Symposium: State Aid in Times of Crisis

SYMPOSIUM

StateAid in Times of Crisis

Edited by: Lena Hornkohl and David Pérez de Lamo

State Aid in Times of Crises

Edited by Lena Hornkohl and David Pérez de Lamo

1. State Aid’s Stress Test

Alfonso Lamadrid de Pablo

2. From Persona Non Grata To De Facto EU Resolution Authority: e European Commission and State Aid to Banks during the Financial Crisis

Sven Frisch

3. State Aid Legal Bases and the Temporary Framework During the COVID-19 Crisis

Juan Jorge Piernas López and Michelle Cini

4. Should Member States Respond to Crises with Individual Aid Measures?

Phedon Nicolaides

5.What Kind of Competition Does EU State Aid Law Protect? A Tale of Two Crises

Antonios Bouchagiar

6.Public support during the pandemic: evaluation on the use of State aid control between the Temporary Framework and the Recovery and Resilience Facility

Irene Agnolucci

7. Bend it until it breaks: Flexibility of Temporary Crisis Framework in the context of the Russian Invasion of Ukraine

Dzhuliia Lypalo

8. Race to the very boom? – e EU response to Foreign Crisis Subsidies

Lena Hornkohl

9. e ‘Green Deal Industrial Plan’ as an interplay between crisis regulation and existing State aid rules

Christopher Montgomery Vollert

10. Sustainability, climate protection and the State aid practice in times of crisis: a chimera?

Maria Segura

State Aid in Times of Crises

Edited by Lena Hornkohl and David Pérez de Lamo

Crises used to happen every several decades; one at a time. Now they have become the ‘ new normal’ and an indenite state of affairs. Just as one crisis ends, another one begins, or even several co-exist, which has resultedina ‘permacrisis’.

ese crises pose fundamental challenges to the EU and its Member States, from a social and economic perspective,whichthemselvesraiseimportantpolicyandlegalquestions.

In this turbulent context, State nancial support has arguably emerged as one of the main policy instruments to combat crises Unlike other regions affected by crises, EU Member States are required to adhere to EU State aid rules when implementing such measures in order to maintain the level playing eld in the EU internal market. However, the EU State aid regime does not turn a blind eye to crisis support, quite to the contrary. State aid has been at the forefront of the Commission’s and the Member States’ efforts to combat the effects of: (i) the 2008 nancial crisis; (ii) the COVID-19 crisis; (iii) the Russian invasion of Ukraine and the ensuing energy crisis; (iv) the looming sustainability crisis; and (v) the geopolitical crisis arising from increasing international competition and its clash with the EU’s industrial and internal market policies. As a result, State aid law has been stretched to the limit and put to a ‘stress test’ that challenges its very raison d’être (seeA.Lamadrid,EULL2023,“ ”). StateAid’sStressTest

To begin with, these crises have evidenced an apparent tension in State aid between the pursuit of legitimate national public interests and the preservation of the EU internal market and the level playing eld. In this regard, some authors raise the question whether Member States should address crises with individual aid measures at all (see P. Nicolaides, EULL 2023, “Should Member States Respond to Crises with Individual Aid Measures?”), or should otherwise adopt wider-ranging aid measures based on the principle of nondiscrimination on grounds of nationality and a ‘balancing test’ that accounts for the effects of State aid on trade and competition within an EU context (see J. J. Piernas and M. Cini, EULL 2023, “State Aid Legal Bases and the Temporary Framework During the COVID-19 Crisis”). Other authors, however, counterargue that Member States retaindiscretion over the initiative to grant aid and, therefore, that the Commission is not in a position to require that Member States’ aid measures take a specic form (see A. Bouchagiar, EULL 2023, “ ”).

WhatKindofCompetitionDoesEUStateAidLawProtect?ATaleofTwoCrises

1. Lena Hornkohl is a Tenure Track Professor for European law at the University of Vienna and a postdoctoral researcher (Habilitandin) at Heidelberg University

2. David Pérez de Lamo is an Associate at an international law rm in Brussels He holds an LL M. in EU Law and Economic Analysis from the College ofEurope(Bruges)andhaspublishedaseriesofcontributionsinEUcompetition andconstitutionallaw

Be that as it may, at least there seems to be an emerging consensus in support of devising EU-wide measures to ensure a harmonious and efficient response to future crises, and to minimise their negative effects on the internal market and the level playing eld, particularly those arising from the disparity in scal capacity between Member States and the fragmentary character of State aid. Building on this consensus and on previous calls for unied policy action (see e.g., A. Lamadrid and J. L. Buendía, Chillin’ Competition 2020, “A Moment of Truth for the EU: A Proposal for a State Aid Solidarity Fund”), the Commission now reportedly plans to set up a ‘collective European Fund’ intending to help EU businesses in a ‘fair and equal way’ (see I. Agnolucci, EULL 2023, “Public Support during the Pandemic: Evaluation on the Use of State Aid Control Between the Temporary Framework and the Recovery and Resilience Facility”). Tracesof this renewed ‘ proEuropean rationale’ can also be glimpsed in the current Next Generation EU package and the Recovery and ResilienceFacilityRegulation(seeI.Agnoluccisupra).

ese crises have also tested the Commission’s institutional limits and raised further questions as to what its role should be when addressing crises, as well as the degree of stringency of its compatibility review of State aid measures. Following the fallout of the 2008 nancial crisis, and absent a comprehensive EU bank supervision and resolution framework, the Commission applied State aid rules, in a pragmatic and exible way, to further nancial stability goals and gradually became the de facto resolution authority (see S. Frisch, EULL 2023, “From Persona Non Grata To De Facto EU Resolution Authority: e European Commission and State Aid to Banks during the Financial Crisis”). Moreover, while the Commission’s compatibility review, during the nancial crisis, became stricter as time went on, during the COVID-19 crisis, the Commission’s approach became ever more exible (see S. Frisch supra; see also J. Piernas and M. Cini supra). e Commission appears to follow the same increasingly exible approach in its Temporary Crisis Framework concerning the Russian invasion of Ukraine, and took it even further by repurposing the Framework as a dual objectivetoolinordertoachievelonger-termgreentransitiongoalsandbyprovidingadditionalincentivesto respond to the international subsidy race propelled by the US Ination Reduction Act (see D Lypalo, EULL 2023, “Bend it until it breaks: Flexibility of Temporary Crisis Framework in the context of the Russian Invasion of Ukraine”). While some authors argue that the difference of stringency in the Commission’s compatibility review may be justied due to underlying policy reasons and the different degree of ‘fault’ of the sectors concerned in provoking or fuelling the respective crises (see A. Bouchagiar supra), the majority of authors appear to advocate for a more consistent and stringent approach that minimises the negative effects ontheinternalmarketandcompetition,whichhasbeenevidencedbyavarietyofemergingdata

Protecting the level playing eld in the EU was also one of the main concerns voiced by authors when it comes to the EU response to foreign crises measures (see L. Hornkohl, EULL 2023, “Race to the very boom? – e EU response to Foreign Crisis Subsidies”). In a globalised world, crises rarely stick to the EU alone. Similar to the EU Member States, third countries also resort to nancial aid to overcome crises. Yet, companies that receive foreign crises subsidies active on the internal market can hold a comparative advantage and distort competition in the internal market. e new EU Foreign Subsidies Regulation aims to prevent and mitigate distortions caused by non-EU Member State subsidies, while foreseeing an exception forforeigncrisisaidspecically,whichraisesanumberofintricatelegalquestions

