3.3.3.     State aid

LEGAL BASIS
Articles 87 to 89 of the EC Treaty.

OBJECTIVES
Competition can be restricted not only by businesses (* 3.3.1. and 3.3.2.) but also by governments, if they grant public subsidies to businesses. For this reason, the Treaty of Rome in principle prohibits any form of State aid that is likely to distort intra-Community competition, on the grounds that it is incompatible with the common market. However, an absolute ban would be untenable: even under a strictly liberal system, it is hard to imagine any government willingly divesting itself entirely of the opportunity to provide funding for certain economic activities. To do so would be to fail in one of its basic responsibilities, namely to ensure that people's basic needs are supplied by correcting imbalances or helping out in emergencies. For this reason the EC Treaty provides for a number of exceptions to the principle prohibiting aid.

ACHIEVEMENTS

1.     The legal framework provided by the Treaty: the ground rules (Article 87 ECT)

a.     General prohibition, under Article 87(1)
An extremely wide-ranging ban covers:

• not only aid granted directly by the Member States but also aid that uses State resources, which includes any agencies that might distribute aid on the basis of government funding, such as local authorities, public establishments and various statutory organisations;
• resources "in any form whatsoever", which means not only non-repayable subsidies but also loans on favourable terms and low-interest loans, and forms of subsidy in which the donated element is less apparent, such as duty and tax exemptions, loan guarantees, the supply of goods or services on preferential terms and even public shareholdings in companies, which:
  - distort or merely threaten to distort competition,
  - and are granted not only to undertakings but also to favour the production of certain goods. (This includes support to a specific industry.)However, the aid must be such as to "affect trade between Member States", which rules out any aid that only has internal consequences within a Member State.

b.     Exemptions
-     Laid down by law, under Article 87(2). Exemptions apply automatically to:

• aid having a social character, granted to individual consumers, provided it is granted without discrimination related to the origin of the products concerned,
• aid to make good the damage caused by exceptional events, such as natural disasters,
• aid for certain areas of the Federal Republic of Germany affected by the division of Germany (now obviously rendered void by German reunification, apart from residual cases).

-     Possible in some circumstances, under Article 87(3). Such exemptions "may be considered" and hence are not automatic. They cover:

• aid to underdeveloped regions,
• aid to promote the execution of a major project of European interest or remedy a serious disturbance in the economy of a Member State,
• aid to facilitate the development of certain economic activities or areas, provided it does not adversely affect trading conditions to an extent contrary to the common interest,
• aid to promote culture and heritage conservation (with the same proviso),
• other categories as may be specified by the Council.

2.     The administrative framework: procedure under Article 88 ECT

To apply the ground rules that it lays down, and in particular the various possibilities for exemption, the Treaty sets up a complete system for Community-level processing of State aid. This gives the Commission main responsibility, with the option of intervention by the Council and ultimate control by the Court of Justice. The basic principle of this administrative and legal procedure is to ensure that no aid is granted without the Commission's agreement.

a.     Review of existing aid, under Article 88(1)
This means aid that already existed before the common market was created, or aid already authorised by the Commission. The Commission carries out the review in conjunction with the Member State concerned and may suggest that it take certain action. If it finds that the aid is not compatible with the common market, it initiates infringement proceedings, although this does not have the effect of suspending application of the aid schemes concerned.

b.     Treatment of new aid, under Article 88(3)
New aid must be notified in advance: Member States are required to inform the Commission of any plans to grant or alter aid, so that it can submit comments. It follows that the Member States do not have the right to put these plans into effect if they have not received Commission authorisation, and that aid granted through plans which have not been notified is illegal and must be repaid. If the Commission considers that an aid plan is incompatible with the common market it initiates infringement proceedings, which suspends application of the measures proposed until there is a final decision.

c.     Infringement proceedings, under Article 88(2)
-     The Commission formally serves notice on the Member State charged with the offence, requiring it to comment within a given period (normally one month).
-     If the comments fail to satisfy the Commission, the latter may decide that the State must alter or abolish the aid within a given period (normally two months).
-     If the Member State fails to comply with the Commission decision by the deadline, the Commission, or any other interested State, may refer the matter to the Court of Justice.
-     The State concerned may itself apply to the Court within the specified period.
-     At the same time, the Member State concerned may apply to the Council for a decision on whether the aid is compatible with the common market. Such an application results in suspension of any infringement proceedings under way, but if the Council has not made its attitude known within three months, the Commission has to give a decision.

3.     Implementation

Until the early 1970s the issue of State aids did not take on especial importance. It began to do so after the recession of 1974 and 1975, and particularly after 1980, when the considerable growth of aid led to a very marked rise in cases referred to the Commission. The Commission tried to ease this increasing workload by establishing criteria for application of the ground rules and procedures, which it decided should be made public in the form of various types of texts: framework documents, communications, guidelines, sometimes just letters, but also directives and regulations. But this piecemeal approach at the purely administrative level did not provide sufficient legal certainty or clear and effective administrative management. Legislation was therefore needed, and was adopted in 1998 for the ground rules and 1999 for the procedural rules.

a.     Application of the ground rules
As there is by definition no obligation to notify aid which is automatically exempt (Article 87(2)), the Commission's work consists in applying the rules on exemption laid down by the Treaty for certain types of aid (Article 87(3)) and thus establishing for each of them a set of exemption criteria.

