State Aid Control Research Articles

The Rationale of State Aid Control: A Return to Orthodoxy

Abstract The prevailing view on the rationale for State aid control is that it should be the same as, or very similar to, the rationale for competition control. It is certainly true that State aid distorts competition, as the economic definition presupposes. However, there is a subtle difference between the two, and we should return to orthodoxy in our analysis of these two concepts. The rational for State aid control is in fact to be found in the logic of the internal market principles. The tools to be used in analysing it are not identical to those used in the antitrust context. Rather, the free movement perspective should be adopted, and most problems in the arena of State aid can be better understood when approached from that perspective. It is also true that State aid procedures can be used to monitor compliance with free movement rules, and so the functional identity between the two sets of provisions is confirmed. State aid is a regulatory restriction on freedom of movement, and State aid control is an essential part of the functioning of the internal market, and so it makes sense to treat it in the same way as any other regulatory measure which has such an effect.

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.

The Application of the Principles of Restructuring Aid to Banks during the Financial Crisis

The financial crisis and the responses to it from Member States and market participants have presented significant and unique challenges to the Commission’s state aid policy, both in terms of the volume and nature of the aid measures being implemented and the speed with which they have been proposed and market conditions have evolved. It is unsurprising then that the Commission’s approach to assessing state aid in the financial crisis has also evolved over the last 15 months, with apparently quite dramatic changes in both the substance and procedure of state aid control. After a period of a cautious approach between October 2008 and March 2009 with a strong focus on the stability of the financial sector, the Commission has increasingly tightened state aid control in the banking sector through the application of the principles of restructuring aid. These principles have been developed in the context of industries with overcapacity and often with firms suffering from idiosyncratic difficulties, and rely on assumptions which lead to results consistent with a proper effects-based analysis (albeit not an unstructured “rule of reason” analysis) in those cases. The banking industry during the current financial crisis, however, differs in fundamental ways from the earlier restructuring cases, in particular the under-supply of lending due to a general lack of confidence and the systemic causes of the recipient banks’ difficulties. As a result, several of the assumptions underlying the restructuring principles do not hold and the restructuring principles lead to a fundamentally different outcome then under an effects-based analysis. By applying the restructuring principles in a fundamentally different context, the Commission risks pursuing a policy which not only fails to achieve any benefits but which is highly likely to make a bad situation worse, harming consumers, the banking industry and the economy at large. The paper is structured as follows: Section 2 describes the causes and effects of the financial crisis in Europe while Section 3 summarises the Commission’s state aid policy response to the financial crisis from the days prior to the collapse of Lehman Brothers to the recent publication of the Financial Crisis Restructuring Guidelines. Section 4 provides a brief overview of the elements of an economics-based analysis which is subsequently applies to restructuring aid under Article 87(3)(c) (in Section 5). The rationale of “normal” restructuring aid cases is then contrasted with restructuring aid to banks in the financial crisis: Section 6 sets out the case for and the implications of an effects-based assessment of restructuring aid under Article 87(3)(b) while the following section looks at the impact of the Commission’s remedies. Section 8 concludes.

Making State Aid Control “Greener”: The EU Emissions Trading System and its Compatibility with Article 107 TFEU

Making State Aid Control “Greener”: The EU Emissions Trading System and its Compatibility with Article 107 TFEU

A Busy Year for State Aid Control in the Field of Public Service Broadcasting

A Busy Year for State Aid Control in the Field of Public Service Broadcasting

State Aid to Banks in the Financial Crisis: The Past and the Future

This Economist's Note considers the use of state aid policy in Europe to control the flow of public funds to the banking sector during the financial crisis, and the potential implications of so doing. During the financial crisis, state aid decisions have had to prioritise saving financial institutions over distortions to competition. But post-crisis, saving institutions is not the same as saving the financial system. The more stable the financial system becomes, the easier it is for state aid control to take a tough approach to aided banks. Looking forward, as aid is unwound there is a policy choice to be made whether to prioritise competition in the single market (by coordinating withdrawal of aid) or to prioritise competition within national markets (by removing state support as and when local conditions permit)

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.

