In a number of recent speeches, Ms. Neelie Kroes, the European Competition Commissioner, has highlighted the European Commission’s (“Commission”) intention to undertake a comprehensive review of the European Community’s (“EC”) state aid policy to stimulate European economic growth and increase European competitiveness on the global market.

Since the signing of the Treaty of Rome in 1957, state aid policy has been an integral part of the EC’s competition policy. Article 87 of the EC Treaty prohibits any aid granted by a Member State which distorts or threatens to distort competition by favoring certain firms or the production of certain goods in so far as it affects trade between Member States. The Commission is responsible for monitoring proposed and existing state aid measures by Member States to ensure that they do not distort intra-community competition and trade to an extent contrary to the common interest, and applying the Treaty’s exceptions to the ban on state aid.

However, the Commission has recognized that state aid control has evolved over the years into an unnecessarily complicated set of rules, exemptions, and guidelines. The procedures have grown lengthy and cumbersome. The Commission has had to intervene in rather insignificant cases, and Commission approval of state aids is often seen as just one additional bureaucratic formality to be jumped at the end, once the decision to grant aid has already been taken. The EC’s enlargement in 2004 underlined the need for an adaptation of state aid policy.

The Commission proposes to redesign the future state aid regime around two twin principles: efficiency and equity. According to Ms. Kroes, efficiency will promote overall economic growth by targeting the gaps that the markets alone cannot fill. State aid rules should help Member States obtain the best value for money for their taxpayers, and ensure that scarce national resources are used where they can have the most impact. Equity means more than ensuring that European companies compete as equals on the basis of merit within Europe’s Single Market. It also means delivering on a wide range of primarily non-economic issues which are of fundamental importance to Europe’s social model, including social and regional cohesion, cultural diversity, and environmental protection.

The Commission has, therefore, issued a State Aid Action Plan, setting out the philosophy, principles and key proposals which will guide its action over the next five years. The State Aid Action Plan contains four key features:

• A general philosophy of less and better state aid. The State Aid Action Plan puts forward general criteria to assess the validity of an aid measure. It argues that state aid should only be used: when it is an appropriate instrument for meeting a well defined objective of common interest (like cohesion, public services, economic growth, or employment); when it creates the right incentives and is proportionate to the problem; and, when it distorts competition to the least possible extent so that on balance it can be authorized by the Commission.

• Refined economic analysis. An economics-based approach will focus aid on market failures in areas that make a difference for the overall competitiveness of Europe. By market failures, the Commission means situations where the market by itself does not deliver an efficient outcome, and gives an example in the field of risk capital, where normal market conditions typically mean that small, innovative and thus risky businesses face tremendous problems in getting funding. In these circumstances, the State is sometimes the only economic actor able to change the incentives for investors, to make them consider innovative ventures worth a try. Commissioner Kroes has also recognized the importance of facilitating the pursuit of wider state aid objectives such as environmental protection, research and development support, and the promotion of regional cohesion.

• Efficient procedures. The Action Plan will also aim to improve the efficiency and transparency of state aid procedures, and speed up decision-making. The Commission will consolidate and extend as much as possible the use of block exemptions, which authorize the granting of aid without it being notified to the Commission. This will allow the Commission to concentrate its resources on cases that significantly distort competition and trade. Fewer aid measures should need to be notified, which means less bureaucratic burden on companies and authorities. The Commission also intends to simplify and consolidate the many existing regulations, so that the overall architecture of state aid policy is easier to grasp. Best practice guidelines will help make the framework as user-friendly as possible.

• Partnership with Member States. The Commission recognizes that the success of these reforms depends on the willingness of Member States to work in partnership. Member States can cooperate by providing complete notifications, or timely and accurate replies to the Commission’s questions. In terms of policy goals, Member States are responsible for setting their own spending priorities and designing schemes that generate growth and sustainable jobs. Finally, if state aid is condemned as illegal and incompatible, Member States have a duty to recover the illegal subsidies, and to put the money to other uses in the interests of their tax-payers.

The Commission’s State Aid Action Plan provides a roadmap of the reforms which the Commission intends to deliver over the coming years. It aims to meet the two basic objectives of state aid policy – efficiency, and equity – and put Europe firmly back on the path to sustainable growth and jobs. Before finalizing its regulatory proposals, the Commission’s Action Plan is subject to public consultation, and comments must be received by September 15, 2005.

Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com