With the aim of creating an aractive business atmosphere and stopping EU companies from migrating to third countries providing more crisis-mitigating subsidies, the EU has recently taken further countervailing measures. While the past State aid practice (see M. Segura, EULL 2023, “Sustainability, climate protection and the State aid practice in times of crisis: a chimera?”) only slowly progressed to address the nancing

needs to tackle and prevent climate and sustainability issues, the Commission has now presented the “Green Deal Industrial Plan for the Net-Zero Age” at plan includes an adaptation of State aid rules in the form of a “ ” designed to help the EU industry to achieve climate neutra- Temporary Crisis and Transition Framework lity and strengthen its position in the global market, especially vis-à-vis the US and its ambitious climate subsidy plan in the form of the Ination Reduction Act (see C. Vollert, EULL 2023, “e ‘Green Deal Industrial Plan’ as an interplay between crisis regulation and existing State aid rules”). Even though EVP Vestager has announced that the (not so) Temporary Crisis and Transition Framework will abide by State aid principles and not undermine the level playing eld in the internal market, there is a discernible risk that the exibility provided may propel deeper-pocketed Member States to become the frontrunners in key sectors inthetransitiontowardsanet-zeroeconomy.

What crises will we face in the future? What kind of State support do we want to allow in the EU to keep up with international competition, while protecting the internal market? What role should State aid law play to ensure that competition in the internal market is not undermined, while allowing Member States to combat crises and pursue public interest goals effectively? ese questions, among others, are of fundamental importance for the EU and its Member States, which the authors discussed in more detail throughout the Symposium,butneverthelessmeritfurtherresearchandpolicyaention.

State Aid’s Stress Test

Alfonso Lamadrid de Pablo1

Jean Monnet, one of the EU’s founding fathers, famously stated “that Europe would be built through crises, and that it would be the sum of their solutions” e EU was conceived at a time of crisis, to ensure the post-war reconstruction of Europe and prevent future conicts, and since then has stepped up to face multiple crises. In recent years, in particular, the EU has been central in devising and articulating the responseto the nancial and Eurozone debt crisis, the migration crisis, Brexit, the Covid-19 health and economic crisis, and the crisis provoked by the Russian invasion of Ukraine Other crises, linked to increasing global warming and geopoliticaltensions,loominthehorizon,leadingtoexpectationsofaglobal“permacrisis”.

Each of these have put the EU, Member States, and society to a “stress test”, exposing tensions, strengths and weaknesses, contradictions and limitations is has been true on many fronts, also in that of State aid Indeed, EU State aid law sets limits on Member State sovereignty, scal autonomy, and expenditure with a view to minimizing distortions to competition between Member States and ensuring a level-playing eld within the internal market. e very nature of the discipline makes it a eld ripe for tensions between Member States, between law and politics, and between conicting public policy objectives, but all those tensionsareexacerbatedintimesofcrisis

Almost three years ago, in March 2020, José Luis Buendía and I warning about the risk that wrote an op-ed “full exibility” would distort competition between Member States favoring those with deeper-pockets. To mitigate this risk, we proposed the creation of a “Solidarity Fund” (suggesting that it be notied to the Commission as an Important Project of Common European Interest), and a commitment that Member StatescontributetothisFundapercentageofthepublicresourcesinvolvedintheirownmeasures.

e risk we anticipated has proved very real. Over the past three years, the Commission has made an extremely exible interpretation of State aid rules to ensure that these would not get in the way of urgent damagemitigationmeasures.

e Commission has adopted, and subsequently widened on several occasions, Temporary Frameworks related to aid adopted in relation to the Covid-19 pandemic (Covid Temporary Framework) and the war in Ukraine (Temporary Crisis Framework). Under these frameworks, the Commission has very rapidly approved hundreds of measures (see and ) amounting to trillions of euros. e Commission has here here recently thatover50%ofthevolumeofaidapprovedsofarundertheTemporaryCrisisFramework disclosed and related Treaty provisions came from one Member State (Germany), and that over 80% came from three Member States (Germany, France, and Italy). e split is similar as regards Covid-19 related aid (see p 24 of the ). ese numbers should be added to the great volume of non-notied aid latest State aid Scoreboard

1. Alfonso Lamadrid de Pablo is a Partner at the EU & Competition Law department of an international rm in Brussels and Visiting Professor at the CollegeofEurope(Bruges).

granted under the General Block Exemption Regulation (covering over 90% of State aid measures), which is also very far from being evenly distributed among Member States (see the gures in GBER spending per Member State in Annex III to the latest Scoreboard). To those, one should also add all aid falling below the de minimis thresholds, as well as the billions or trillions of State support taking the form of general measures considered to fall outside the scope of EU State aid rules (unlike in other contexts, the Commission does not appeartohaveadoptedastrictinterpretationofthenotionof“generalmeasures”).

ere is now a widespread concern that this exibility has contributed to exacerbating differences between Member States. is concern is shared by , in some way or another by all contributors to the inuential media latest , and by the European Commission itself In a EU Law Live Symposium on “State aid in times of crisis” leer to Member States, EVP Vestager recently stated that “not all Member States have the same scal space for Stateaid.atisafact AndariskfortheintegrityofEurope”;theleerfeaturedthegraphbelow:

In the same leer, EVP Vestager announced yet additional exibility, the transformation of the Temporary Crisis Framework into a “Temporary Crisis and Transition Framework”, also aimed at supporting the green transition and to react to US subsidies, as well as the boosting of the REPowerEU plan and the creation of a collective European fund to support countries in a fair and equal way. A few days later President von der Leyen publicly a plan to step up EU funding “to avoid a fragmenting effect on the single market” announced viathecreation,inthemediumterm,ofa“EuropeanSovereigntyFund”.

It is evident that awareness about the exacerbation of asymmetries and distortions resulting from “full exibility” under State aid rules has been a driver for major, bold, and arguably historic political initiatives. ese include the SURE instrument (which raised close to €100 billion of common debt to support unemployment reinsurance schemes), the €750 billion Next Generation EU stimulus package (with its partial introduction of debt mutualization via the Recovery and Resilience Facility Regulation), and the recentlyannouncedSovereigntyFund.

