State aid inequalities may curb recovery

First published in the Irish Independent on 3 July 2020.

You reap what you sow. What will be the consequences of countries across the EU pumping trillions of euro into businesses because of the Covid Crisis? What are the lessons which we should learn and apply?

The aid injections to business are enormous in scale and scope. On 12 March, the European Commission made its first Covid Crisis State aid decision – to approve aid being paid by Denmark. In the 16 weeks since, the EU and the UK have provided over €2.6tn of State aid to businesses. That number is still growing. Moreover, that aid is in addition to an unquantifiable amount of assistance which does not constitute "State aid" in the technical sense and does not need Commission approval but is still supporting businesses. 

It is useful to put the value of Covid Aid into context. During the Financial Crisis, Ireland's Troika deal was worth €85bn. This now looks like small change. In the Covid Crisis, on one day alone, 21 March, France had a €300bn aid package – more than three times the Irish bail out - approved by the Commission under the State aid laws. And it keeps growing. This Tuesday, another €30bn of French aid was approved under the same laws. We do not know how long the Covid "Fire Brigaid" will have to keep fighting fires across the economy pumping more and more aid into stricken economies.

Europe has had to craft a home-grown Marshall Plan that has been hatched on the hoof and implemented instantaneously. No one is pretending that the money is being spent after years of planning. This is emergency money and much (but not all) of it is genuine "life-support money". While the Financial Crisis aid was given mainly to banks, this aid is destined for almost every sector. A huge proportion of the aid is much needed and well-spent.  But we need to understand both the background to, and the lessons from, this unprecedented priming of the economy. 

The background is straightforward.

State aid involves assistance given by an EU State or, until the end of this year, the UK. The assistance must involve the use of State resources as well as the supporting of selected beneficiaries in a way which distorts competition and affects trade between EU States.

If an EU State or the UK wants to give State aid then the country must first notify the Commission. The country must then await the Commission's approval otherwise the aid may not be given. Until the current crisis, the Commission usually took months or even years to approve aid. Now it is days at most.

Historically, the Commission is normally cautious about approving aid. The EU institution knows that some aids can be harmful to society and the economy. The Commission often objects to aid because it can stifle and distort competition, lead to subsidy races between countries and can mask inefficiency. Commission decisions can therefore be overturned by the European Court where the Commission's decision-making is defective.

Since March, the Commission has eased the State aid rules to deal with the Covid Crisis. It has not abolished the rules – they are enshrined in the treaties and the Commission cannot get rid of these laws which have survived more than sixty years. But the Commission has relaxed the rules in the context of Covid in four phases: adopting a so-called "Temporary Framework" on 19 March and then adopting three amendments (the most recent on Monday).

So far, the Commission has adopted over 182 Covid State aid decisions covering at least 227 measures.  There are so many decisions that the Commission has been publishing a daily tally and update. The figures are staggering. €6bn to Lufthansa. €7bn to Air France. The UK got approval for an "umbrella" fund of €50bn – an umbrella fund is shorthand for a sort of blank cheque which is approved now but with the payees and purposes being decided later.

Ireland has secured Commission approval for four aid schemes amounting to €850m. This is apart from assistance which did not constitute "State aid" (for example, so called "general measures") in the technical sense.

As a proportion of their GDPs, Germany, the Czech Republic, Italy and France have been given the highest amount of aid. Cyprus, Holland, Latvia and Ireland are at the other end.

Oxera, the economists, believe that the German aid amounts to 45% of German GDP but Irish aid amounts to less than 1% of the Irish GDP. This is not a criticism of Ireland but the lessons need to be understood.

It is time to turn from the background to those lessons.

The lessons are clear. And the consequences of ignoring them are stark.

First, as different States have given different levels of aid to their businesses, we have to avoid an uneven recovery across the EU and the UK.

The value of the Covid Aid given by some countries is clearly enormous. And so too is its breadth. The Financial Crisis mainly affected banks with a knock-on effect on the economy generally. The Covid Crisis affects the whole of the economy with a potential knock-out effect on the whole of the economy. Covid aid has therefore been spread across the economy with the Commission's decisions under EU State aid law reflecting that reality.

Unless remedial action is taken by the EU and its Member States, there will be an uneven recovery across the EU. This is because some countries have deployed steroid aid while others (like Ireland) have used less State aid. 

This risk of an uneven recovery was identified by the likes of the Cypriot Finance Minister and the OECD's Chief Economist. Most importantly, EU Competition Commissioner Vestager has recently identified it too. It is now time to do something about it.

From Ireland's perspective, the remedial action is not for Ireland to pump in excessive State aid.  Ireland could not compete with aid worth 45% of Germany's GDP. 

Instead, Ireland should urge the Commission and the Member States to use the EU's new Covid funds (for example, the €2.4tn Recovery Plan) to equalise the impact of the uneven aid.  Otherwise, there will be an uneven recovery. Smoothening out the recovery will help, for example, German exporters by enabling Irish consumers to buy German goods but it is equally important that Irish exporters can compete in the EU's internal market.No one should be left behind. Put simply, the State aid curve needs to be flattened.

Secondly, due to the Brexit Transition agreement, aid granted by the UK is still supervised by the Commission until the end of 2020 despite the UK having left the bloc on 31 January. If the UK is no longer subject to EU State aid law post-2020 then the UK could pump enormous amounts of aid into its economy (including Northern Ireland). The Covid Crisis proves that it is critical for those remaining EU States to have a "level playing field" otherwise there would be a serious distortion from a neighbour pumping and priming its economy.

Thirdly, many businesses have had a "sugar rush" of enormous amounts of State aid. Experience shows that many aid recipients become less efficient. There is now a heightened risk that European businesses could become less competitive as a result. The EU must adopt a programme to ensure competitiveness and to facilitate the process of businesses weaning off this aid.

Finally, the Commission moved very quickly to approve proposed State aid proposals almost as soon as they were notified. In an ideal world, the Commission would have waited and made a holistic assessment of all the proposed aid packages. But the Commission could not have sat idly by waiting to see all of the proposed measures "in the round". As the Member States are usually prohibited from giving aid until the Commission gives its approval, Europe would have been devastated while the Commission pondered its approach. 

As a result, the Commission made these decisions at great speed. The Commission cleared billions of aid in days. Some of that aid will now be challenged in the European Court and reviewed by national parliaments. Businesses which have received aid need to be careful because if the aid is struck down then the businesses usually have to repay that aid with interest to the governments which gave it. Equally, businesses which have suffered because their competitors - wherever in the world – have received aid should consider whether they could challenge the aid before the European Court.

No one should blame the Commission for approving the aid quickly – like the fire brigade, it has to fight the fires – but decisions made in wartime will be reviewed in peacetime and some of those decisions might not withstand scrutiny. So if a business receives aid now, it could have to repay it later.

In the meantime, we have to ensure that there is a flattening of the unequal curve of State aid across the EU otherwise economic recovery will be delayed by the unintended consequences of a relaxation of the usual tough regime.  The rules on State aid law were tough rules for many decades and for a reason. We hope the relaxation does not have adverse consequences.

For more information on this topic please contact Dr Vincent Power, Partner or any member of A&L Goodbody's EU, Competition & Procurement team.

Date published: 6 July 2020