European State Aid Control Research Articles

State-aided Price Coordination in the Dutch Mortgage Market

We show how price leadership bans, imposed as part of the European Commission's State aid control on all main mortgage providers except the largest bank, shifted the Dutch mortgage market from a competitive to a collusive price leadership equilibrium. In May 2009, mortgage rates in the Netherlands suddenly rose against the decreasing funding cost trend to almost a full percentage point above the Eurozone average. We derive equilibrium best-response functions, identify the price-leader, and estimate response adjustments in daily household mortgage rates between 2004 and 2012. Around the Spring of 2009, when the bans were collectively negotiated, we find structural decreases in the leader's cost pass-through, much closer following of its price, and strongly reduced transmissions of common cost changes into price-followers' mortgage rates. Indicative predicted overcharges are 125 basis points or 26%, on average.

State-Aided Price Coordination in the Dutch Mortgage Market

We show how price leadership bans, imposed as part of the European Commission's State aid control on all main mortgage providers except the largest bank, shifted the Dutch mortgage market from a competitive to a collusive price leadership equilibrium. In May 2009, mortgage rates in the Netherlands suddenly rose against the decreasing funding cost trend to almost a full percentage point above the Eurozone average. We derive equilibrium best-response functions, identify the price-leader, and estimate response adjustments in daily household mortgage rates between 2004 and 2012. Around the Spring of 2009, when the bans were collectively negotiated, we find structural decreases in the leader's cost pass-through, much closer following of its price, and strongly reduced transmissions of common cost changes into price-followers' mortgage rates. Indicative predicted overcharges are 125 basis points or 26%, on average.

West German Borderland Aid and European State Aid Control

Abstract This article focuses on one of the most persistent regional aid programmes in West German history, the so-called “zonal borderland aid” (Zonenrandförderung). The programme supported regions along the 1,393-kilometer long inter-German border that divided West and East Germany during the Cold War. The article seeks to explain the increasingly fraught relationship between borderland aid and European state aid control in the 1970s and 1980s. The intervention of the Directorate for Competition (DG IV) against borderland aid begs an explanation since the Treaty of Rome (1957) had granted a specific exemption for aid to these regions from the competition policies of the Common Market. The article makes the general case that regional state aid is a key component of structural policy alongside sectoral aid. It argues that interest politics prevented a sober needs assessment of the West German border regions, turning Zonenrandförderung into funding by habit, not by need. This left the European Commission as the only institution that could mount a credible challenge to an ossified sense of entitlement in the affected regions.

The Economic Approach to European State Aid Control: A Politico-Economic Analysis

Since the mid-2000s, the European Commission has employed a so-called ‘more economic approach’ to European state aid control. Under this modified regime, the Commission checks not only whether a state aid has competition-distorting effects, but in addition, whether it enhances social welfare. This reform implies an extension of the Commission’s competences vis-a-vis the Member States as the Commission gets the power to prohibit national state aid regarded as socially wasteful. The Commission explains its reform with the necessity of giving state aid control a sound economic basis. This article, however, demonstrates that the more economic approach – somewhat paradoxically – is not based on a consistent economic view of public policy that would justify the aforementioned shift of competences to the supranational EU level. The economic-theoretical inconsistencies identified in this article may be used by policymakers to rethink some elements of current EU state aid policy.

Measuring the Extent of European State Aid Control: An Econometric Analysis of the European Commission Decisions

This paper provides an analysis of the European Commission (EC) decisions on state aid control using data on 550 state aid cases approved by the EC between 1998 and 2009. We measure the determinants of the duration of state aid, total budget of state aid and daily budget of state aid. By using these imperfect proxies, we try to identify the extent of European state aid control. Our results suggest that aid with multiple objectives to achieve has both longer durations and higher amounts of budget. We also find that for some aid objectives or industries, the EC approves cases of aid with both longer durations and higher levels of budget. On the other hand, for some class of aid objectives and industries, there is a trade-off between duration and the level of budget to counter-balance the undesired effects. The interpretation of the results implies that the European state aid control, which once was originally intended to address concerns about export subsidies and strategic trade, recently puts more emphasis on market failures mostly associated with externalities and public goods.

Taxing Multinationals in Europe

Within the European Union, there exists a fundamental tension between the fiscal sovereignty of its Member States, in particular in the field of direct taxation, and the requirements of the Internal Market, which aim at the abolition of any regulatory or fiscal obstacles to cross border movement of goods, persons, services and capital. While the impact of secondary European legislation and state aid control is still rather limited, the judicature of the European Court of Justice on the fundamental freedoms has established substantial constraints for national legislators which force Member States to provide equal treatment for purely domestic and cross-border situations. This has a major effect with respect to the taxation of corporate groups as the legislator is obliged to extend benefits for domestic groups to multinational enterprises. The article explains how this affects important elements of the international tax order like relief for intercompany dividends (credit or exemption), deductibility of expenditure related to foreign dividends, intra-group loss compensation, CFC legislation, thin capitalization and interest barriers/debt caps, transfer pricing and exit taxation.

