Recent Developments: From Competition between Member States to Competition between Undertakings

Let us now take a brief look at the recent history of State aid control: what is its core raison d’être after all? Is State aid control mainly about restricting competition between Member States or about preserving competition between undertakings?

It is submitted that, at its origins, the main objective was rather to put limits on the competition between Member States and to prevent subsidy wars between them in order to attract economic activity to their territory. The similarities between State aid and infringements of other Treaty rules addressed to the Member States were underlined. The rules were basic, simple and “legalistic” even if those applying them were mainly economists. In general there was no need for profound economic analysis (an exception was the “market investor principle”). The exceptions foreseen in the Treaty were all “equity based” – in particular regional development – and no reference whatsoever was made to “efficiency” or “market failures”. This is of course an oversimplified view, but gives a general sense of things at the time.

Then the emphasis started to change as from 2000. The Commission began to speak more and more of “competition between undertakings” as the core mission of State aid control, only paying lip service to the other dimension. Furthermore, some techniques began to be imported from antitrust which had just experienced a modernisation. This was encouraged and reinforced by staff movements between both parts of DG COMP.

We witnessed two waves of State aid modernisation, in 2003 and 2005, respectively: “Lesser Amounts of State Aid” and “Less Effects on Trade” (LASA & LET), and “State Aid Action Plan” (SAAP).5 A “refined economic approach” was advocated for State aid too (probably without much thinking about its actual implications).6 _{“Solving a market failure” suddenly became the main reason} to declare compatible State aid and “equity reasons” were discretely downgraded, having implications

5 _{Commission of the European Communities, State Aid Action Plan – Less and Better Targeted State Aid – a Roadmap for} State Aid Reform 2005-2009, Document COM(2005)107 final of 7 June 2005.

6 _{Some of the most illustrative literature following the tendency were the following: J. Derenne and M. Merola (Eds.)} Economic Analysis of State Aid Rules – Contributions and Limits, Proceedings of the Third Annual Conference of the Global Competition Law Centre (GCLC), College of Europe, 21-22 September 2006, Lexxion, Berlin, 2007; D.

Hildebrand and A. Schweinsberh, “Refined Economic Approach in European State Aid Control- Will it Gain Momentum?”, World Competition 30/3 (2007), pp. 449-462; P. Heidhues and R. Nitsche, “Comments on State Aid Reform – Some Implications of an Effects-Based Approach”, European State Aid Law Quarterly 1 (2006), pp. 23-34; L. Hancher, “Towards an Economic Analysis of State Aids”, European State Aid Law Quarterly 3 (2005), p. 425; D. Spector, “The Economic Policy of State Aids: The Assessment Criteria”, Concurrences, n. 2, 2006; P. Crocioni, “Can State Aid Policy Become More Economic Friendly”, World Competition 29/1 (2006), pp. 89-108.

Among the studies it is worth mentioning the report by the Office of Fair Trading of the UK, “Public Subsidies”, November 2004, OFT 750, and the study made for the Directorate general of Economic affairs of the European Commission, Nitsche, R. and Heidhues, P., “Study on methods to analyse the impact of State aid on competition”, February 2006.

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on the kind of aid approved. Efficiency enhancing aid was labelled as “good aid”, implying that equity driven aid was “not so good”.7

The effects of the new approach could be seen in two of the main compatibility fields: regional aid, and research and development and innovation aid (R&D&I).8 Regional aid lost its original glamour, becoming something that was to be more and more limited. Intensities of regional aid were generally reduced and big regional aid projects became subject to an even stricter regime. The only exception was telling: more intensity was allowed for small and medium-sized enterprises in the richer regions of Europe! At the same time, R&D&I became the paradigm of “good aid”. Intensities increased, scope was expanded, incentive effects were easily presumed, and big projects were not penalised.

These changes – justified under the logic of “competition between undertakings” and “efficiency” – had, however, rather perverse implications for the “competition between Member States”. Certain Member States, who had more resources to spend on aid, could now support more R&D&I, while others, who wanted to support regional projects, were unable to do so to the same extent as in the past. The result was more aid granted and in the richer zones of the EU. Calling it “good aid” entirely missed the point; “good aid” may be as distorting of competition as “bad aid”, or even more. So, the Member States with resources and willingness to grant aid preferred that State aid policy focused on competition between undertakings and not so much on competition between Member States.

