EC State Aid Control: The Case for Reform

EC State Aid Control: The Case for Reform

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On 14 June 2005, Wilmer Cutler Pickering Hale and Dorr LLP and the University of Leiden organized a one-day conference in Brussels, to discuss reform of the EC State Aid control regime, with the participation of the Competition Commissioner, Mrs. Neelie Kroes. In a keynote address, Commissioner Kroes outlined the main elements of the State Action Plan, adopted by the Commission only a week before. The conference, which was attended by some 250 participants, thus represented the first public event at which the Commissioner, economists, practitioners and representative of industry could exchange views on the rules that will guide State Aid control in the next few years.

Claus-Dieter Ehlermann opened the conference by underlining that the ambitious, comprehensive reforms proposed in the State Aid Action Plan represented a key moment in the evolution of State Aid control. The Action Plan could start a new phase in which State Aid would contribute to the growth and competitiveness of the European economy in the spirit of the Lisbon Agenda. Professor Ehlermann did however sound a note of caution, reminding the audience of the risk that State Aid control would be misused to re-introduce industrial policy within the realm of Competition Law, under the pretext of promoting the Lisbon Agenda. Professor Ehlermann noted with approval the focus of the Action Plan on the use of State Aid to correct market failures but questioned what economists could do to provide a clear method to assess the right amount of aid needed in a given economic context.

In her first intervention since the presentation of the State Aid Action Plan, Commissioner Neelie Kroes reaffirmed her belief that Europe needs a State Aid policy to maintain a level playing field to preserve free and open markets, which are the best guarantee for increasing the competitiveness of the European economy. Only through a competitive economy will the European social model be preserved. At the same time, Commissioner Kroes noted that the current State Aid rules were less than satisfactory: the rules are scattered in an unnecessary set of complex block exemptions, guidelines and notices, the proceedings are long and cumbersome and the Commission is too often called upon to intervene against insignificant cases, such as the famous case of aid to a German swimming pool.

The State Aid Action Plan is structured around two main guiding principles: efficiency and equity. Efficiency demands simple, user-friendly and predictable rules that aim at ensuring the best use of the European taxpayer’s money from which State aid is financed. Equity means that State Aid rules must ensure that State intervention in the economy does not distort competition on the merits between equals, while respecting the non-economic objectives inherent in the European social model, such as the promotion of social and regional cohesion, protection of the environment and the promotion of Europe’s cultural diversity.

Commissioner Kroes acknowledged that the State Aid Action Plan could be deemed very ambitious and that, through its adoption, the Commission had set its sights very high. Beyond the “less and better targeted state aid” philosophy that inspires the Plan, the promotion of the economic objectives of the Lisbon Agenda requires that State Aid be reoriented through refined economic analysis towards the correction of identified market failures. Economics would have a lesser role to play, she conceded, as regards the use of State Aid to promote regional cohesion and the other recognized non-economic objectives of the European model. Commissioner Kroes also called upon the Member States to show their commitment to the success of this reform by granting State Aid measures that trigger growth and sustainable employment and by improving their disappointing record in recovering illegal subsidies. In this like in most issues of State Aid control, Commissioner Kroes acknowledged that complainants and competitors in general may be the Commission’s only or best friends and, in response to an intervention, she appeared willing to consider a general improvement in the procedural rights of complainants. Commissioner Kroes concluded her intervention by calling all interested persons to actively participate in the public consultation in order to turn the proposals into concrete and efficient regulatory measures.

In response to Professor Ehlermann’s introductory question: on what help economists could provide to define a more accurate and coherent State Aid policy, DG Competition’s Chief Economist Lars-Hendrik Röller stressed the peculiar position of State aid policy, which, unlike other areas in competition, is not only directed at economic objectives but also strongly linked to social goals. He thus warned of the danger to abuse economics in what is at least partly a political debate. Economists on the panel agreed that economic theory cannot at present provide much indication as to what level of aid is the most appropriate. On the other hand, a more focused economic approach could help to design better-targeted State subsidies.

The second panel of the day discussed the current procedural rules applicable to State Aid matters. Panelists Frédéric Louis and Professor Piet Jan Slot of the University of Leiden concurred on the need to bring more substance to the analysis of distortion of competition and effect on trade between Member States, which are necessary conditions for a finding of State Aid. In the absence of any meaningful analysis of these two conditions, the Commission finds it virtually impossible not to deal with such cases like aid to the Dutch zoos or to German swimming-pools, which clearly are of no relevance for competition on the internal market. The current very low de minimis thresholds must be significantly increased and coherent, workable economic criteria have to be found to “block exempt” most instances of economically insignificant aid, thus relieving the Commission from the task of reviewing them through the notification process. Only then will the Commission be able to concentrate its scarce resources on more significant cases. The panelist disagreed with the traditional view that the structure of Article 87 and 88 EC make it difficult for the Commission to find ways not to deal with insignificant cases.

On procedure, the panelists mainly criticized the current neglect of the rights of so-called “third parties”, who include the beneficiary of the aid and complainants. Irrespective of the basic lack of fairness and transparency inherent in the current situation, the more focused, market-driven economic approach advocated by the State Aid Action Plan requires that “third parties” be given a much improved status, beyond that of mere “information sources” as they were characterized in a recent judgment of the CFI.

