II) The effect on trade between Member States
2.6 THE FINANCIAL CRISIS OF 2008 AND ITS INFLUENCE ON
Up until 2008, the Union’s main priority was to implement the objectives of the State Aid Action Plan for less and better targeted state aid.
189
Commission Staff working paper ‘Common principles for an economic assessment of the compatibility of State Aid under Article 87.3’ box 1 page 5,
<http://ec.europa.eu/competition/state_aid/reform/economic_assessment_en.pdf> accessed on 27-1-2011.
190 State Aid action Plan: Less and better targeted State Aid: a roadmap for State Aid
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However, the occurrence of the financial crisis inevitably affected the Union’s objective. The Commission issued Communications in 2008 and 2009 where it states that it considers that Article 107(3)(b) TFEU is available as a legal basis for aid measures to address the crisis.191 Aid for firms in difficulty was usually assessed under Article 107(3)(c) TFEU, and according to the Rescue and Restructuring Guidelines in the past (henceforward R&R Guidelines).192 However, Article 107(3)(b) TFEU has also been used in the past, even though quite scarcely. Article 107(3)(b) TFEU, then Article 92(3)(b) TEC, was eligible as a legal basis to assess measures taken by Member States to battle the recession caused by the 1973 oil crisis.193
The choice of 107 (3)(b) TFEU as a legal basis has been criticised because the Commission decided to justify its decision to adopt it after it characterised the crisis as systemic, which means that it affected the whole of the economy. However, some believe that there is no real justification for the choice of 107 (3)(b) TFEU as a legal basis.194 Furthermore, it was rejected as a legal basis in the beginning of the crisis when the Commission was called to assess the measures taken in the Northern Rock case.195 In those various Communications adopted during the crisis there is no
191
Communication on the application of State Aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis, [2008] OJ C270/8 para 9. This Communication was replaced by Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis ("Banking Communication") [2013] OJ C216/01, which is currently in force.
192
Case T-349/03 Corsica Ferries France v Commission [2005] ECR II-2197 para 183;
Northern Rock (Case C14/2008) Commission Decision of 7/5/2009 [2010] OJ L112/38. 193 Commission, Vth report on competition policy April 1976 para 133.
194
Rose M. D’ Sa, ‘Instant State Aid law in the financial crisis – a u-turn?’ (2009) EStAl 2, 139, 142.
195 Christopher Vajda QC, ‘The banking crisis and the EC State Aid rules’ (2009) 2 JIBFL 67,
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explanation of the term systemic and how it is viewed by the Commission: the question is whether the term ‘systemic’ refers to the banking sector alone, or the economy as a whole. If the crisis only affected one sector, Article 107(3)(c) TFEU would have been more applicable as a basis.
In the early stage of the current crisis, some European banks were affected by the spill over effects of the crisis in the US market and European Member States took ad hoc measures under Article 107(3)(c) TFEU and the R&R Guidelines, such as the ones in the Northern Rock,196 or the Bradford and Bingley197 and Hypo Real Estate198 cases. However, even though the present crisis started from failing financial institutions, it soon became ‘systemic’199
and the disturbance affected the whole of the economy of Member States, and the credit squeeze caused credit blocking, a drop in demand and recession.200 This led to the relaxation of state aid rules, with the adoption of new soft law instruments by the Commission in 2008- 2009, which have been updated thrice since.201 A Communication202 that was
196
Northern Rock (Case NN70/2007) Commission Decision of 5.12.2007 [2008] OJ C43/01.
197
Rescue aid to Bradford & Bingley (Case NN41/2008) Commission Decision of 1.10.2008 [2008] OJ C290/01.
198 Rescue aid to Hypo Real Estate (Case NN44/2008) Commission Decision 2.10.2008
[2008] OJ C293/01.
199
State Aid Scoreboard - Spring 2009 Update, COM(2009) 164, 8 .
200 Communication on the temporary Community Framework for State Aid measures to
support access to finance in the current financial and economic crisis [2009] OJ C16/01 para 1.1.
201 Temporary crisis rules currently in force are: 1) Communication from the Commission
on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis ("Banking Communication") [2013] OJ C216/01, which replaced the Communication on the application of State Aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis, [2008] OJ C270/8
2) Communication on the temporary Community Framework for State Aid measures to support access to finance in the current financial and economic crisis [2009] OJ C16/01 3) Communication on the recapitalisation of financial institutions in the current financial crisis [2009] OJ C10/2.
4) Communication on the treatment of impaired assets in the Community banking sector [2009] OJ C72/01.
