State aid rules in pandemic times: Flexing or bending?

At the sound of pandemic sirens, Margrethe Vestager, EU Competition Commissioner, launched on 19 March the State aid Temporary Framework¹  and laid out with Scandinavian linearity the Commission’s views:

“The economic impact of the COVID-19 outbreak is severe. We need to act fast to manage the impact as much as we can. And we need to act in a coordinated manner. This new Temporary Framework enables Member States to use the full flexibility foreseen under State aid rules to support the economy at this difficult time.”

As of 27 August, a staggering amount of EUR1.358 billion in State aid measures to be granted by Member States across the EU to tackle the economic impact of the coronavirus outbreak had been approved by the Commission.

The (extended) Temporary Framework

The main thrust of the package vetted by the Commission has been approved under the Temporary Framework, which was designed to cover aid granted ‘to remedy a serious disturbance in the economy of a Member State².

The initial version focussed on:

• direct grants, selective tax advantages and advance payments;
• State guarantees for loans taken by companies from banks;
• subsidised public loans to companies;
• safeguards for banks that channel State aid to the real economy;
• short-term export credit insurance.

On 3 April, the Commission amended the Temporary Framework³ such as to cover:

• coronavirus-related research and development;
• construction and upscaling of coronavirus-related testing facilities;
• production of products relevant to tackle the coronavirus outbreak;
• deferral of tax payments and/or suspensions of social security contributions in those sectors, regions or for types of companies that are hit the hardest by the outbreak;
• wage subsidies for employees of those companies in sectors or regions that have suffered most from the coronavirus outbreak and would otherwise have had to lay off personnel.

On 8 May, the Commission expanded the Temporary Framework⁴ to enable targeted public interventions in the form of recapitalisation and subordinated debt measures to non-financial companies, focussing on:

• conditions on the necessity, appropriateness and size of intervention;
• conditions on the State's entry in the capital of companies and remuneration;
• conditions regarding the exit of the State from the capital of the companies concerned;
• conditions regarding governance;
• prohibition of cross-subsidisation and acquisition bans.

Finally, on 29 June, the Commission extended the Temporary Framework⁵ to enable Member States to provide public support to micro and small companies, even if they were already in financial difficulty on 31 December 2019.

The Commission also adapted the conditions for recapitalisation measures for those cases where private investors contribute to the capital increase of companies, irrespective of size, together with the State. The aim is to encourage capital injections with significant private participation in companies, limiting the need for State aid and the risk of competition distortions, in particular, if the State decides to grant recapitalisation aid but private investors contribute to the capital increase in a significant manner (at least 30% of the new equity injected) at the same conditions as the State.

Under those circumstances, conditionality for approval by the Commission is significantly reduced, namely in terms of acquisitions and dividend bans, remuneration caps for the management and State’s exit.

As of 27 August, the Commission had approved EUR1.264 billion of State aid measures to be granted under the Temporary Framework⁶.

Exceptional occurrences

The Commission also approved “aid to make good the damage caused by natural disasters and exceptional occurrences”⁷.

The Commission considered that the COVID-19 outbreak qualifies as an “exceptional occurrence”, as it is an extraordinary, unforeseeable event having a significant economic impact. As a result, exceptional interventions by the Member States to compensate for the damages directly linked to the outbreak are deemed justified.

The “exceptional occurrence” argument was used by fewer Member States than the “serious disturbance in the economy” defence in their notifications to the Commission. The likely reason is the heavier burden of proof linked to the need to evidence the damages and show the direct causal link to the coronavirus outbreak. Not that such proof is under the current circumstances impossibly cumbersome, but it requires additional fact-finding work in less obvious cases and thus, more time. As swiftness is a must in the ongoing salvage exercise, more Member States opted for the “serious disturbance in the economy” grounds.

As of 27 August, the Commission had approved EUR28 billion of State aid measures to compensate for damages caused by “exceptional occurrences”.

Rescue and restructuring aid

The Temporary Framework (as much as the “exceptional occurrences” grounds) does not apply to “undertakings in difficulty”, i.e. companies which are almost certainly condemned to going out of business in the short or medium term without intervention by the State, either because most of its share capital has vanished as result of accumulated losses, or it is subject to insolvency proceedings or its debt to equity ratio is fragile. In these cases, Article 107(3)(c) of the Treaty and the “rescue and restructuring rules”⁸ apply, rendering the undertaking at stake subject to a restructuring exercise.

As of 27 August, only two cases (TAP Air Portugal and SATA) had been approved by the Commission under these rules (EUR 1.3 billion).