But while these are unambiguously positive rst steps entailing an element of solidarity beneting States with less scal capacity, they pursue very specic goals (notably the green transition and digitisation), which are unrelated to the distortions caused by the aid measures adopted under a relaxed State aid regime. ose distortions affected, and will continue to affect, sectors and companies that may not benet from new funding opportunities While the existence of “earmarked” strategic funds may have a positive “macro” effect on Member States budgets, they do not address the harm that opening the State aid oodgates has on companiesandmarkets.

e objective of preventing the harm to competition and fragmentation of the internal market can arguably only be aained by a meaningful compatibility assessment of State aid measures, balancing their negative and positive effects, and having regard to, among others, the principles of proportionality, equal treatment, and the cumulative effect of aid measures. is is, of course, assuming that such an objective remains a real priority at a time when the EU is arguably, and perhaps legitimately, more concerned about geopolitical competition with third countries than about intra-EU competition between Member States and between companies

Compatibility under State aid law, in other words, is not to be measured only against the EU’s (external) strategic goals at any given point in time, legitimate as they may be If State aid law is to fulll its goal under the Treaty, the Commission must necessarily pay due aention to the negative effects of aid on competition in the internal market and require proportionate countervailing positive effects prior to giving it a pass. is is, of course, much harder, but also even more necessary, at a time of crisis, when both stakes and pressures are high.

e Commission has very recently that “[w]hatever we do, we must avoid a subsidy race If we compete argued individually as Member States, we lose as a whole is is why the proposed changes to the State aid rules, broad and far-reaching as they may be, will be temporary- they would apply until 31 December 2025” . But even if we assume that derogations will be temporary, their effects on the internal market will be long lasting. And if State aid control is regarded as inappropriate precisely when it is needed the most, then one may start wondering what isthepointofkeepingitinplaceateveryothertime

From Persona Non Grata To De Facto

EU Resolution Authority: e European Commission and State Aid to Banks during the Financial Crisis

1

Sven Frisch

On 30 September 2008, two weeks aer Lehman Brothers collapsed, the Irish government announced a blanket guarantee scheme to cover deposits in six Irish-owned banks without consulting with the European Commission. e fallout was immediate UK depositors moved to these six banks in droves and UK Prime Minister Gordon Brown threatened to introduce capital controls to stem the bleeding. While Brown never followed through, the episode highlighted the dangers of national beggar-thy-neighbour responses to a globalcrisisandgavepausetothosewhohadcalledforsuspendingEUStateaidrulestogiveMemberStatesa freehandinstabilisingtheirbankingsystems.

e soonrecognisedthatMemberStateswouldhavetoimplementtheirindividualpolicy EuropeanCouncil responses within a ‘coordinated framework.’ Absent a comprehensive EU bank supervision and resolution regime to coordinate national interventions, EU State aid rules provided a second-best framework. But Member States were not ready to allow these rules to delay their efforts to restore nancial stability e Council made clear that the Commission would have to apply EU State aid rules ‘in a way that meets the need forspeedyandexibleaction.’

Heeding that call was key to the Commission’s success in maintaining State aid discipline throughout the nancial crisis To use the language of , the Commission is an agent whose ability to enforce EU social science Stateaidrulesiscontingentonadegreeofacquiescencefromitsprincipals,theMemberStates.Tokeepthem on side at a time when its authority was in question, the Commission showed pragmatism in simplifying procedures (I) and made use of its substantive discretion under Article 107 TFEU to further nancial stability goals and gradually take on the role of a de facto resolution authority (II). Although the Banking Union eventually relieved the Commission of that role and reduced the scope for State aid to banks, the experiencecontinuestoprovethatStateaidpolicycanbepartofthesolutiontocrises(III).

1.Proceduralpragmatism

In late September and early October 2008, the rst order of business was to adjust State aid procedures to the imperatives of the day. e Commission designed a dedicated fast-track procedure to ‘ ensure the swi authorisation’ of crisis aid ( , para 53). Member States could have their rescue 2008 Banking Communication measures cleared within weeks and sometimes even over a weekend ( ). By way of comparison, a NordLB preliminaryexaminationundertheordinaryprocedurecouldtakeup totwomonths( , Regulation659/1999

1. Sven Frisch is a référendaire at the General Court of the European Union. He is a co-author of ‘Preserving cross-border banking in the face of the crisis: State aid policy under the nancial trilemma’ in Research Handbook on State Aid in the Banking Sector (edited by F.-C Laprévote, J Gray, and F de Cecco,Elgar,2017).eviewsexpressedinthisOp-Edarestrictlyhisown.

art 4(5)) and the accelerated procedure for rescue aid under the 2004 Rescue and Restructuring Guidelines uptoonemonth.

e Commission harnessed three key mechanisms to achieve these procedural efficiencies. First, DG COMP set out to minimise the duration of formal notication proceedings by placing considerable emphasis on guiding Member States in designing crisis aid measures during pre-notication talks Second, the Commission took steps to streamline internal procedures. ose included simplifying internal and interservice consultation processes, easing linguistic requirements, and empowering Commissioner Kroes to take decisions in lieu of the College of Commissioners. ird, the Commission routinely issued provisional decisions following the ‘ ’ moo. ose decisions approved crisis aid for a limited clear now and assess later period (typically six months). e Commission could then extend that period subject to the Member State concernedsubmiingareportontheimplementationofthemeasureornotifyingarestructuringplan.

2.Strategicuseofsubstantivediscretion

e Commission made strategic use of the substantive discretion available to it under Article 107 TFEU. at meant maintaining a strict interpretation of the concept of State aid (1) while taking a exible approach toreviewingthecompatibilityofcrisisaidwiththeinternalmarket(2).

1.StrictinterpretationoftheconceptofStateaid

In keeping with the objective character of the concept of State aid (Ladbroke Racing, , para 52), the T-67/94 Commissiondid not aempt to water down the criteriaof Article 107(1) TFEU e Commissioneven took a on the advantage criterion, routinely excluding the application of the market economy operator hard line principle. For example, the Commission embraced the controversial ‘pollution theory’, which excludes the application of that principle to measures in favour of banks that have previously received State aid and which required multiple clarications from the EU Courts (see, e.g., ING Groep, ; and FIH Holding et C-224/12 P FIHErhvervsbank, ). C-579/16P

2.Flexibleapproachtocompatibility

Far greater exibility was on display in the way that the Commission used its broad discretion to assess the compatibility of State aid with the internal market. e crux of the Commission’s approach lay in a switch in legal bases e Commission had approved early crisis aid under Article 107(3)(c) TFEU (‘aid to facilitate the development of certain economic activities’) via the 2004 Rescue and Restructuring Guidelines e assumption was that distressed banks’ difficulties stemmed from mismanagement rather than from systemic issues( ,para38; ,para42). NorthernRock WestLB

Once Lehman Brothers led for bankruptcy, the Commission came to view the crisis as an ‘international market-failure’ ( , para 59) and began to assess crisis aid under Article Guarantee scheme for banks in Ireland 107(3)(b) TFEU (‘aid […] to remedy a serious disturbance in the economy of a Member State’). is previously lile-used provision formed the basis for a series of seven crisis communications adopted

between October 2008 and August 2013. In the interest of the overriding goal of nancial stability, the rst of these communications struck a particularly permissive tone. Unlike the Rescue and Restructuring guidelines, that communication did not subject crisis aid to the ‘ one time, last time’ principle and allowed the Commission to approve both rescue aid of a structural nature and aid schemes in favour of nancial institutionsofallsizes(ratherthanjustSMEs).

e Commissionsoened its stance even further – albeit selectively– in December 2008. Aer DG COMP’s reservations towards the precautionary recapitalisation of solvent banks elicited criticism from Member States, vowed to be pragmatic and to provide them with detailed guidance. at guidance took the Kroes form of the , which introduced a new distinction between ‘distressed’ and Recapitalisation Communication ‘fundamentally sound’ banks. e Commission essentially accepted that nancially sound banks receive capital at a lower price than distressed banks and that Member States only be required to le a restructuring planforthelaer.