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adopted in 2011 keeps in force the four Communications of 2008 – 2009, which set the conditions for the compatibility of guarantees, recapitalisation and asset relief with the Treaty rules on state aid, as well as the requirements for a restructuring or viability plan (the Restructuring Communication).203 The Commission’s Communications are non-binding soft law instruments; however, they are a guide to the Commission’s methodology and would certainly be taken into consideration by the Court.204
This brief analysis designates that the financial crisis was seen by the Commission as a systemic risk to the whole of the economy that could be avoided by state aid measures. This brings back the conflict between protectionism and liberalism in market regulation. During the crisis there is more protectionism and more regulation. However, each Member State’s financial system is nationally regulated, even though all are interconnected. General guidelines from the supranational authority might be useful to prevent a subsidy race between Member States to save their own financial institutions, but there are various types of measures available,205 and each Member State should be able to address the crisis with the measures and the intensity of aid that would be more suitable to each situation.206
202 Communication from the Commission on the application, from 1 January 2012 , of
State aid rules to support measures in favour of banks in the context of the financial crisis [2011] OJ C 356/7.
203 Commission communication on the return to viability and the assessment of
restructuring measures in the financial sector in the current crisis under the State aid rules [2009] OJ C 195/9
204
Mara Hellstern and Christian Koenig, ‘The European Commission's decision-making on state aid for financial institutions - good regulation in the absence of good governance?’ [2013] 34(4) ECLR 207, 208.
205 Those State Aid measures proposed by the Union in the Commission’s Communications
are capital injections, the guarantees and the asset relief measures.
206
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Finally, it should be mentioned that other types of competition policy instruments such as mergers have not been used enough.207 Mergers between financial institutions might be adequate measures to address the crisis. There was no need to alter the rules on mergers because they ‘proved well equipped to withstand the crisis.’208 Instead of injecting public money to failing banks, those that had sound economic figures could take over those that would be obligated to exit the market, due to their own bad management of risk related issues. Of course, this solution is only viable under the condition that there were sound banks, and that not all of them were affected by the crisis.
The results of the new crisis framework are contrary to the reform of the implementation of state aid envisaged in the SAAP, in which the Commission declared that its objective is to modernise state aid rules based on a ‘refined economic approach’ and ‘less and better targeted state aid’. 209
First of all, large amounts of state aid have been directed in one sector alone (the banking sector), completely disregarding previous objectives.210
Also in the SAAP, the Commission reaffirmed the need ‘to balance the positive impact of the aid measure against its potentially negative side effects’211
in its assessment of the compatibility with the internal market. In Commission decisions that have been taken under the new rules, the
207
There was the acquisition of HBOS from Lloyds in the UK, and the merger of
Commerzbank and Dresdner in Germany, BNP Paribas with Fortis in France and Anglo Irish with Irish Nationwide Building Society in Ireland.
208
Neelie Kroes, ‘Competition policy and the crisis – the Commission’s approach to banking and beyond’ (2010) 1 Competition Policy Newsletter 3, 6.
209
State Aid action Plan: Less and better targeted State Aid: a roadmap for State Aid reform 2005-2009, COM(2005) 107 final, para 18.
210
D’Sa R, ‘Instant State Aid law in a financial crisis- A U-turn?, (2009) 2 EStAL Quarterly 139 143.
211 State Aid action Plan: Less and better targeted State Aid: a roadmap for State Aid
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balancing test was practically absent. This is the result of the new faster procedure, which might help to clear a measure faster, but fails in the transparency condition.
Furthermore, no competitors were able, so far, to raise their objections in the pre-adoption of the measure stage,212 and how could they be informed and prepared, when a measure is to be cleared in 24 hours. As for the refined economic approach envisaged in the SAAP, it was also limited, justified by the urgency of the situation. In a typically approved recapitalisation scheme, for example, any economic justification of the measure is lacking; instead it was said that:
‘The Commission found the scheme and the commitments to constitute an appropriate means to restore confidence in the creditworthiness of Italian financial institutions and to stimulate lending to the real economy. The measures are well-designed and interventions will be limited to what is necessary to achieve the stabilisation of the Italian financial sector’.213
Finally, one last major concern is the ability of the state aid control mechanism and the market to return to the pre-crisis regime; if however, this return will be desired in the future, once the crisis is over. When the new crisis framework was adopted, the new rules would only be applicable until 31 December 2010. The Commission though, has prolonged the implementation of the crisis framework until the end of 2011, with some
212
P Werner-M Maier, ‘Procedure in crisis? Overview and assessment of the Commission’s State Aid procedure during the crisis’, (2009) 2 EStAL 177, 183.