After the panel on remedies, in which the deficiencies of the current system where highlighted by former Advocate general of the European Court of Justice Giuseppe Tesauro, the fourth panel discussed the international dimension of State Aid control. Professor Marco Bronckers showed that State Aid was prevalent in the economy of the European Union’s main trading partners, while the EU is the only trading block in the world to have introduced an internal system of State Aid control. Analysis shows that State subsidies in the US are neither less important, nor better targeted than in the EU, suggesting that the decision whether to introduce State Aid control is essentially political in nature. Professor Bronckers highlighted that remedies existed in the WTO system against subsidies in favour of the EU’s foreign competitors, in the form of countervailing duties at EU borders, a practice that is getting more common as European industry is slowing awakening to this possibility. One way of dealing with this international imbalance is to get the EU’s trading partners to adopt similar control mechanisms. However, Koen Van de Casteele of the European Commission confirmed that the export of the EU State Aid rules through multilateral negotiations has currently little chance of success. On the other hand, he suggested that the European Union had been quite successful in “selling” its State Aid control regime to neighboring countries (notably Egypt, Turkey or the ex-Yugoslavian Republics). Interveners from the audience, however, noted that such agreements were rarely enforced and were always concluded with countries that do not have the necessary economic resources to subsidize national companies at a level that may endanger the European economy. Economic giants such as the US, China, Japan or India, conversely, would never envisage to enter into this kind of negotiations.

The idea that a reformed State Aid policy should take more into account the economic situation at a global level was supported by the distinguished commentators from industry that, unusually for a legal conference, intervened in the last panel of the day. The industry panelists showed a convergent approach on most issues.

First, the industry panelists unanimously urged the Commission to take into account the fact that European companies do not only compete on European markets but also globally, and warned that Europe was dangerously falling behind where it matters most, i.e. investment in R&D and innovation. They noted that the US and Japan heavily subsidize R&D activities of their companies without taking much pause to reflect on possible distortions of competition that may derive from these subsidies. Therefore, they suggested that the Commission’s State Aid policy should move away from an inward-looking consideration of impact on the internal market and give more weight to the international dimension of competition in the global marketplace.

Second, panelists insisted on the role a modernized State Aid policy had to play in promoting R&D and innovation. The CEO of Saint-Gobain, Mr. Jean-Louis Beffa, voiced the often heard concern that financial analysts have promoted a short-term focus on profitable core activities detrimental to the kind of long-term, high risks investments that Europe needs to grow its high-tech sector. The average size of European manufacturing companies is far smaller than their US or Japanese counterparts, noted Chairman of Confindustria and Fiat President Luca Cordero di Montezemolo. European companies are too small to dedicate the necessary resources to innovation and European industry in general is too fragmented to produce significant R&D results. Mr. Jorma Olilla, CEO of Nokia Corporation, stressed the need for State Aid policy to move away from trying to sustain declining activities and to support innovative industries, calling for a significant increase in the EU R&D budget and for aid measures geared towards support of R&D and innovation and more risk capital funding for SMEs. All panelists agreed that there were currently too many aid programs for R&D activities, each lacking the necessary funding to promote the kind of parallel knowledge sharing across borders between industry and public universities that is required by the fast-paced innovation cycle characteristic of today’s high-tech industries. While calling for more aid at EU level, the panelists insisted on the need to streamline the current plethora of little known, underfunded initiatives into a smaller set of better programs, with higher budgets.

Third, all panelists agreed, although with different “nuances”, that State Aid should no longer be used to sustain companies that do not reasonably guarantee profitability in the short to medium term. In the words of Mr. Beffa, State Aid money should not be granted to lame ducks, even if he considered it sometimes necessary to “give temporary relief for a short period of time” to companies experiencing difficulties, where it is more efficient and socially responsible not to let these companies die. Mr. Olilla recalled that it was essential for the competitive struggle that declining activities be allowed to die, yet State Aid could play a role in assisting companies going through an internal renewal process, away from traditional activities towards more innovative, future-oriented sectors. According to Mr. Olilla, an internal, company-driven renewal process is the most efficient way to effect the change towards an innovative economy, although he acknowledged that the rigidity of the European economy meant that we are not good at such internal renewal, a comment that was echoed by Mr. Cordero di Montezemolo.

Fourth, industry panelists also criticized the current State Aid policy for favouring SMEs in all circumstances while it may sometimes be more appropriate to promote instead the creation of large(r) companies that have the resources and the capabilities to produce innovative products and services. Mr. Beffa in particular noted that the current approach to State Aid rules, characterized by an explicit favour for SMEs, has not proved particularly successful in bringing about the knowledge economy envisioned in the Lisbon Agenda. He considered that often only incumbents have the necessary human resources, networks and logistic capabilities to innovate. Mr. Cordero di Montezemolo feared that current State Aid policy may actually contribute to the problem by offering more attractive conditions to SMEs, which thus had fewer incentives to pursue a growth strategy. He suggested instead that one of the main goals of State Aid policy should be to help European SMEs to outgrow their status. In general, all panelists urged for a more balanced policy, acknowledging that both SMEs and large companies have a role to play in the development of Europe’s economy.

The industrialists’ panel also discussed the non-economic objectives of EC State Aid policy, including in particular regional cohesion. Mr. Cordero di Montezemolo noted that the new Member States generally have a more lenient, investment-friendly fiscal regime and can maintain tax-free zones until 2011. He queried whether it was appropriate to deny less developed regions in the “old” Member States the possibility to introduce comparable regimes to attract foreign investment. The situation is even more acute in regions of the “old” Member States that border a “new” Member State. In these regions, de-localization of industrial activities is more significant than in other areas of the EU, given the attractiveness of the labour and fiscal conditions applied just a few kilometers beyond the border. Mr. Cordero di Montezemolo argued that State Aid policy should not favour delocalization.

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