State aid remains in crisis mode

EU state-aid rules have changed rapidly over the past few years, and more change is on the way.

In 2008, at the height of the financial crisis that was threatening banks across Europe, it quickly became clear that the normal rules governing member states’ ability to hand out state aid were not going to suffice. Emergency bail-outs to save under-capitalised banks in France, the Netherlands and the UK were threatened with delay because of EU state-aid requirements.

In the autumn of 2008, the European Commission introduced emergency rules that relaxed the requirements for state aid to banks. They stipulated that aid could be put into effect immediately if it satisfied minimum requirements, and banks could be bailed out more than once if a systemic risk was involved.

In return, the Commission imposed restructuring conditions that included requirements that banks sell off assets and eventually repay the public contribution. Shareholders were also required to shoulder a ‘fair’ share of the burden.

“The bail-outs had the potential to alter the competitive structure of the banking market,” said Joaquín Almunia, the European commissioner for competition, in a speech to the Federation of German Industries (BDI) earlier this month. “But Europe played as a team and the risk was averted,” he said.

The emergency rules were meant to be temporary, expiring at the end of 2010, but continued financial fragility meant they had to be extended until the end of this year.

The Commission had intended to introduce stricter rules from 1 January, but in light of the renewed tensions in the markets it has now abandoned that idea. Next week, the Commission will again extend the emergency rules, this time indefinitely.

The rules have allowed an enormous amount of state aid to be awarded to banks. According to the Commission, between October 2008 and December 2010, EU governments granted €1.2 trillion in aid to the financial sector. The largest share – €757 billion – was in the form of guarantees. The remainder was in the form of capital injections, asset relief and liquidity measures.

‘Real economy’ aid

The rules also include a temporary framework of aid to the ‘real economy’ – aid not related to the crisis. The Commission has approved commitments of €81bn under this framework, of which member states have deployed about a quarter. Germany spent the lion’s share of this money.

But although the emergency rules are now entering their fourth year, there has been an evolution of state-aid approval. “We can see the Commission becoming strict, insisting more on burden-sharing and focusing more on restructuring plans,” said Kai Struckmann, a competition lawyer with White & Case.

The uncertainty caused by the extension of the emergency rules has meant long-promised general reforms of state aid have had to be delayed. The drafted reforms focus on two main changes: diversification of the Commission’s control, and targeted protection for disadvantaged social groups.

“We have decided to ease our control on the services that do not have a significant impact on the internal market, and to focus on the commercial operations that have a real potential to distort competition,” Almunia told the BDI. He added that the rules would also aim to “defend Europe’s public services in times of fiscal consolidation”.

Commission control

The rules would exclude from the Commission’s control small compensation grants made by local authorities. But scrutiny would increase for large-scale commercial services such as mail delivery, environmental services and energy supply. The number of sectors exempt from requirements for prior authorisation would increase for services catering to “essential social needs and vulnerable groups”. Currently, only hospitals and social housing qualify.

Many of these changes amount to enshrining into law and tightening up procedures that have been followed since a landmark European Court of Justice ruling in 2004. This outlined four criteria that must be satisfied in order to avoid having to notify a body providing social services about state aid that has been granted, one of which is efficiency.

This has raised eyebrows among some member states and the legal community. “There has been criticism that it is not the Commission’s job to impose efficiency criteria, it is up to member states how they want to spend their money as long as there is no over-compensation,” said Struckmann.

Almunia is hoping to have the new rules approved by the college of commissioners by the end of the year. But given the continued uncertainties surrounding bank bail-outs, it will probably be the markets, rather than the Commission’s timetable, that dictate when the emergency regime will come to an end.