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State Aid Control in the EU

- in particular the latest developments on policy concerning the recovery of incompatible aid

Alexander Schaub

The Mentor Group

The Forum for US-EU Legal-Economic Affairs



1) Introduction

I am very pleased to have the opportunity to talk about "State aid control in the European Union" and in particular to expand on the latest developments of our policy concerning the recovery of incompatible aid.

Today, state aid control is one of the key elements for the Commission in its efforts to accompany and safeguard the achievements of the internal market and to guarantee undistorted competition.

2) Reasons for State aid control in the EU

As you know, the maintenance of a system of free and undistorted competition is one of the cornerstones of the European Union. It is undisputed that competition may be distorted by advantages given by public authorities to certain companies which compete with other companies in the Union. All efforts under the anti-trust rules to ensure that companies do not distort competition and trade within the Union would be to no avail if Member States were allowed to seek to outbid each other in offering subsidies to save firms in economic difficulties or to attract investment.

Today, this applies more than ever. There are three major reasons for the increasing importance of State aid control:

- First, as the Internal Market becomes a reality, the elimination of a vast number of trade barriers between Member States also progresses. This means that the more classical forms of distortion of competition by Member States have disappeared. If not properly controlled, state aid may be used to replace the barriers to trade that have already been dismantled.

- Second, the single market in Europe and increased world-wide competition have lead to widespread liberalisation of sectors where competition was or is still restricted or even excluded, such as telecommunications, postal services and energy. The consequence of this trend is obvious: introducing competition necessarily means enlarging the scope of state aid control to these sectors.

- There is a third reason for the increasing importance of state aid control: in periods of serious economic difficulties with politically unsustainable levels of unemployment, Governments - not only in the EU, but also in other regions of the world - are tempted to use aid as an instrument to combat unemployment, often merely shifting the problem to another factory, another sector, another area, another country.

3) The characteristics of State aid control in the EU

One might, of course, at least in theory, advocate the simple ban of State aid to achieve free and undistorted competition throughout the European Union. However, the early experience with the European Coal and Steel Community and its strict and unconditional prohibition of any State aid has shown that this way cannot realistically be maintained: in some cases there are valid reasons to grant aid.

The conclusion drawn in the Treaty of Rome was to accompany the general prohibition to grant aid by a list of possibilities for exemption. Properly controlled, the granting of aid may contribute to the development of the Community as a whole, whilst potentially harmful or protectionist effects can be eliminated.

But who would be able to carry out this task in a neutral and well-balanced way? The Treaty of Rome solved this question by entrusting the Commission with the task of ensuring a level playing field of competition throughout Europe.

This is indeed the very centre-piece of State aid control in the European Union: the Treaty of Rome not only obliges the Member States to inform the Commission of subsidies granted to enterprises. The obligation goes an important step further and makes the award of aid subject to prior approval by the Commission.

The obligation of notification prior to implementation and, more than that, the fact that the implementation of a plan to grant or alter aid is subject to approval by an independent authority, is one of three key elements which make the control of State aid in the European Union unique both in international and national law. Only the Commission may find aid compatible by applying one of the exemption clauses provided for in the Treaty. Implementing new aid without having obtained the Commission's approval is illegal.

The second element characterizing the State aid control system established by the European Union follows from the first: there are remedies against State aid decisions. Also private operators, in particular aid recipients and competitors, may seek judicial review before the European Courts.

Third, the Commission is not only entrusted with the day-to-day application of the State aid rules, but is also empowered to develop the Community's State aid control policy. Within the wide margin of discretion entrusted to it, the Commission has gradually developed policy through cases and - in order to ensure homogeneity and to increase transparency - through policy frameworks, communications and notices.

Today, the Commission has at its disposal a broad set of clear-cut, transparent and consistently applied rules in the field of State aid control. It distinguishes between aid which is or may be declared compatible and aid which is incompatible with the common market: a favourable approach is usually given towards

- regional aid,

- aid to SMEs,

- aid for environmental and R&D purposes, and

- aid for the creation of employment.

