playing field within the internal market. The very nature of the State aid discipline makes it a field ripe for tensions between Member States, between law and politics, and between conflicting public policy objectives, but all those tensions are exacerbated in times of crisis.

Almost three years ago, in March 2020, José Luis Buendía and I wrote an op-ed warning about the risk that “full flexibility” would distort competition between Member States favoring those with deeper-pockets. To mitigate this risk, we proposed the creation of a “Solidarity Fund” (suggesting that it be notified to the Commission as an Important Project of Common European Interest), and a commitment that Member States contribute to this Fund a percentage of the public resources involved in their own measures. The risk we anticipated has proved very real.

Over the past three years, the Commission has made an extremely flexible interpretation of State aid rules to ensure that these would not get in the way of urgent damage mitigation measures. The Commission has adopted, and subsequently widened on several occasions, Temporary Frameworks related to aid adopted in relation to the Covid-19 pandemic (Covid Temporary Framework) and the war in Ukraine (Temporary Crisis Framework). Under these frameworks, the Commission has very rapidly approved hundreds of measures (see here and here) amounting to trillions of euros. The Commission has recently disclosed that over 50% of the volume of aid approved so far under the Temporary Crisis Framework and related Treaty provisions came from one Member State (Germany), and that over 80% came from three Member States (Germany, France, and Italy). The split is similar as regards Covid-19 related aid (see p. 24 of the latest State aid Scoreboard).

These numbers should be added to the great volume of non-notified aid granted under the General Block Exemption Regulation (covering over 90% of State aid measures), which is also very far from being evenly distributed among Member States (see the figures in GBER spending per Member State in Annex III to the latest Scoreboard). To those, one should also add all aid falling below the de minimis thresholds, as well as the billions or trillions of State support taking the form of general measures considered to fall outside the scope of EU State aid rules (unlike in other contexts, the Commission does not appear to have adopted a strict interpretation of the notion of “general measures”).

There is now a widespread concern that this flexibility has contributed to exacerbating differences between Member States. This concern is shared by influential media, in some way or another by all contributors to the latest EU Law Live Symposium on “State aid in times of crisis, and by the European Commission itself. In a letter to Member States, EVP Vestager  recently stated that “not all Member States have the same fiscal space for State aid. That is a fact. And a risk for the integrity of Europe”; the letter featured the graph below: 

In the same letter, EVP Vestager announced yet additional flexibility, the transformation of the Temporary Crisis Framework into a “Temporary Crisis and Transition Framework”, also aimed at supporting the green transition and to react to US subsidies, as well as the boosting of the REPowerEU plan and the creation of a collective European fund to support countries in a fair and equal way. A few days later President von der Leyen publicly announced a plan to step up EU funding “to avoid a fragmenting effect on the single market” via the creation, in the medium term, of a “European Sovereignty Fund”.

It is evident that awareness about the exacerbation of asymmetries and distortions resulting from “full flexibility” under State aid rules has been a driver for major, bold, and arguably historic political initiatives. These include the SURE instrument (which raised close to €100 billion of common debt to support unemployment reinsurance schemes), the € 750 billion Next Generation EU stimulus package (with its partial introduction of debt mutualization via the Recovery and Resilience Facility Regulation), and the recently announced Sovereignty Fund.

But while these are unambiguously positive first steps entailing an element of solidarity benefiting States with less fiscal capacity, they pursue very specific goals (notably the green transition and digitisation), which are unrelated to the distortions caused by the aid measures adopted under a relaxed State aid regime. Those distortions affected, and will continue to affect, sectors and companies that may not benefit from new funding opportunities. The existence of “earmarked” strategic funds may have a positive “macro” effect on Member States budgets, but they do not address the harm that opening the State aid floodgates has on companies and markets.

The objective of preventing the harm to competition and fragmentation of the internal market can arguably only be attained by a meaningful compatibility assessment of State aid measures, balancing their negative and positive effects, and having regard to, among others, the principles of proportionality, equal treatment, and the cumulative effect of aid measures. This is, of course, assuming that such an objective remains a real priority at a time when the EU is arguably, and perhaps legitimately, more concerned about geopolitical competition with third countries than about intra-EU competition between Member States and between companies (whether the loosening of State aid rules may affect the legitimacy of enforcement efforts under the Foreign Subsidies Regulation is a separate matter).

Compatibility under State aid law, in other words, is not to be measured only against the EU’s (external) strategic goals at any given point in time, legitimate as they may be. If State aid law is to fulfill its goal under the Treaty, the Commission must necessarily pay due attention to the negative effects of aid on competition in the internal market and require proportionate countervailing positive effects prior to giving it a pass. This is, of course, much harder, but also even more necessary, at a time of crisis, when both stakes and pressures are high.

The Commission has very recently argued that “[w]hatever we do, we must avoid a subsidy race. If we compete individually as Member States, we lose as a whole. This is why the proposed changes to the State aid rules, broad and far-reaching as they may be, will be temporary- they would apply until 31 December 2025”. But even if we assume that derogations will be temporary, their effects on the internal market will be long lasting.

And if State aid control is regarded as inappropriate precisely when it is needed the most, then one may start wondering what is the point of keeping it in place at every other time.


[This post will also be published as part of series of contributions to EU Law Live Symposium on “State aid in times of crisis, also featuring excellent contributions from P. Nicolaides. J. Piernas, D. Lypalo, A. Bouchagiar, S. Firsch, I. Agnolucci, M. Segura, C. Vollert, L. Hornkhol and F.C. Laprévotte].

Written by Alfonso Lamadrid

14 February 2023 at 12:40 pm

Posted in Uncategorized