Only once the threat of a nancial meltdown had receded and the Member States’ acceptance of crisis-time State aid control had solidied did the Commission begin to tighten the rules. at involved not only placing greater emphasis on the traditional goal of limiting distortions of competition, but also taking on a role Commissioner Almunia later described as that of a ‘de facto crisis-management and resolution authority at EU level’ Building what called a ‘leaner, cleaner and healthier banking system’, curbing the moral Almunia hazard that had fuelled excessive risk-taking in the lead-up to the crisis, and preserving the integrity of the internal market gradually moved to the top of the agenda. e Commission’s instrument of choice for achieving these goals was conditionality. e March 2009 and the August Impaired Assets Communication 2009 accordingly introduced burden-sharing requirements and detailed a Restructuring Communication series of behavioural commitments (e.g., acquisition bans and advertising restrictions) and structural measures(e.g.,market-openingdivestitures)towhichtowhichtheapprovalofcrisisaidcouldbesubjected.

e August 2013 took burden-sharing requirements one step further in light of the Banking Communication sovereign debt crisis. To reduce the burden bail-outs impose on taxpayers and thus weaken the two-way feedback loop between banks exposed to sovereign risk and their over-indebted national governments, the communication required that shareholders and junior creditors be bailed-in before a bail-out (paras19and44).

3.StateaidcontrolandtheBankingUnion

Just a year later, in 2014, the Banking Union completed the shi from bail-out to bail-in. Deploying a rstbest approach to ensuring nancial stability, the Banking Union set up a comprehensive bank regulation framework, with a single resolution mechanism, a single resolution fund ( ) and a Regulation 806/2014 single rulebook for bank resolution and recovery ( ). at framework greatly reduces the Directive 2014/59 scope for State aid to banks State aid remains permissible to provide liquidity assistance to solvent banks ( ) and, subject to the 2013 Banking Communication’s burden-sharing requirements, to effect Aica Bank precautionary recapitalisations ( ) and to facilitate the orderly liquidation of non- Monte dei Paschi di Siena systemic banks ( ). Where, on the other hand, the resolution of a bank that is failing Banco Popolare di Vicenza or likely to fail is in the public interest, State aid is the last resort. Beforehand, shareholders, junior creditors,

covered depositors and senior bondholders must absorb 8% of the bank’s liabilities and the single resolution fund5%.

Although these developments have shied the regulatory onus from the Commission to the Banking Union, the nancial crisis is lasting proof that the Commission can mobilise EU State aid rules in a exible manner that supports Member States in responding to ‘black swan’ events Perhaps it should not come as a surprise thatcallstosuspendtheserulesduringtheCovid-19crisisfailedtogaintraction.

State Aid Legal Bases and the Temporary Framework During the COVID-19 Crisis

Juan Jorge Piernas López and Michelle Cini

At the start of the COVID-19 pandemic, the Commission resorted to Article 107(3)(b) TFEU as the most suitable legal basis for dealing with this crisis, and it did so with more condence, as a result of the experience gained during the previous nancial crisis Article 107(2)(b) TFEU was also used, particularly in the air transport sector, though to a lesser degree. By contrast, the Commission adopted very few pandemic-related decisionsunderArticle107(3)(c)TFEU (1).

roughout the COVID-19 pandemic, the Commission used so law guidance as part of the “crisis toolbox”. As in the previous nancial crisis, this took the form of a Temporary Framework (the “TF”). e TF was adopted on and amended six times over the course of the pandemic (2). Each time, the 20 March 2020 Commission claried the rules and included new exemptions. is differed from the approach taken in the nancial crisis because the TF became more exible (and not stricter) as time went on. e adoption of the TF was convenient for reasons of urgency, transparency and legal certainty It was also ing for the Commission to enact again an extraordinary and temporary framework rather than to resort to the direct application of the existing rules on a case-by-case basis. is path allowed the Commission to interpret the rules exibly, although for a limited time and under certain conditions, while applying those rules equally to all Member States. As some commentators put it: ‘the Temporary Framework acts as a kind of ‘procedural shortcut’ by which the Commission can limit its analysis in relation to the compatibility of the aid by showingadherencetothecriteriaintheTemporaryFramework’ (3).

eInterpretationofArticle107(3)(b)TFEU:BalancingTestandNon-Discrimination

e recurrent application of Article 107(3)(b) TFEU since the nancial crisis, especially during the COVID-19 crisis, has led to some clarications in the interpretation of this provision by the Union Courts e General Court has claried that Article 107(3)(b) TFEU applies both to aid schemes and to individual aid (4), overcoming the initial resistance to apply this provision in individual aid cases. More worryingly in our view, the General Court has concluded in recent casesthat Article 107(3)(b) TFEU does not require the Commission to perform a balancing test, that is, an assessment of the impact of aid on trade and competition within an EU context (5) As explained elsewhere, this nding is at odds with the role of the compatibility analysis of State aid under the Treaties, the legislative history of Article 107(3)(b) TFEU, and the case-law of the Court of Justice (6). We also believe that this approach is detrimental to the cohesion of the internal market.

1. Juan Jorge Piernas López is a Senior Lecturer and Jean Monnet Chair, University of Murcia Law School, Spain; Consultant to e World Bank, WashingtonDC,USA,andotherpublicinstitutions

2.MichelleCiniisProfessorofEuropeanPolitics,SchoolofSociology,PoliticsandInternationalStudies,UniversityofBristol.

eseconcerns are exacerbated by the interpretation given by the Commission and the General Court to the principle of equal treatment and non-discrimination in COVID-19 cases. In essence, the General Court found that the principle of non-discrimination based on nationality per Article 18 TFEU was embedded in the Treaty provisions concerning State aid (Articles 107-108 TFEU) (7) Consequently, if the State aid provisions are respected, the argument goes, Article 18 TFEU would also be respected. is approach is coherent with the case-law of the Court of Justice, according to which Article 18(1) TFEU applies independently only to situations governed by Union law for which the Treaty lays down no specic rules of nondiscrimination (8) Such an approach is also compatible with the previous judgment of the General Court in the ermenhotel Stoiser Franz case, where it held that the rst paragraph of Article 18 TFEU could not be applied independently in the context of a State aid case ‘by reason of the existence of the competition rules of theTreaty’ (9).

However, as explained earlier (10), the foregoing must be reconciled with the case-law of the Court of Justice of the EU, which found, in Grand Chamber formation, that the application of the State aid rules must never produce a result that is contrary to the specic provisions of the Treaty or the general principles of Community law, such as the principle of equal treatment (11).e boundaries establishing what kind of discrimination must be necessary under the State aid provisions and when this becomes excessive are not clear. But a clear discrimination based on nationality may go beyond what is necessary to address a serious disturbance of the economy under Article 107(3)(b), and therefore be contrary to both the principle of equal treatment andthecase-lawoftheCourt.

FinalRemarks:OntheCohesionoftheInternalMarket

In a nutshell, the EU institutions, and particularly the Commission, were able to provide a coordinated response to the COVID-19 crisis, resisting aempts to suspend the application of EU State aid rules and avoiding an open subsidy race among Member States On the other hand, the TF was very generous and exible. is lax approach – which can also be seen in the case of the more recent reaction to the Ukraine crisis – entails risks for the cohesion of the internal market. In our view, this risk is exacerbated by the signicant difference in the budgets and State aid expenditure of Member States, as well as by the interpretation given by the Commission and the General Court to the principle of equal treatment and the balancing test in theabovementionedcases.