Sectors

In addition to horizontal schemes or measures aimed at supporting the economy at large, Member States have notified a number of sector or category-specific measures. As of 27 August, these are the most significant sectors and categories having received the Commission’s approval for governmental support:

Table 1

*Schemes aimed at the overall support of the economy are not included.
**Air transport is not included.

Source: European Commission, Coronavirus Outbreak - List of Member State Measures approved under Articles 107(2)b, 107(3)b and 107(3)c TFEU and under the State Aid Temporary Framework, updated as of 27 August 2020.

Table 2

* This is not an exhaustive list of beneficiaries.
**Out of which EUR2.3 billion for “companies and self-employed”.

Source: European Commission, Coronavirus Outbreak - List of Member State Measures approved under Articles 107(2)b, 107(3)b and 107(3)c TFEU and under the State Aid Temporary Framework, updated as of 27 August 2020.

In terms of sectors, unsurprisingly the amount allocated to air transport stands out in comparison with other activities, given the almost total freeze that was imposed on air traffic and the sheer cost of entire fleets stranded on the ground.

In terms of categories of beneficiaries, the amount allocated to self-employed people might appear slightly more surprising, although the absence of furlough schemes for the self-employed provides a likely justification.

Déjà vu, or maybe not

The Commission has been widely praised for the swiftness in handling the requests from national governments. The pace at which notifications have been dealt with (in some cases the green light has been given in 24 hours) reminds of the fractional tempo used by the “task forces for the financial crisis” set up by DG Competition during the 2008 financial and economic crisis.

In fact, this is the second time in ten years that this scale of public intervention in the economy under the form of State aid occurs in the EU. Fortunately, as opposed to the 2008 crisis, this time around there is no systemic risk at stake in the financial sector and no link between undertakings (or rather, banks) in difficulties and sovereign countries threatens to drown the solvency of both. That’s that as to the good news, thou.

The COVID-19 outbreak has directly hit the real economy, causing both supply and demand to collapse at the same time. On the other hand, the epidemiological situation remains, the disease is still active and until an effective vaccine exists, containment measures will continue to be necessary across Europe. As such, industries will continue to be severely affected by the decrease in consumption, as it is expected that consumers’ behaviour continues to adjust to the containment measures and to their fear of the disease.

The expectation is therefore that the injection of public money in the economy will continue for some time to come. Differently from what was the case during the 2008 crisis, the coronavirus outbreak is a symmetric occurrence for all EU economies and moral hazard does therefore not play a role in the competition assessment carried out by the Commission. This will certainly facilitate the continued approval of further State aid.

Flex or bend?

The Commission’s resolute approach in flexing State aid rules to mitigate the impact of the coronavirus outbreak has not won unanimous praise.

Some Member States burdened with heavier financial constraints growled at the apparent ease with which the Commission approved across-the-board support schemes for companies established in financially more powerful Member States. According to the disgruntled countries, seemingly bottomless aid betrays the goal of an Internal Market free of competition distortions induced by protectionist measures of national governments, the very reason State aid rules were created in the first place.

On the other hand, some companies have expressed dissatisfaction at the imbalance brought about by State aid grants in markets where private and State-owned enterprises compete neck-to-neck. Low-cost airline Ryanair has probably been the most vocal of the protesters and has so far announced legal challenges against the decisions by the Commission approving aid to Finnair, Lufthansa, SAS, TAP, and as well as against the decisions approving a French tax deferral scheme for airlines with a French-issued license and a Swedish loan-guarantee program for airlines with a Swedish-issued license.

It is now up to the Court of Justice in Luxembourg to decide whether the Commission has flexed or bent EU State aid rules. Stay tuned.

¹ Temporary Framework to support the economy in the context of the coronavirus outbreak, OJ C 91I, 20.3.2020, p. 1–9.
² Article 107(3)(b) of the Treaty on the Functioning of the European Union (“Treaty”).
³ First Amendment to the Temporary Framework to support the economy in the context of the coronavirus outbreak, OJ C 112I, 4.4.2020, p. 1–9.
⁴ Second amendment to the Temporary Framework to support the economy in the context of the coronavirus outbreak, OJ C 164, 13.5.2020, p. 3–15.
⁵ Third amendment to the Temporary Framework to support the economy in the context of the coronavirus outbreak.
⁶ The Commission approved an additional amount of EUR64 billion of aid technically outside the Temporary Framework but still under Article 107(3)(b) of the Treaty, the same provision on which the Temporary Framework is grounded.
⁷ Article 107(2)(b) of the Treaty.
⁸ Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.07.2014, p. 1–28.