Economics at DG Competition, 2011–2012

This paper discusses a selection of cases and important policy developments in the enforcement activities of the Directorate General for Competition at the European Commission during the past year (2011–2012). In particular, it illustrates the importance of competition policy in the area of financial markets based on the Deutsche Borse/NYSE Euronext merger decision, discusses the role that the analysis of innovation can play in merger cases based on recent transactions in the hard disk drive industry, and illustrates the rising role of economic analysis in European state aid control.

Analysing national practices after European state aid control: are multi-stakeholder negotiations beneficial for public service broadcasting?

This article analyses the increasing emphasis on multi-stakeholder approaches in the development of public broadcasting policies. The European Commission, in particular, reinforces this trend, having pointed to the necessity of ‘third parties’ being involved in procedures that allow public broadcasters to expand activities to new media markets. The article’s research question is twofold. First, what type of multi-stakeholder approach has been advocated for by the Commission? Second, are multi-stakeholder approaches, implemented by Member States after an encounter with the Commission, adding to more democratic (understood as more inclusive) decision-making on public service broadcasting or, rather, simply providing an additional forum for private sector interests? Evidence derives from two case studies in the Netherlands and Flanders, where some form of ex ante evaluation has been developed and a multi-stakeholder consultation has been set up in preparation for management contract renewals. Findings show that the newly developed multi-stakeholder policy practices are far from inclusive and fail to meet several aspects of deliberative democracy. Essentially, they have been created in response to market pressures (and, hence, over-focus on market questions) and rarely take as their starting point the improvement of public service broadcasting as a democratic policy project.

Solidarity and Competition in the European Union During the Financial and Debt Crisis

The global financial and economic crisis has affected the trade-off between solidarity and competition in the European Union in two respects. Firstly, member state governments are pushing for rapid and extensive assistance for their domestic banks (and non-bank companies). This form of solidarity within member states is, however, subject to European state aid control, which aims to prevent detrimental subsidy races and to ensure undistorted competition within the single market. Secondly, the sharp increase of state aid sanctioned by the European Commission exacerbated the problem of sovereign debt, which has assumed dramatic proportions especially in the south of the EU. A question of priorities consequently arose: Should one trust in solidarity among member states to prevent the looming insolvency of some of them or should competition among the same states be relied upon to induce greater fiscal discipline and stem the increase of sovereign debt. The remainder of this article discusses these two aspects of the trade-off between solidarity and competition within the European Union in more detail.

Measuring the Extent of European State Aid Control: An Econometric Analysis of the European Commission Decisions

This paper provides an analysis of the European Commission (EC) decisions on state aid control using data on 550 state aid cases approved by the EC between 1998 and 2009. More specifically, we measure the determinants of the duration of state aid, total budget of state aid and daily budget of state aid. By using these imperfect proxies, we try to identify the extent of European state aid control. Our results suggest that aid with multiple objectives to achieve has both longer durations and higher amounts of budget. We also find that for some aid objectives or industries, the EC approves cases of aid with both longer durations and higher levels of budget. On the other hand, for some class of aid objectives and industries, there is a trade-off between duration and the level of budget so as to counter-balance the undesired effects. The interpretation of the results imply that the European state aid control, which once was originally intended to address concerns about export subsidies and strategic trade, recently puts more emphasis on market failures mostly associated with externalities and public goods.

From Negative to Positive Integration: European State Aid Control Through Soft and Hard Law

European state aid control, a part of competition policy, typically follows the logic of negative integration. It significantly constrains the potential for Member States to distort competition by reducing their ability to subsidize industry. In addition, this paper argues, ambiguous Treaty rules and heterogeneous Member States' preferences have enabled the European Commission to act as a supranational entrepreneur, not only enforcing the prohibition of distortive state aid, but also developing its own vision of good state aid policy. In order to prevent or to settle political conflict about individual decisions, the Commission has sought to establish more general criteria for the state aid which it still deems admissible. These criteria have been codified into a complex system of soft law and, more recently, hard state aid law. The Commission has thus created positive integration from above and increasingly influences the objectives of national state aid policies. Als Teil der europaischen Wettbewerbspolitik folgt die Beihilfekontrolle der Logik negativer Integration. Sie beschrankt die Moglichkeiten der Mitgliedstaaten erheblich, Unternehmen zu subventionieren und so den Wettbewerb zu verzerren. Daruber hinaus, so das Argument des Papiers, konnte die Europaische Kommission aufgrund auslegungsbedurftiger Vertragsregeln und angesichts heterogener Interessen der Mitgliedstaaten als supranationaler Entrepreneur handeln und hat dabei nicht nur das Verbot wettbewerbsverzerrender Beihilfen durchgesetzt, sondern auch ihre eigene Vision guter Beihilfepolitik entwickelt. Um politische Konflikte uber Einzelentscheidungen zu vermeiden beziehungsweise beizulegen, hat die Kommission schrittweise allgemeine Kriterien fur zulassige staatliche Beihilfen formuliert. Diese Kriterien wurden zu einem komplexen System weichem und neuerlich auch hartem Beihilferecht ausdifferenziert. Die Kommission hat dadurch positive Integration von oben geschaffen und beeinflusst zunehmend die Ziele staatlicher Beihilfepolitik.