213
Press release for Italian recapitalization scheme for financial institutions (Case N648/2008) [2009] OJ C88/52 available at
<http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/2059 > accessed on 8 November 2009.
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stricter conditions,214 and again prolonged beyond the end of 2011, without setting a new end of date.215 This ongoing state support to the banks contradicts what the Commission was expecting or hoping in the early stages of the crisis: in 2009 Commissioner for Competition Kroes had declared that ‘there can’t be a second bail out. [...] there is no money left for a second bailout’.216
The Commission also hopes to set more permanent rules for assessing state aid to financial institutions under the legal basis of Article 107(3)c TFEU ‘as soon as market conditions permit’,217 which seems more than a hope than a reality at this point.
The Banking Crisis has largely reached the stage where more cases and more importance is being given to the restructuring of financial institutions that receive state aid. The new Banking Communication218 adopts the principle that recapitalisations and impaired asset measures will only be authorised if the restructuring plan is accepted in advance.219 Also, the Banking Communication increases the minimum requirements for burden-sharing.220 This is required in current sovereign debt conditions because it minimises public intervention. According to the new rules, banks that seek state aid should try to raise capital from the market first and ask
214 Aided banks after June 2010 for example have to pay larger remuneration. 215
Communication from the Commission on the application, from 1 January 2012, of state aid rules to support measures in favour of banks in the context of the financial crisis. [2011] OJ C-356/ 02.
216
Commissioner N Kroes, ‘Did government interventions help in the crisis?’, Address at International Banking Conference of British Bankers Association, London 30 June 2009, Speech/09/324
217
Communication from the Commission on the application, from 1 January 2012, of state aid rules to support measures in favour of banks in the context of the financial crisis. [2011] OJ C-356/ 02 para 4.
218 Communication from the Commission on the application, from 1 August 2013, of State
aid rules to support measures in favour of banks in the context of the financial crisis ("Banking Communication") [2013] OJ C216/01
219 Ibid para 23. 220
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contribution from their shareholders, and junior debt creditors.221 In Anglo Irish Bank222 the Commission authorised the restructuring plan, which involved the complete closing of operations, because it ensures that the Bank shares the burden of its rescue. However, it is noted in the Commission Decision that the ‘value of assets (to be contributed) is so depreciated that the proceeds of their sale is dwarfed by the capital injected into both banks.’223 To make things even worse, the Commission admits that for the burden-sharing by stockholders the Bank was already completely nationalised and private stockholders were ‘wiped-out’.224
This is an extreme case, which shows that the crisis rules certainly contain all the necessary conditions to secure the public, involvement, losses, though, for the tax payer will be inevitable in some cases.
The first case in the context of the crisis state aid framework to reach the Court of the EU is ING.225 The case involved aid that the Netherlands granted to ING in 2008, which was declared compatible by the Commission under the conditions of a restructuring plan. 226 Part of the Commission’s Decision on the restructuring plan referred to the amendment of conditions for the repayment of the initial capital injection of 2008 as being additional state aid. The Netherlands challenged the Commission Decision claiming that repayment conditions were in conformity with the MEIP227 and thus not
221
Ibid.
222 Anglo Irish Bank and Irish Nationwide Building Society (Case SA.32504 (2011/N) and C
11/10 (ex N 667/09) Commission Decision of 29 June 2011 [2012] OJ L139/18
223
Ibid para 162.
224
Ibid para 165.
225 Case T-29/10 and T-33/10 Netherlands and ING Groep NV v Commission [2012] ECR 00
(NYR)
226 ING's Illiquid Assets Back Facility and Restructuring Plan (Case C10/09 (ex N138/09)
Commission Decision 2010/608/EC of 18 November 2009 [2010] L 274/139
227
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state aid. The General Court held that the Commission failed to apply the MEIP. The General Court’s judgment is interesting because it engages in a ‘comprehensive review’ of the economic assessments of the Commission, even though it did recall that the judicial review of cases where there is technical or complex228 economic assessments is limited.229 The Commission appealed the General Court’s judgment on the grounds ‘that there is no requirement in law to apply the market economy investor principle in relation to an amendment of repayment conditions for a measure that itself constituted State aid.’230 The impact of the judgment of the Court judging under appeal, concerning the application of the MEIP231 in similar cases, when delivered, could have an impact on the way Member States analyse state aid measures before notifying them; they might be required to perform detailed economic assessments, such as the ones that the Commission might be obliged to perform even when there are amendments of aid measures.232
2.7 STATE AID TO FINANCIAL INSTITUTIONS AND OTHER