The above changes were policy choices, perfectly legitimate if the consequences are understood and assumed. The problem was that the changes were, rather, presented as logical consequences of economic science and the implications were not openly discussed or even entirely understood.

Following the SAAP some people started advocating for the “economic approach” to also be applied to the notion of aid, based on the idea of “competition between undertakings”.9 _The Commission realised that this would severely undermine State aid control and tried to apply the brakes.10

Then the crisis arrived, first in the banking sector and then spreading to the rest of the economy. The aid granted to the banks in one year equalled the total aid previously granted to the whole European economy since the origins of the Communities. With aid to banks, State aid control suffered a massive “stress test” that put it on the edge of collapse, with the dimension of competition between Member States emerging as a major issue (see the example of Irish guarantees for deposits). It probably persuaded many Member States of the need to preserve State aid control after all. State aid policy emerged from the crisis alive and even reinforced, but the Commission learned the importance of competition between Member States.

7 _{For a more nuanced discussion of the issues see H.W. Friederiszick, L.H. Röller and V. Verouden, “European State Aid}

Control: An Economic Framework”, in Buccirossi (ed.), Handbook of Antitrust Economics (Cambridge Massachusetts, MIT Press 2008). For a more critical view, see J.L. Buendía Sierra and B. Smulders, “The Limited Role of the ‘Refined Economic Approach’ in Achieving the Objectives of State Aid Control: Time for Some Realism”, in EC State Aid Law:

Liber Amicorum Francisco Santaolalla, Chapter 1 (Alphen aan den Rijn, Kluwer 2008); J.Y. Chérot, “Le plan d´action

de la Commission dans le domaine des aides d´État, Progrès et limites de l´analyse économique dans le contrôle communautaire des aides d´État”, 44 L´Actualité Juridique. Droit Administratif, 24 décembre 2007, p. 2412 ; J.L. Buendía Sierra, “Not Like This: Some Sceptical Remarks on the Refined Economic Approach in State Aid”, in New

Developments in European State Aid Law 2006 – Proceedings of the 4th _{Experts’ Forum held in Brussels on 18 and 19}

May 2006, EStALQ, Lexxion, Berlin, 2006, pp. 59-64.

8 _{This duality is further analysed in J.L. Buendía Sierra & B. Smulders, ibid.}

9 _{S. Martin and C. Strasse, “La politique communautaire des aides d’Etat est-elle une politique de concurrence?”,} Concurrences, n. 3, 2005, p. 52.

10 _{See the interesting reply given to the above article by T. Kleiner and A. Alexis, “Politique des aides d’Etat: Une analyse}

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The very recent “State Aid Modernisation” (SAM, 2014)11 is more pragmatic than its two predecessors and apparently less focused on the economic approach. The main change is a very big expansion of the categories of aid exempted from notification. Again, this may make some sense from the point of view of State aid policy (increasing R&D, environmental investments, etc.) but much less from the point of view of State aid control. The latter is particularly true if we think of competition between Member States. It is indeed obvious that the level of resources that the different Member States may use for State aid is tremendously different, much more so after the crisis. Increasing the theoretical possibilities for all of granting aid without Commission control may actually mean that only some Member States will use such possibilities.

The EC argues that a reduction in the number of notifications would allow DG COMP to concentrate on the “cases most distortive of competition”. It obviously means distortive of “competition between undertakings”. However, even if this proved to be true (it is too soon to judge), it would not at all solve the problem created by SAM to the other form of competition: competition between Member States.

Another problem with SAM is that, while increasing the theoretical emphasis on competition between undertakings, it does absolutely nothing to increase the rights of undertakings in State aid procedures. The paradox is blatant: despite the latest “modernisation”, the undertakings have no real say in a system whose main aim is supposed to be protecting competition between them. Instead, Member States remain the only counterparts of the Commission. It is hard to explain such a contradiction.