-     Regional aid (Article 87(3) (a) and (c))
The current system is laid down by the 'guidelines' of March 1998, which brought together several previous communications. In March 2002 the Commission also issued a Multi-sectoral Framework on regional aid for large investment projects that covers regional aid intended to promote initial investment, including associated job creation. The criteria for exemption are:

• territorial criteria: for exemption under Paragraph (a) (aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment), the aid must go to regions with a per capita GDP below 75% of the Community average (Level 2 regions of the Nomenclature of Territorial Statistical Units - NUTS); for exemption under Paragraph (c) (aid to facilitate the development of certain economic activities or areas but not having a significant adverse effect on trading conditions), the aid must go to regions corresponding to Level 3 of NUTS forming compact zones of at least 100 000 inhabitants each, to regions with a population density under 12 inhabitants per km2, or to regions eligible under the Structural Funds, all within an overall ceiling for the number of aid recipients laid down at Community level and divided between the Member States,
• criteria for objective and volume: in principle, aid cannot be used to help run businesses, but only for investment (start-up or creating additional jobs). It must not exceed a certain proportion of investment: in general, 50% for exemption under Paragraph (a), 20% under Paragraph (c).

-     Sectoral aid

• The exemption criteria have been laid down in several texts, for each of the main sectors: steel, shipbuilding, automobiles and synthetic fibres (* 4.7.2., 4.7.3., 4.7.4., 4.7.5.). These are various types of texts but, for shipbuilding, they are Council directives on the basis of Article 87(3)(e). Transport and agriculture are subject to a particular legal system involving Articles 87 to 89 and ad-hoc provisions (*4.1.1. and 4.5.1.). The same is true for State enterprises and public services (*3.3.4.).
• These texts have one common theme: to be acceptable, aid must not tend to preserve the status quo by maintaining over-capacity but must aim to restore long-term viability by resolving structural problems, including by reducing capacity; it should be degressive and proportional.
• Guidelines for application of competition rules to different sectors are regularly issued. Recent communications refer to environmental protection, risk capital, advertising of agricultural products, public service broadcasting and restructuring of the steel sector.

-     Horizontal aid: this is aid which is likely to benefit all sectors of the economy: research and development, SMEs, environmental protection, salvage and restructuring of failing enterprises, employment.

• Until now horizontal aid, like the other forms of aid, has been covered by various piecemeal texts (framework documents, guidelines etc) laying down the exemption criteria for each type of aid.
• On 7 May 1998 horizontal aid became subject to the first Council Regulation (994/98) on the basis of Article 89 for the application of Article 87(3). This gives the Commission the power to adopt regulations exempting certain categories, on the principle of declaring certain aid compatible a priori with the common market and thus exempt from the obligation to notify. This is applicable to aid to SMEs, research and development, environmental protection, employment and training and to certain regional aid. The exempting regulations must specify the purpose of the aid, the categories of beneficiaries and the thresholds. The Commission adopted in January 2001 three new regulations on the application of the competition rules to training aid, on the 'de minimis' rule and on State Aid to small and medium-sized enterprises.

• In order to guarantee coherence, stability and efficiency, as laid down in Article 89 of the Treaty the Commission has adopted a number of procedural rules, for example with regard to deadlines or to reimbursement of aid which had not been notified. Regulation 659/99, adopted on 22 March 1999, incorporates a number of existing practices. It seeks to clarify and rationalise these, in particular by specifying the deadlines applicable to the various stages of the process and by setting strict rules on the suspension and recovery of aid incompatible with the Treaty. It establishes the Commission's methods of investigation (in particular, making provision for on-site monitoring visits) and the Member States' obligation to cooperate (in particular through annual reports on all existing aid systems).
• The gradual clarification of the rules and reinforcement of the principle of suspension and provisional recovery of non-notified aid has significantly accelerated the number of notifications, which grew from 296 in 1989 to 812 in 1999.

c. Transparency
During 2001 the Commission introduced two new instruments to promote transparency in the area of state aid. The State Aids Register, first published in March 2001, provides summary information on notifications and Commission decisions. The State Aid Scoreboard, launched in July 2001 and updated twice annually, provides indicators of the situation and control procedures in each Member State.

ROLE OF THE EUROPEAN PARLIAMENT
Parliament has expressed its views on the issue of state aids in recent resolutions of 7 May 1998, 24 October 2000 and 6 February 2002. It produces regular reports in response to the Commission's 'State Aid Scoreboards'.

16/07/2002