The Application of the Principles of Restructuring Aid to Banks during the Financial Crisis

The financial crisis and the responses to it from Member States and market participants have presented significant and unique challenges to the Commission’s state aid policy, both in terms of the volume and nature of the aid measures being implemented and the speed with which they have been proposed and market conditions have evolved. It is unsurprising then that the Commission’s approach to assessing state aid in the financial crisis has also evolved over the last 15 months, with apparently quite dramatic changes in both the substance and procedure of state aid control. After a period of a cautious approach between October 2008 and March 2009 with a strong focus on the stability of the financial sector, the Commission has increasingly tightened state aid control in the banking sector through the application of the principles of restructuring aid. These principles have been developed in the context of industries with overcapacity and often with firms suffering from idiosyncratic difficulties, and rely on assumptions which lead to results consistent with a proper effects-based analysis (albeit not an unstructured “rule of reason” analysis) in those cases. The banking industry during the current financial crisis, however, differs in fundamental ways from the earlier restructuring cases, in particular the under-supply of lending due to a general lack of confidence and the systemic causes of the recipient banks’ difficulties. As a result, several of the assumptions underlying the restructuring principles do not hold and the restructuring principles lead to a fundamentally different outcome then under an effects-based analysis. By applying the restructuring principles in a fundamentally different context, the Commission risks pursuing a policy which not only fails to achieve any benefits but which is highly likely to make a bad situation worse, harming consumers, the banking industry and the economy at large. The paper is structured as follows: Section 2 describes the causes and effects of the financial crisis in Europe while Section 3 summarises the Commission’s state aid policy response to the financial crisis from the days prior to the collapse of Lehman Brothers to the recent publication of the Financial Crisis Restructuring Guidelines. Section 4 provides a brief overview of the elements of an economics-based analysis which is subsequently applies to restructuring aid under Article 87(3)(c) (in Section 5). The rationale of “normal” restructuring aid cases is then contrasted with restructuring aid to banks in the financial crisis: Section 6 sets out the case for and the implications of an effects-based assessment of restructuring aid under Article 87(3)(b) while the following section looks at the impact of the Commission’s remedies. Section 8 concludes.

A Competition Policy Lesson in Times of Crisis: State Aid Control by the European Commission (in Spanish)

The enforcement of State aid prohibition in the current economic crisis provides a good example of threats faced by competition policy. At first sight one may think that state aid control by the EC Commission could become an easy 'victim' of the economic crisis due to the current multiplication of Member States interventions in aid of domestic firms. However, that view is mistaken, the strategy developed by the EC Commission to face the threats and risks that the economic crisis have posed to the state aid prohibition and control is a good public policy model to follow. The EC Commission has remained loyal to the principles and rules that apply to State aid in the EU, coherently it has prohibited many Member State aids that squarely infringed the State aid prohibition of the EC Treaty. Moreover, respect to the principles inspiring state aid regulation in the EU (transparence, non discrimination, common interest, necessity and proportionality) has not been broken by the adoption of exceptional and provisional measures aimed at providing a sensible framework to accommodate Member States interventions directed to the banking sector to provide stability to financial and credit markets and to regain confidence. The strengthening of the EC Commission’s resources assigned to state aid control has greatly contributed in the task to secure a consistent, fast and effective functioning of the system in current times.

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.

The Concept of State Aid in Liberalised Sectors

The author highlights the balancing act both on the regulatory as well as on the institutional level between state aid control and the liberalization of public services. He focuses on partially liberalized markets and tackling cross-subsidisation where Member States infringe the competitive neutrality of the privatisation process by various funding schemes. These are all subject to three criteria linked to the private investor test. Once partially liberalized, sectors traditionally shaped by public service obligations are prone to state intervention owing to the special needs they fulfil. Starting from the premise that the concept of universal services is designed to combine public policy objectives with a fully competitive market, the author allocates the role of state aid control as both a specific mandate avoiding selective distortions through the granting of state resources imputable to the State and as a regulatory mandate to maintain a level playing field for all undertakings in the Internal Market. The jurisprudence of Community Courts - e.g. UFEX, Chronopost and Laboratoires Boiron - is faced with the demarcation of the European Commission's powers and the determination of the nature and extent of judicial review. Its analysis focuses on cost calculation and allocation in search of cross-subsidisation of liberalised market segments by using state resources originally designed to compensate for public service obligations. He closes with the assumption that, because of the narrow confines of aleatory references made to the Courts, preference should be given to a best practice approach to cost allocation standards.

