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17th March 2020
Banking & Finance Competition & State Aid Covid-19 Internal Market

Op-Ed: “State aid and COVID-19 outbreak – What can we expect?” by Juan Jorge Piernas López

In addition to the devastating impact on individual lives and public health, the COVID-19 outbreak is liable to generate serious economic effects. The reaction of EU Member States to the crisis through the injection of a significant amount of public resources into the economy, and particularly in some sectors, may also bring about considerable competition distortions. In this context, the State aid regime will, once again, have to strike the balance between the need to avoid an economic meltdown and the goal of protecting effective competition in the internal market. This contribution will briefly analyse the Commission’s possible reaction to the COVID-19 crisis in light of the previous response of the ‘guardian of the treaties’ to the last severe challenge to the State aid discipline, that is, the 2008 financial crisis.

During the financial crisis, the European Commission’s policy on State aid evolved from a very lax approach, motivated by the high economic and political tension of the early days of the crisis, towards a stricter approach, as the financial and economic context was becoming more stable. The Commission’s method to progressively increase the rigidity of State aid control was based on the publication of soft law instruments stating how it intended to approach the compatibility of aid for banks firstly, and for the real economy subsequently, in different phases of the crisis.

The adoption of soft law instruments, particularly of seven communications related to the financial sector and a temporary framework related to the ‘real economy’, together with a very permissive interpretation of the rules at the beginning of the crisis under a (then) exceptional legal basis (Article 107(3)(b) TFEU), allowed the Commission to avoid direct confrontation with Member States in a difficult context in which it was even ‘requested by some’ to suspend the application of the State aid discipline altogether. Over time, the European Commission also pursued a number of regulatory objectives, in addition to the traditional protection of competition, such as financial stability, moral hazard, or the return to long-term viability of financial institutions. Indeed, in the absence (at the time) of a supranational regime for banking resolution at the EU, the State aid rules emerged as the appropriate framework to police the measures adopted by Member States to stabilise, rescue and resolve banks established within their territories. As underlined by former Commissioner Almunia ‘the Commission […] acted as a de facto crisis-management and resolution authority at EU level’.

In the current COVID-19 outbreak scenario, the Commission is likely to follow a similar path as it is now confident to resort to Article 107(3)(b) TFEU as the suitable legal basis for dealing with the new crisis. In this regard, although the first decision related to COVID-19 was adopted under Article 107(2)(b) TFEU (aid to make good the damage caused by natural disasters or exceptional occurrences – COVID-19 being defined as an ‘exceptional occurrence’), the Commission underlined in the press release concerning this decision that in case of particularly severe economic situations ‘such as the one currently faced by Italy’, Member States may grant support to remedy a serious disturbance to their economy under Article 107(3)(b) TFEU. The Commission announced a day later that it was ‘preparing a special legal framework under Article 107(3)(b) TFEU to adopt in case of need’, which Commissioner Vestager linked to the Temporary Framework adopted in relation to the 2008 financial crisis.

The Temporary Framework complemented the measures adopted by the European Commission in relation to aid granted to financial institutions during the 2008 crisis by exceptionally allowing the granting of State aid to undertakings in other sectors of the economy. The Framework aimed to facilitate undertakings’ access to finance, and to encourage companies to invest in the sustainable growth economy. The most distinguishable measure of the Temporary Framework was the possibility of granting aid not exceeding EUR 500,000 per undertaking under a State aid scheme. This type of aid could not be granted to firms which were in difficulty before the beginning of the financial crisis (1 July 2008). Other measures included in the Temporary Framework were subsidised loan guarantees, subsidised loans, and subsidised loans for the production of ‘green products’. The Framework also provided for the temporary adaptation of existing State aid instruments, particularly the Risk capital guidelines, and the communication on short‑term export credit insurance. The Temporary Framework was planned to apply until 31 December 2010. However, a phase-out approach was adopted and the Framework was prolonged until the end of 2011, although the possibility of granting EUR 500,000 per undertaking was not prolonged.

In the current context, some of these measures could be replicated in the new package that the European Commission is preparing, together with other measures targeting more specifically the sectors that a priori appear most affected by the new crisis, such as tourism, transport, hotels and restaurants, to cite those mentioned by Commissioner Vestager in her recent statement related to COVID-19.

In this regard, even before the adoption of the new framework, Member States, and the United Kingdom until the end of the transition period provided for in the Withdrawal Agreement, have several options to compensate businesses for the damage caused by COVID-19. They can resort to de minimis aid, to the General Block Exemption Regulation (GBER), and to aid to make good damage caused by exceptional occurrences, given that, as mentioned before, COVID-19 has already been recognised as such. In addition, the Commission has reminded Member States that the current Rescue Aid and Restructuring Guidelines enable them to support undertakings to cope with liquidity shortages, and that they can also set up support schemes for Small and Medium-Size Enterprises (SMEs) to cover liquidity needs for a period of up to 18 months. Finally, in the case of Italy and other Member States, like Spain, where the COVID-19 outbreak has already caused severe economic problems, Article 107(3)(b) TFEU is an additional legal basis for the assessment of State aid measures adopted to cope with the situation generated by the COVID-19 pandemic.

Finally, it remains to be seen whether the European Commission will also emerge in this case as a de facto crisis-management authority at EU level, in such a sensitive domain as public health. We hope, at least, that a proactive and flexible application of the State aid rules will contribute to the realisation that the coronavirus is a common threat that requires a truly European answer.

 

Juan Jorge Piernas López is Assistant Professor of International Law and International Relations at the University of Murcia (Spain) and consultant to the World Bank and other public institutions in competition and State aid law and policy. He is the author of The Concept of State Aid under EU Law: From internal market to competition and beyond, published by Oxford University Press in 2015.

 

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