On the other hand, the Commission does, as a general rule, not allow

- general investment aid for large companies outside well-defined disadvantaged geographic areas,

- export aid, and

- operating aid, i.e. aid to cover current expenses of enterprises of a continuous or periodic character.

Furthermore, a close and in-depth scrutiny is carried out in cases of

- rescue and restructuring aid,

- financial transactions between the State and its public companies resulting in aid, and

- aid to companies in certain sensitive sectors such as steel, shipbuilding, motor vehicles and synthetic fibres.

In substance, our rules match the new provisions set out in the Agreement on Subsidies and Countervailing Duties under the "GATT 1994" and are, in some respects, even more strict. However, the supervisory functions of the Commission and the European Courts go much further than that of the WTO institutions. In the EU, the main principle is "approval prior to implementation" compared to a more simple annual "notification after implementation" procedure under the WTO system. Moreover, private operators cannot take action on the international level under the WTO rules.

4) Enforcement of the State aid discipline in the EU

One crucial question remains: How do we enforce the State aid rules?

The notification discipline ensures that the Commission sees and evaluates aid. Aid which does not meet all the conditions required to benefit from one of the possibilities for exemption is incompatible with the objectives of the Treaty and must not be implemented.

Thus, recovery is at stake only in cases where a Member State has not fulfilled its obligation to await the Commission's decision before awarding aid.

It has not been easy to establish, step-by-step, a strict and coherent State aid policy. Introducing a systematic policy to recover incompatible aid has proven even more difficult.

Let me recapitulate the most important milestones:

- It was in 1973 that the Court, in the German "mining regions" case, (1) clarified the Commission's right to order recovery of illegally granted aid.

- In the course of the Eighties, recovery orders became constant Commission practice. The Court firmly backed the Commission's approach by stating that recovery is the "logical consequence" (2) of the finding that an aid was unlawfully granted. In its recovery policy, the Commission concentrated its efforts on "big" cases like Renault and Peugeot (1988), Alfa Romeo (1989) or British Aerospace/Rover (1993).

- The "Boussac"-judgment, delivered by the Court in 1990, (3) can be regarded as a "cornerstone" in two respects:

First, it stated that the Commission is obliged to examine the compatibility of an aid even in cases where the Member State has not fulfilled its obligation to notify and to await the Commission's decision. Thus, it is not possible for the Commission to order recovery simply for the reason that a Member State has granted aid whilst failing to respect the procedural obligation to notify. To order recovery, therefore, the Commission must also establish the substantive incompatibility of the aid with the common market.

However, when faced with aid implemented before a decision has been taken, the Commission has the power to issue an interim decision ordering the Member State concerned to suspend further payment pending the outcome of the Commission's investigation. Moreover, this interim decision may also contain an order to provide the Commission with all necessary information in order to enable it to assess the compatibility of the aid with the common market. We have done so recently in the "Volkswagen"-case concerning aid to projects in Eastern Germany. (4)

- In a communication issued in June 1995, (5) the Commission went a step further and announced that it may, in appropriate cases, adopt an interim decision ordering the Member State to recover any amounts which have been disbursed in infringement of the Treaty. In doing so, the Commission reacted to the problem that a suspension order does not have any practical meaning in cases where the unnotified aid is already paid in full.

To sum up: what we have achieved during the past years is an increased notification discipline and a very high public awareness of the consequences of unlawfully granted aid. It has been made clear that the purpose of recovery is to re-establish the previously existing situation on the market.

However a number of difficulties remain: It may take several years from the Commission decision to actual recovery. The recovery order is - like any other decision in the State aid field - addressed to the Member State concerned, which then has to recover the aid in accordance with national law. Procedurally speaking, the beneficiaries of illegal aid may use all remedies available under national law in order to seek to delay or suspend the immediate restoration of the previously existing situation.