Moreover, there have also been risks associated with procedural rights and transparency, which have been underlined in reports published by the European Parliament and sanctioned in some judgments of the GeneralCourt (12).

Finally, the intense coordination of the crisis response at EU-level since the 2008 nancial crisis may have accelerated an ongoing transformation concerning the adoption of EU nancial instruments, instead of national ones, to cope with crises (see ongoing discussions about new EU Funds) (13) We believe, to conclude, that these centralised initiatives are a step in the right direction in order to alleviate the effects of futurecrisesandtheirsubsequentimpactonthecohesionoftheinternalmarket.

(1) European Commission, ‘Coronavirus outbreak – list of Member State measures approved under Articles 107(2)(b),107(3)(b)and107(3)(c)TFEUandundertheStateaidTemporaryFramework’,8July2022.

(2) In 3 April 2020, OJ C 112, 4.4.2020, pp. 1-9, 8 May 2020, OJ C 164, 13.5.2020, p. 3-15, 29 June 2020, OJ C 218, 2.7.2020, pp. 3-8, 13 October 2020, OJ C 340, 13.10.2020, pp. 1-10, 1 February 2021 OJ C 34, 1.2.2021, pp. 6–15;and24November2021OJC473,24.11.2021,pp.1–15.

(3) Paula Riedel, omas Wilson and Shane Cranley, ‘Learnings from the Commission’s Initial State Aid ResponsetotheCOVID-19Outbreak’,EStAL2|2020,pp.115-126,atp.119.Youcanaccessit .here

(4)Ibid andparticularlyCase ,RyanairvEuropeanCommission,para32. T-388/20

(5) See in this regard also Phedon Nicolaides, “e Evolving Interpretation of Article 107(3)(b) TFEU”, ,here cit., at p 39-42 and Case , Ryanair v European Commission, and Case , Ryanair v European T-238/20 T-388/20 Commission.

(6) Piernas López, Juan Jorge ‘e COVID-19 State Aid Judgments of the General Court … Every Man for Himself?·Cases and RyanairvCommission”.Cit.,atpp.261-265.Youcanaccessit . T-238/20 T-259/20 here

(7) See e.g. Ryanair v European Commission, at paragraph 31 and and Case , Ryanair v T-238/20 T-388/20 EuropeanCommissionatparagraph82.

(8) See, among others, Case Peralta [1994] EU:C:1994:296, para 18, and Case UTECA C-379/92 C-222/07 [2009]EU:C:2009:124,para38.

(9)Case ermenhotelStoiser[2004],para147. T-158/99

(10) Piernas López, Juan Jorge ‘e COVID-19 State Aid Judgments of the General Court … Every Man for Himself?·Cases and RyanairvCommission”.cit.Youcanaccessit . T-238/20 T-259/20 here

(11) Nuova Agricast v Ministerio delle Aivita Productive, at paragraphs 50-51 and case-law cited and C-390/06 C594/18P,AustriavCommission(HinkleyPointC),para43.

(12) See e g. European Parliament, ‘Impact of state aid on competition and competitiveness during the COVID19 pandemic: an early assessment’, PE 658.214, you can access it ; and Judgment in Case Ryanair here T-465/20 DACvCommission.

(13) See, e.g., the recent reference to the planned establishment of a European Sovereignty Fund made by the PresidentoftheEuropeanCommissionattheJanuary2023WorldEconomicForum,availablehere.

Should Member States Respond to Crises with Individual Aid Measures? Phedon Nicolaides1

Introduction

e Covid-19 pandemic is the rst and only event in the history of the EU that was classied both as an ‘exceptional occurrence’ and a ‘serious economic disturbance’. Consequently, Member States were able to grant State aid to offset the impact of the pandemic both on the basis of Article 107(2)(b) TFEU and Article 107(3)(b) TFEU e choice between the two legal bases was determined to a large extent, but not absolutely, by the intentions of the aid grantors. Both paragraphs 2(b) and 3(b) of Article 107 TFEU allow aid to remedy the disruption caused by the pandemic. However, aid that is granted on the basis of paragraph 2(b) has to be linked precisely to the nancial loss caused by the pandemic and may not exceed the amount of that loss, while aid that is granted on the basis of paragraph 3(b) may, without being required, go beyond the loss incurred in order to enable the recipients to restructure their operations, especially where, as a result of the upheaval causedbyseriousdisturbancesuchasthepandemic,achangeofbusinessmodelisnecessary. (1)

e that accompanies the European Commission’s 2021 Annual Competition Staff Working Document Report indicates that in the two-year period 2020-2021 Member States granted a record amount of State aid which exceeded EUR 3.1 trillion (pages 24-25). e Commission approved that record amount in also a record number of decisions that came close to 1200. Perhaps more worrisome for its impact on the internal marketwasthefactthatmorethan80%ofallaidwasnotiedbythreecountries:Germany,ItalyandFrance (2)

Member States granted aid to combat Covid-19 both in schemes and in individual measures. e Court of Justice of the EU has never articulated any limits to the right of Member States to grant individual aid. e purpose of this article is to consider whether it is time for the Court to address this issue and question whether individual aid is an appropriate intervention to compensate for the damage caused by an exceptional occurrenceortoremedyaseriouseconomicdisturbance.

ecaselaw

So far there have been 12 judgments related to Covid-19 cases as shown in Table 1 below. All of them concerned appeals brought by Ryanair against Commission decisions authorising State aid. e General Court rejected 9 appeals and upheld 3 but suspended the effects of the annulments pending the re-adoption of the decisions by the Commission to remedy the respective failures in the statement of reasons at is, the General

1.PhedonNicolaidesisProfessorattheUniversityofMaastrichtandtheUniversityofNicosia

Court faulted the Commission in terms of procedure rather than substance. Ryanair lodged appeals which arependingbeforetheCourtofJustice.

*eCommissionre-adoptedthedecisionsinJuly–August2021

Ryanair raised several pleas, including notably the violation of Article 18 TFEU on non-discrimination and free movement rules, the use of inappropriate means of intervention, and the failure to respect the principle of proportionality, among others For the purpose of this article, I will focus on the argumentation concerning individual measures and draw on the latest judgment in Case , Ryanair v European Commis- T-111/21 sion,concerningaidtoCroatiaAirlines,whichcitespreviousjudgments.

First, the General Court acknowledges that ‘it is true, as the applicant correctly submits, that all airlines operating in Croatia were affected by [Covid-19] restrictions and that as a consequence they, like Croatia Airlines, have all suffered damage resulting from the halting of air transport activities following the introduction of the aforementioned restrictions’ (para. 111). But it goes on to state that ‘the fact remains, as the Commission correctly submits in its defence, that there is no requirement for Member States to grant aid to make good the damage caused by an ‘exceptional occurrence’ within the meaning of Article 107(2)(b) TFEU’(para 112).