European State Aid and Merger Control in the Financial Crisis--From Negative to Positive Integration

As a response to the financial crisis, the European Commission has permitted Member States to support financial institutions subject to conditions imposed under EU State aid rules. Through these conditions, which were laid down in a special framework, the Commission is tackling inadequate business models in major banks. This has been a Herculean task, but the Commission deserves credit for not succumbing to pressure from Member States' governments to relax the state aid rules. On the other hand, the control of crisis mergers happens according to the normal merger control regime. The Commission also tends to impose structural remedies in this field. However, most crisis mergers were dealt with by national Competition Authorities since they did not have a Community dimension. In both areas, the remedies imposed by the Commission can be described as steps of positive integration.

Measuring the Extent of European State Aid Control: An Econometric Analysis of the European Commission Decisions

This paper provides an analysis of the European Commission (EC) decisions on state aid control using data on 550 state aid cases approved by the EC between 1998 and 2009. More specifically, we measure the determinants of the duration of state aid, total budget of state aid and daily budget of state aid. By using these imperfect proxies, we try to identify the extent of European state aid control. Our results suggest that aid with multiple objectives to achieve has both longer durations and higher amounts of budget. We also find that for some aid objectives or industries, the EC approves cases of aid with both longer durations and higher levels of budget. On the other hand, for some class of aid objectives and industries, there is a trade-off between duration and the level of budget so as to counter-balance the undesired effects. The interpretation of the results imply that the European state aid control, which once was originally intended to address concerns about export subsidies and strategic trade, recently puts more emphasis on market failures mostly associated with externalities and public goods.

Compliance with rules of negative integration: European state aid control in the new member states

Starting from existing accounts on candidate country and member state compliance, the compliance record of the Central and Eastern European countries in the field of state aid policy is puzzling. Despite allegedly low compliance costs in areas of negative integration and despite the European Union's powerful instrument of conditionality, the candidate countries' state aid policies have been in striking contrast to European rules before accession. After accession they quickly brought their policies in line with European requirements. This compliance record is a result of the institutional structure of European state aid control, conceding extraordinary enforcement powers to the Commission, rather than of low compliance costs in this field. By shifting the burden of proof to potential state aid grantors and channelling enterprises' state aid demand, Commission control produces strong incentives to comply with European state aid rules.

Of ‘Good’ and ‘Bad’ Subsidies: European State Aid Control through Soft and Hard Law

European state aid control, a part of competition policy, typically follows the logic of negative integration. It constrains the potential for member states to distort competition by reducing their ability to subsidise industry. In addition, this paper argues, ambiguous Treaty rules and heterogeneous member state preferences have enabled the European Commission to act as a supranational entrepreneur, not only enforcing the prohibition of distortive state aid, but also developing its own vision of ‘good’ state aid policy. In order to prevent or to settle political conflict about individual decisions, the Commission has sought to establish more general criteria for the state aid that it still deems admissible. These criteria have been codified into a complex system of soft law and, more recently, hard state aid law. The Commission has thus created positive integration ‘from above’ and increasingly influences the objectives of national state aid policies.

European State Aid Control

European State Aid Control

The 'More Economic Approach' in European State Aid Control

The 'More Economic Approach' in European State Aid Control

Refined Economic Approach in European State Aid Control—Will it Gain Momentum?

A new guiding principle in the EC competition rules is the so-called “more economics based approach”. This refined economic approach is based on an effects analysis. The question is now whether this successful modernisation in antitrust and merger control will spill over to State aid. The Commission has already started implementing the refined economic approach to some areas of the State aid provisions. The balancing test in Article 87(3) EC Treaty is one example. However, the economic analysis in Article 87(1) EC Treaty analysis is still rudimentary. The authors think through the potential and consequences of a refined economic approach in Article 87(1) EC Treaty in accordance with the new interpretation of Article 81(1) EC Treaty. An appropriate economic procedure will be developed by applying the lessons learned form antitrust.