A New Sound Approach to EC State Aid Control of Airport Infrastructure Funding

A New Sound Approach to EC State Aid Control of Airport Infrastructure Funding

The ‘Elusive Frontier’: Regulation under EC State Aid Law

The more one gets involved with the definition of State aid under Article 87(1) EC the more there is a realization of how elusive this is. Each and every element of this concept still raises fundamental questions and is still subject to debate. There is one area, however, which is the real frontier of EC State aid law, and indeed of any system aiming to control public subsidies: regulation. This paper attempts to sketch some of the aspects raised by the legal status of regulation under EC State aid control. It does not propose to offer definitive answers. The fact itself that after more than fifty years since the entry into force of the Treaty of Rome we are asking this question is probably a sign that there are no final answers. From another perspective, the issue ultimately depends on policy and not legal choices, which is partly beyond our remit. What we aim to achieve with this paper is two-fold. On the one hand, to analyze the issue at an operative micro-level, by assessing it against the various traditional elements of the notion of State aid under Article 87(1) EC. At the same time, to insert the issue of the control of regulation within its broader systemic and institutional context. This turns on asking what other EC law provisions, particularly internal market rules, could apply to the same measure and what institutional, and even constitutional, implications the application of State aid, rather than internal market rules, might have. It can be anticipated that these considerations do play a crucial role in the definition of EC State aid under Article 87(1) EC and on whether regulation should be covered or not.

European State Aid Control

European State Aid Control

A study of the notion of legitimate expectations in State aid recovery proceedings: “Abandon all hope, ye who enter here”?

Although the protection of legitimate expectations is a well–known doctrine of EU law and is, as such, regularly applied by Community courts, its boundaries in the particular field of State aid are remarkably unclear. The case law relating to the application of this doctrine appears at first sight to be ambiguous and even sometimes incoherent. This seems to have led several commentators to conclude that applicants seeking the benefit of the protection of legitimate expectations should, if not renounce altogether, at least abandon almost all hopes of succeeding in such an endeavour. On the basis of a near–comprehensive study of the relevant case law and decision practice, this paper will try to show (i) that, once a rationalization effort is performed, the conditions of a successful legitimate expectation claim appear more clearly; and most importantly (ii) that the EU institutions in charge of State aid control (principally the Commission and the Community courts) are not indifferent – far from it – to claims based on the notion of legitimate expectations. Therefore, it will be argued that recipients of unlawful State aids should study carefully the conditions of application of the principle of legitimate expectation, for there is still a case for hope.

Does EU Policy Challenge the Digital Future of Public Service Broadcasting?

In this article the authors assess the impact of the European Commission's state aid policy on the public service remit of public broadcasting organizations in the digital age. The article consists of two parts. In the first part the authors give an overview of the policy and legal context in which state aid control of public service broadcasting evolves. Second, recent state aid cases that touch upon the issue of digitization and public service broadcasting are analysed. Whereas Member States fear too much Commission intervention, the European Commission, on the contrary, fears that Member States abuse the margins of the European Treaty in order to expand the digital public service remit in unauthorized ways, such as financing commercial digital activities. Whether the Commission is right to fear a `mission creep' on behalf of the public service broadcasters due to vague and overambitious digitilization plans, remains to be seen however.

The Control of Regional Aid to Large Investment Projects: Workable Compromise or Arbitrary Constraint?

The control of State aid to large investment projects has long been a preoccupation of the European Commission. A key feature of the evolution of competition policy control over regional aid has been the emphasis on devising ‘frameworks’ within which aid schemes could be authorised thereby obviating the need for case-by-case analysis of individual awards.

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.

HOW SELECTIVE IS SELECTIVITY? A FEW THOUGHTS ON REGIONAL SELECTIVITY

Article 87 (1) EC prohibits any state aid in whatsoever form, unless the Commission considers it to be compatible with the common market. This prohibition significantly reduces in many cases the freedom of Member States to conduct their policies in defining the political and economic environment in which undertakings operate. Article 88 (3) EC, which provides for the notification procedure and prohibits the implementation of aid measures before the Commission's approval, also significantly reduces the Member State's playground. Rarely, however, can it be argued that the state aid control could potentially have drastic consequences for the national constitution order. Although the questions of what constitutes state resources and to which extent trade between Member States can be affected are controversial, this article focuses on only one aspect of the definition of state aid, namely selectivity, the application of which may have the most far-reaching consequences for many Member States' constitutional orders. It has to be stressed, though, that this short article does not aim to deal comprehensively with every difficult issue connected with the application of the selectivity test, but is limited to some of its aspects which may have bearing on Member States' decisions concerning the distribution of powers and especially the power of taxation.