Indeed, there is no provision in EU law that obligesMember Statesto grant State aid. But, once they decide to grant State aid they must comply with the relevant State aid rules. e question, therefore, is whether, aer they decide to grant State aid, Member States should grant it to all undertakings that suffer damage from the same exceptional occurrence under Article 107(2)(b) TFEU or are affected by the same serious disturbance underArticle107(3)(b)TFEU.

e General Court gives an ambiguous answer to this question: ‘[a]n aid measure may be directed at making good the damage caused by an exceptional occurrence, in accordance with Article 107(2)(b) TFEU, irrespective of the fact that it does not make good the entirety of that damage’ (para 114). is answer is

ambiguous because it is not clear whether it means that Member States do not have to compensate 100% of the damage suffered by each undertaking or whether they may compensate the damage suffered only by selected undertakings But, in the very next paragraph, the General Court claries that Member States ‘cannotberequiredtograntaidtoallofthevictimsofthatdamage’(para.115).

e General Court appears to infer that Member States are free to grant individual aid simply because Article 107(2) or (3) TFEU does not prohibit it. e General Court considers that ‘to argue, as [Ryanair] does, that the grant of the aid at issue is contrary to the principle of non-discrimination amounts, in essence, to calling into question systematically the compatibility of any individual aid with the internal market solely on account of its inherently exclusive and thus discriminatory nature, even though EU law allows Member States to grant individual aid, provided that all the conditions laid down in Article 107 TFEU are met (see, to that effect, judgment of 14 July 2021, Ryanair and Laudamotion v Commission (Austrian Airlines; COVID-19), , under appeal, para 58)’ (para 116). e source of this statement is a previous T-677/20 judgment of the General Court. If we go to the judgment in case on Australian Airlines, we nd in T-677/20 paragraph 58 exactly the same statement as in paragraph 116 above, without, however, any reference to any other more detailed judgment or case law of the Court of Justice. However, the rst time that the General Court made that statement was in case , which was also an appeal by Ryanair against a Commission T-378/20 decisionauthorisingindividualaidtoSAS.(3)

In its judgment in case , Ryanair v European Commission, concerning aid granted to Finnair, this T-657/20 time on the basis of Article 107(3)(b) TFEU, the General Court held that ‘Article 107(1) TFEU states that any aid granted by a Member State or throughState resourcesis incompatiblewith the internal market‘in any form whatsoever’ Article 107(3)(b) TFEU therefore applies to individual aid (judgment of 14 April 2021, Ryanair v Commission (Finnair I; Covid-19), , under appeal, para. 32)’ (para. 28). So, here too the T-388/20 General Court cites a previous judgment of itself. If we go to the judgment in case , we nd in T-388/20 paragraph 32 again a statement that is almost identical as that in paragraph 28 above (4), but again without anyreferencetoamoredetailedjudgmentorcaselawoftheCourtofJustice

We can infer, therefore, that the General Court is led to those conclusions based on two reasons. First, Article 107(2) or (3) TFEU does not prohibit individual aid or does not require that aid is to be granted in the form of schemes Second, individual aid may be granted in compliance with the conditions in paragraph 2(b) or 3(b) because Article 107(1) TFEU prohibits any aid implying both aid schemes and individual awards of aid. erefore, the exceptions to the prohibition of Article 107(1) must extend to both schemes and individualawards.

I hasten to admit that both of these explanations may be valid Since there is no articulation of such explanations in the case law, we can only surmise what the General Court meant. Indeed, it is possible that State intervention to correct market failures may require support of a single company or that a natural disaster may damage only a single company. Ryanair did not argue against individual aid in principle, but only against the granting of aid to a single company when others are also affected by the same event. e question, then, is whether compensatory aid under Article 107(2)(b) TFEU or remedial aid under Article 107(3)(b) TFEU shouldbegrantedtoasinglecompanywhenthedisturbanceaffectsthewholeoftheeconomy.

e General Court has provided an answer which, however, is not convincing. e aid recipients in the measures contested by Ryanair were incumbent airlines. ey had larger market shares than that of Ryanair and consequently were more important for the Member States concerned (5) Although this answer appears reasonableitdoesnotexplainwhytheaidcouldnotbegrantedpro-rataorinproportiontomarketshareorto the extent of connectivity they provided within the aid-granting Member State or with the rest of the world. is would minimise the distortion of competition in the internal market. Moreover, it would address more effectively the very purpose of the aid which was to restore the connectivity that was disrupted by Covid19.(6)

Member States may not have sufficient resources to support all companies that are harmed by an exceptional occurrence. But in this case a limited amount of aid can be distributed on the basis of objective criteria accordingtoneedorcontributiontotheobjectiveofthepolicymeasureinquestion.(7)

Conclusions

State intervention to remedy a market failure or market disruption itself causes a distortion in the internal market. e distortion is minimised when the intervention targets as closely as possible the cause and/or the effects of the failure or disruption.Since the objective of competition rulesis to protect the functioning of the internal market (Article 3(b) TFEU) and since the ‘internal market includes a system ensuring that competition is not distorted’ (Protocol 27 TFEU), it follows from these higher principles that any State aid that is allowed by the Treaty must satisfy at minimum two criteria: it must be capable of achieving one or more of the objectiveslaiddown in paragraphs2 or 3 of Article 107 TFEU and must causethe least distortion to competition. Aid measures that support individual companies by excluding their similarly affected or eligiblecompetitorsfailthisdoubletest.

(1) See, for example, the Temporary Framework section 3.13 on investments for a sustainable recovery and section 3.14 on solvency support to offset increased debt levels that may hamper growth. e consolidated version of the TemporaryFrameworkcanbeaccessedhere

(2) e impact of Covid-19 aid on the internal market is analysed in more detail in P. Nicolaides, e limits of ‘proportionate’ discrimination, European State Aid Law Quarterly, 2021, vol 20(3), pp 384-396; and P Nicolaides & C.Soupart,StateaidtocombatCovid-19:Itsupportsnationaleconomiesbutwhatisitsimpactontheinternalmarket? EuropeanCompetitionLawReview,2022,vol 43(8),pp 354-364.

(3)Seealsocase ,RyanairvEuropeanCommission(SAS),paras.65-66. T-378/20

(4) ‘Article 107(1) TFEU states that any aid granted by a Member State or through State resources is incompatible with the internal market ‘in any form whatsoever’. erefore, it should be noted that Article 107(3)(b) TFEU applies bothtoaidschemesandtoindividualaid’(para 32).

(5) See , Ryanair v European Commission, para. 121 or , Ryanair v European Commission (SAS), T-111/21 T-378/20 paras 72-74or ,RyanairvEuropeanCommission,paras 141-143. T-657/20

(6) In other case concerning aid schemes where aid was linked to the permanence of the connection between the aid recipients and the local economy, the General Court agreed with the Commission that Member States could not be expected to distribute State aid pro-rata because they did not have unlimited resources (see , Ryanair v T-238/20 European Commission, para 50, concerning a Swedish scheme). is response too is not convincing because the amount of aid could be modulated according to objective criteria (e g. size of the recipient, number of employees, etc) so that, for any amount of available resources, the potential recipients could be ranked in terms of need or contribution tothelocaleconomy.

