Expert Opinion: State aid in response to COVID-19 and implications for competition
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Read the Expert Opinion written by Urs Haegler, Senior Vice President, Compass Lexecon and Georges Siotis, Consultant, Compass Lexecon and Associate Professor, Universidad Carlos III de Madrid.
With the adoption of the initial Temporary Framework on 19 March, the European Commission (“EC”) enabled Member States to take swift action to mitigate the economic fallout, by applying state aid rules flexibly and approving notified aid measures at record speed. The EC has so far approved more than €2.5 trillion across around 200 national aid schemes, mainly under the Temporary Framework, which since its adoption has been amended three times. In setting up the Temporary Framework and widely approving the notified aid measures, the EC has made extensive use of the room for manoeuvre that the rules afford it in the specific context of the COVID-19 crisis.
As State aid linked to COVID-19 becomes more targeted, what will be the most controversial issues of debate?
The initial State aid Temporary Framework allowed Member States to adopt general support measures, applicable across economic sectors. It has been amended three times to date, with the first amendment widening the scope of general aid to tax and social security deferrals, wage subsidies, support of R&D activities, and production of goods and services directly related to the mitigation of the pandemic. General support measures have accounted for about 95 percent of the volumes of State aid granted so far.
The second amendment to the Temporary Framework enables Member States to provide aid in the form of recapitalizations and subordinated debt to companies with urgent liquidity needs. These kinds of support measures are generally considered to pose a greater threat to competition and, although safeguards have been put in place to try to protect the level playing field, some measures have already attracted intense controversy. The most prominent example so far is the Lufthansa bailout approved by the EC, which signaled a shift toward sizeable interventions targeted more specifically at individual, predominantly large companies.
What role does conditionality play?
The generosity of some of the schemes created by certain Member States has raised questions as to whether there is a need for conditionality. The EC is constrained in the extent to which it can attach conditions. For example, Article 107(2)(b) TFEU allows for compensation of damages caused by a natural disaster or an exceptional occurrence. Although in principle the 107(2)(b) route lends itself well to compensate for damages suffered by sectors that have been particularly hard hit, there have so far only been about 15 cases of this type. The Member States, on the other hand, can impose conditions more freely with a view to creating incentives to pursue wider political objectives, particularly in relation to digitalization and future technologies (e.g., in Germany’s economic recovery program) as well as environmental sustainability.
What are the parallels with State aid and other government support granted in the wake of the financial crisis? What are the main differences?
The European Commission adopted the initial Temporary Framework on 19 March, only a few days after the introduction of lockdown measures in many EU countries. The EC was clearly able to leverage the knowledge and experience it had gathered during the financial crisis in 2008 and 2009 when it took almost a month following the collapse of Lehman Brothers for the EC to issue its first communication on the application of State aid rules to measures taken in relation to the global market turmoil. The 2020 Temporary Framework includes all the instruments of its predecessor, except for specific provisions for risk capital and green products. The main difference is that the level of allowed support is more generous. Grants of €800k are allowed and, more importantly, the applicable margin on guarantees or loans is not conditioned by the recipients’ credit rating.
Do the recent State aid measures undermine the level playing field across Member States?
Some observers have expressed concern about the potential of significant distortions to the internal market caused by the asymmetric national responses to the COVID-19 outbreak. The fiscal headroom available differs significantly across Member States, potentially allowing some Member States to provide generous support to keep a large swath of their economy afloat, while in other jurisdictions fiscal constraints only allow for limited use of the flexibility offered by the Temporary Framework. In addition, the possibility of offering non-selective support (e.g., furlough schemes) could exacerbate this tension.
What is the role of economic analysis in evaluating State aid cases?
High-quality economic analysis is essential to reliably assess the cost and benefits of State aid, compliance with State aid rules, and the potential distortionary effects on competition in the marketplace.
Economists can assess each of the relevant conditions set out in the State aid guidelines for the type of aid at issue and produce quantitative and qualitative analyses that provide robust evidence to advance a case, either on behalf of aid recipients or government bodies. Economists will advise on case strategy and prepare economic submissions to authorities and expert reports to assess whether the support is compatible with European Commission State aid rules. Find out more