The limitations of European Union control of state aid

Posted by D. Daniel Sokol

Alberto Heimler (Scuola Superiore della Pubblica Amministrazione) and Frederic Jenny (ESSEC Business School) analyze The limitations of European Union control of state aid

ABSTRACT: The European Union (EU) is one of the few jurisdictions in the world that has introduced specific legal provisions for controlling state aid. The treaty provisions are structured in such a way that the Commission is in principle obliged to authorize every single grant of aid. This has proved to be practically impossible, the more so with 27 members of the EU. As a result, the Commission has issued a number of exemption and de minimis rules, for which notification is not required, that suggest that the bulk of state aid is beneficial. In order for state aid policy to become more rigorous, the 2005 State Aid Action Plan rightly enhanced the role of economic analysis. This means rethinking the exemption regulations and the way individual decisions are taken. One important step forward would be to make sure that distortions of competition are noticeable before a state measure is declared incompatible. As a result, at least with respect to individual decisions, EU policy would stop addressing cases where the distortions of competition are minimal. Furthermore, the Commission would stop imposing irrelevant constraints on subsidized forms. This is particularly the case for restructuring aid, where the restoration of the healthiness of the firm is the final objective of the aid. However, even in recent decisions taken as a result of the financial crisis, the Commission uses competition-type considerations only to overcome moral hazard by attaching a number of intrusive conditions to its authorization decisions (prohibition of reducing prices before a competitor does, introduction of capacity or sales caps, merger prohibitions, caps on managers’ salaries, etc.). Very often these conditions reduce, not increase, the probability that these companies restructure successfully. Moral hazard can only be eliminated by not allowing the aid, by limiting the aid to what is strictly necessary, or by making sure that it is a once-and-for-all option, and not by constraining the company from competing.