(7) One of the editors pointed out that certain Member States granted aid through non-discriminatory schemes, e g. Romania(

What Kind of Competition Does EU State Aid Law Protect? A Tale of Two Crises Antonios Bouchagiar 1

e ancient Greeks believed that Justice was the daughter of the Sky (Uranus or Ουρανός) and the Earth (GaeaorΓαία).Hernamewasemisandsherepresentedwisdomandgoodcounsel.

Since emis recently , her myth is all the more ing to gave her name to a building in the Court of Justice introduce the family origins of EU State aid law. ose origins in turn shed light into the notion of ‘competition’thatStateaidlawprotects,includingintimesofcrisis.

edoubledimensionof‘competition’

In order to nd somebody’s family origins, a good starting point is their birthplace For EU State aid law, this istheTreaty.

e Treaty’s Chapter on the rules on competition is divided into two sections: the antitrust rules in Articles 101-106TFEUandtheStateaidrulesinArticles107-109TFEU

Although both antitrust and State aid rules aim at protecting ‘competition’, that word does not have exactly the same meaning in those two branches of EU competition law. In EU State aid law, the notion of ‘competition’ismoredynamicthaninEUantitrustlaw

Both antitrust and State aid rules aim at protecting competition between undertakings. However, State aid rules have an additional dimension: they also aim at protecting competition between Member States. In other words, State aid rules play a pivotal role, not only in maintaining a level-playing eld between undertakings, butalsoinavoidingharmfulsubsidywarsbetweenMemberStates

CompetitionbetweenMemberStates:atheatreplayisbestwatchedseated

e double dimension of the protection of competition in EU State aid law is exemplied by the seled caselaw according to which a measure may be prohibited as State aid even if it supports a whole economic sector ( ,para 33). C-75/97

eviewsexpressedarepurelypersonalandmaynotinanycircumstancesberegardedasstatinganofficialposition oftheEuropeanCommission.

1. AntoniosBouchagiaris a memberof the Legal Service of the EuropeanCommissionandadjunct professorat the Vrije Universiteit Brussel.He is the authorof‘StateaidinthecontextoftheCOVID-19outbreak’ in‘EUStateAids’(6thedition, Sweet&Maxwell, 2021).

Under a narrow perspective focusing solely on competition between undertakings, one may wonder: what is the point of prohibiting an advantage granted equally to all undertakings of a given sector? If all possible competitorsinarelevantmarkethavebeenequallyfavoured,howdoesthatmeasuredistortcompetition?

Well, it does distort competition between Member States, because now all undertakings of that economic sector are aracted to the aiding Member State is forces other Member States to grant similar aid (even if initially they were not planning to do so), in order for their respective sector not to ee towards the aiding Member State. Soon enough, all Member States might be granting that sectoral aid, to preserve that segment of their economy. e need to protect competition between Member States explains why the concept of the ‘relevantmarket’doesnotmaerasmuchinStateaidlawasitdoesinantitrustlaw

In fact, the anti-competitive effects of sectoral aid is one of the main counterintuitive propositions that students and practitioners try to grasp when rst introduced to State aid law. Since antitrust law is a more popular discipline than State aid law (let’s be honest), many newcomers to the State aid eld have been trained to focus on competition between undertakings erefore, while they easily understand why granting State aid to ‘undertaking A’ but not to ‘undertaking B’ distorts competition, they might nevertheless wonderwhygrantingaidtoallundertakingsintherelevantmarketalsodistortscompetition.

e irony of sectoral aid is that, if all Member States end up granting it, they are still not beer-off than in the situation where none of them would have granted the aid No Member State manages to aract the sector (since the aid is available in all Member States), but all Member States waste their public nances in that endeavour. It is as if one spectator of a theatre play stands up to see beer than the rest of the audience, which prompts all of the audience to gradually stand up. In the end, all spectators are watching the play standing uncomfortably,butwithoutseeingbeerthaniftheywereallseated

In the same way, Member States are beer-off commiing that, in principle, none of them will grant State aid. Stateaidrulescanbeseenasanon-competeclauseagreedbetweenMemberStates.Of course,theremightbe causes for which it is worth ‘standing up ’ , such as promoting renewable energy or remedying an economic crisis,inwhichcasetheCommissionmayauthorisesuchaidascompatiblewiththeinternalmarket.

efamilytreeofStateaidlaw

e double dimension of ‘competition’ gives to EU State aid law a particular hybrid nature. By protecting competition both between undertakings and between Member States, it stands somewhere between EU antitrustlawandEUinternalmarketlaw

As in antitrust law, preserving a level-playing eld between undertakings plays an important role in State aid law.However,itisnottheendofthestory.

As in EU internal marketlaw, certainState measuresmight be prohibited, even if they do not distort competitionbetweenundertakings,becausetheystilldistortcompetitionbetweenMemberStates.

erefore,EUStateaidlawisthechildofEUantitrustlawandEUinternalmarketlaw

Adynamicnotionof‘competition’shapedinthecontextofacrisis

Since the notion of ‘competition’ in State aid law is more dynamic than in antitrust law, it is highly dependent on the overall context of State aid enforcement. When that context is a crisis, the particular circumstances of a given crisis shape the precise concept of ‘competition’ that needs to be protected when assessing the compatibilityofStateaid.

Here I must clarify that, since the notion of State aid under Article 107(1) TFEU is an objective and legal concept ( , para 111), it is rather immutable to the circumstances of an economic crisis However, C-487/06 P once a measure qualies as State aid, the Commission enjoys wide discretion in deciding whether to declare it compatible under Article 107(3) TFEU. Since such discretion involves complex economic and social assessments ( , para. 68), the Commission may determine what kind of competition distortions are C-431/14 P tolerableornot,dependingonthespeciccircumstancesofacrisis

Amongst the various compatibility bases of Article 107(3) TFEU, point (b) is particularly relevant in times of economic crisis, since it allows the Commission to authorise aid ‘to remedy a serious disturbance in the economy ofaMemberState’ .

ere has been no shortage of crises that the EU has faced in recent years Two of them illustrate rather clearly the varying degree of tolerable competition distortions under Article 107(3)(b) TFEU: the 2008 global nancialcrisisandtheCOVID-19pandemic.

eglobalnancialcrisis

In the context of the 2008 global nancial crisis, State aid was needed to prevent the failure of systemic banks, whichcouldhavehaddominoeffectsonthenancialsectorandtheeconomyasawhole.However,bankswere ‘blamed’ for their nancial difficulties, given that the crisis had been caused by the banking sector’s excessive risk-taking behaviour A major policy concern at the time was that State aid should not create moral hazard by rescuingbanksatthefullcostoftaxpayersandwithoutrequiringthemtorestructuretheiroperations

erefore, in order to receive State aid, banks had to implement burden-sharing measures whereby their equity, hybrid capital and subordinated debt would fully contribute to offset any losses (Banking Communication, points 15 and 40-44). Such private contribution by the bank, its shareholders and its creditors reduced accordingly the amount of taxpayers’ money needed for the bank to return to viability. Of course, that rather high level of burden-sharing was introduced in phases, in order not to endanger nancial stability (Banking Communication,points16-19).