However, the rule that aid must be recovered with interest at market rates calculated from the date of the actual award "softens" somewhat the length of the recovery period. Moreover, it is important to note that the recovery claim sticks to the company regardless of changes of ownership and without any term of prescription.

An analysis of the Commission's decisions shows that the percentage of cases where the aid is eventually recovered gradually rises. This confirms what seems to be a general underlying principle in the process of European integration: once a specific target has been set, the Community is usually able to achieve it in a step-by-step approach. The policy concerning recovery can be said to be in its third phase: In the Seventies, the Court confirmed the principle. In the Eighties, the Commission established the practice.

Today, in the Nineties, we seek to improve the effectiveness of the Commission's practice. In view of the fact that recovery is undertaken according to national law, we are approaching this in cooperation with the Member States. This effort is based on the Courts findings that national law cannot stand in the way of full application of Community law. Member States have to cooperate with the Commission to overcome all difficulties encountering the implementation of a recovery order. (6)

In parallel, national Courts can play an important role in the field of state aid. The prohibition of granting aid before the Commission has taken its decision is one that has direct effect. (7) This means that individuals may invoke an infringement of this obligation before a national Court. The role of national Courts is to preserve the rights of individuals faced with possibly illegal State aid until the final decision of the Commission. (8) Competitors may thus achieve suspension of payments or recovery of illegally granted aid pending the outcome of a Commission decision on the matter.

This important task of national courts of safeguarding competitor's interest was emphasised in a landmark decision of the European Coort of Justice handed down just last week: (9) the Court held that a national court is obliged to meet a request for recovery in cases of unnotified aid, unless exceptional circumstances are involved.

Last weeks judgment also underlines that it is the States' responsibility to notify aid. Therefore, individuals may sue the State for damages resulting from illegally granted aid. On the other hand, a beneficiary cannot be held liable for damage caused to other economic operators on the sole base of community law.

In its recently published Notice on cooperation with national Courts in the field of State aid, (10) the Commission offers to assist national Courts in such cases. It is our hope that national Courts will use this assistance and thereby increase the possibilities for competitors to seek interim protection of their rights before national Courts in State aid cases.

5) Conclusions

Much of this must sound rather exotic to you. In the United States, you do have an effective anti-trust law, but you do not have laws on the control of subsidies provided to industry by individual states or local authorities. However, for the European Union, State aid control is an essential tool to accompany and safeguard the implementation of the single market.

Moreover, we think that State aid control has its role to play wherever free trade in goods and services is established. This was the reason to enshrine our rules on State aid in certain far-reaching agreements with third countries. To mention the most important ones: the Europe-Agreements with the Central and Eastern European States and the customs-union agreement with Turkey.

This was also our reason to negotiate, in the WTO context, clear-cut state aid criteria and more transparency in this field. In view of the increasing inter-dependency on the world markets, it is my hope that similar ideas would strike roots also outside the European Union and its European partners.

* * * * * *

(1) ECJ Case 70/72, Commission/Germany, ECR 1973, 813 (829).

(2) See e.g. ECJ Case C-142/87, Belgium/Commission (Tubemeuse), ECR 1990, I-959 (1020).

(3) ECJ Case C-301/87, France/Commission, ECR 1990, I-307.

(4) Commission Decision 96/179/EC of 31.10.95 enjoinding Germany to provide all documentation, OJ 1996 L 53/50.

(5) OJ 1995 C 156/5.

(6) ECJ Case C-303/88, Italy/Commission (ENI-Lanerossi), ECR 1991, I-1433(1485).

(7) ECJ Case 120/73, Lorenz/Germany, ECR 1973, 1471 (1484).

(8) See ECJ Case C-354/90, FNCE ("Saumon"), ECR 1991, I-5505 (5528).

(9) ECJ case C-39/94, SFEI, judgment of 11.7.1996.

(10) OJ 1995 C 312/8.

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