Moreover, a restructuring plan approved by the Commission was necessary for banks to access recapitalisationaid(BankingCommunication,point50).

erefore, in terms of tolerable competition distortions under Article 107(3)(b) TFEU, the Commission was ratherstrictinthecontextoftheglobalnancialcrisis

eCOVID-19pandemic

ecircumstanceswerequitedifferentintheeconomicturmoilcausedbytheCOVID-19pandemic

As of 2020, many undertakings entered into nancial difficulty through no fault of their own. ey faced liquidity and even solvency problems due to an external, unforeseeable and widespread event: the negative economic impact of the pandemic e temporary difficulties of those undertakings were not the result of their own mismanagement or other structural and inherent viability problems. Since those undertakings were in difficulty only due to the pandemic, they were expected to return to viability, once the economic environmentbecamenormalagain,withouttheneedtorestructuretheirbusiness.

e risk of moral hazard that underpinned the reaction to the global nancial crisis was not present in the context of the COVID-19 pandemic. erefore, the Commission was more tolerant in the application of Article 107(3)(b) TFEU. e 2020 Temporary Framework did not require burden-sharing from shareholders or creditors of the beneciary undertaking. Moreover, apart from one very limited exception (Temporary Framework, point 85), the Temporary Framework did not require the restructuring of beneciaries, even if they qualied as undertakings in difficulty during the pandemic, provided that they were healthy undertakingsbeforethepandemic.

Ataleoftwocrises

e contrast between the two abovementioned crises focuses on the banking sector’s ‘fault’ for the 2008 global nancial crisis versus the absence of ‘fault’ when in 2020 the COVID-19 pandemic unforeseeably affectedvarioussectorsoftheeconomy.

At rst sight, the concept of ‘fault’ seems to bear no relation to the notion of ‘competition’ or in general to economicconsiderations

However, the concept of ‘fault’ obtains economic signicance when seen through the prism of moral hazard. Because of the risk of moral hazard, beneciary banks during the global nancial crisis had to implement strict burden-sharing and restructuring measures, whereas beneciaries during the COVID-19 pandemic didnothavetotakesuchmeasuresinordertoaccessStateaid.

In the context of those two crises, moral hazard (or the absence thereof) shaped the dynamic notion of ‘competition’embeddedinArticle107(3)(b)TFEU.

Lessonsforthefuture

Although the Commission has control over authorising or prohibiting State aid, it has no control over the initiative to grant State aid. at initiative belongs to the Member States, which are not obliged to grant State aid if they are unwilling to do so, or simply unable due to their limited funds erefore, although the Commission can determine which State aids must not be granted in the internal market, it cannot determine whichStateaidsmustbegranted

Although in times of crisis generous amounts of aid are justied, not all Member States are willing or able to provide it. While some undertakings receive the aid they need, others do not receive such aid (or not to the same extent) from the Member State where they mainly operate. erefore, for a level playing eld in the internal market, it is crucial that aid from national funds is complemented by support from resources pulled togetheratEUlevel,whichshouldideallyformthemajorityofthatsupport.

However, that is rather a discussion de lege ferenda at the present stage of development of EU law While EU funds have been deployed in the past to face a crisis, the large part of the response to the crisis stemmed from national funds. Perhaps that is a chapter of EU mythology to be wrien in the future, when the ‘right’ crisis willstrike.

Public support during the pandemic: evaluation on the use of State aid control between the Temporary Framework and the Recovery and Resilience Facility

Irene Agnolucci

e economic crisis which originated from the quick spread of the virus globally has been the biggest economic turmoil since the Great Depression, characterised by a demand and supply shock, fuelled by restrictions on the movement of people imposed by governments Almost three years on from the outbreak of COVID-19, it is relatively safe to acknowledge that the pandemic has changed important paradigms in the EUlawandpolicymakingprocess.

PandemicStateaid

State aid policy was used as a rst instrument to counteract the crisis, when in March 2020 the Commission adopted the (‘COVID-19 TF’). Such use of State aid control is not

Temporary Framework for State aid novel, as it replicates the (‘2009 TF’) adopted during the nancial 2009 Temporary Framework for State aid crisis. e major difference between temporary rules for State aid during the nancial/banking crisis on the one hand and the pandemic on the other hand, is that the COVID-19 TF came with no strings aached (e.g., conditionality imposed on banks, for instance, the presentation of a credible restructuring plan). Further, under the 2009 TF, most aids were directed to ensure banks’ liquidity, while only a small proportion of aid was given as direct liquidity to businesses Crisis measures implemented and reported by the Member States in 2008, 2009, and 2010 amounted to approximately€212.2 billion, €353.9 billion, and €1.1 trillion respectively, while according to the , the most recent official data, €384.33 billion have State Aid Scoreboard 2021 been granted in State aid in 2020 alone. Overall, the Commission authorised around €3.1 trillion in aid in 2020 and 2021, as reported by a recent Commission , which gathers collected by the State aid brief data CommissionthroughsurveystoMemberStates.

e COVID-19 TF has been certainly well received by Member States, as it allowed them to keep businesses aoat. In this regard, the TF was a success, as it was amended six times and extended until June 2022, to provide Member States with a wide range of instruments to counteract businesses’ liquidity shortage e State Aid Scoreboard 2021 shows that direct grants and interest rate subsidies are by far the aid instruments for which Member States have spent the most, representing 46% of total expenditure in 2020, while equity interventions measures represent only 3% of total expenditure. Interestingly, before the pandemic, tax

1.IreneAgnolucciisaResearchFellowattheDepartmentofLawinBocconiUniversity

advantage was the second most used instrument (33% in 2019), while in 2020 it amounted to only 14% of State aid expenditure Further, the Commission State Aid Brief has that 64% of total aid granted in estimated 2020and2021tooktheformofState-backedcredit,beingeitherguaranteesorsubsidisedloans.

However, one of the main concernsconnected with the implementation of the COVID-19 TF is its impact in the internal market. Indeed, to facilitate Member States’ swi and effective support to national companies, the Commissionaccelerated investigationson aid, which were taken within weeks or days Such relaxation of State aid control might have produced of competition and negative effects on trade, both distortions geographically and sectorially. Firstly, Member States with a greater GDP, e.g., Germany and France, granted signicantly more support to national companies. Data reported by the shows State Aid Scoreboard 2021 that in 2020 German expenditure on aid represented around 30% of total State aid in the EU, followed by France with 14% and Italy with 10%. e conrms this picture, as in 2020 and 2021 Germany State Aid Brief allocated 24.1% of total aid, France 23.8% and Italy 21.8%. us, businesses based in those countries will enjoy an advantage vis-à-vis the European competitors in the internal market. Secondly, pandemic aid might have produced sectoral distortions. While before the pandemic there was a clearly positive trend in State aid – i.e., aid had been mostly directed to environmental protection, RDI and to regional support – during COVID-19 Member States granted public resources to relieve companies from the economic consequences of the pandemic e issue of sectoral distortions will need to be tackled to prevent some Member States from lagging behind on specic goals of industrial policy. Indeed, official published by the Commission data shows that there was a reduction in spending for non-crisis objectives in Member States having a limited scalcapacity,e.g.,Malta,Lithuania,Poland,Slovakia,EstoniaandBulgaria.

In sum, while the TF has successfully secured public support to EU companies in difficulty, it has also produced imbalances in favour of companies based in Member States with ‘deep pockets’, even if the prime objectiveoftheStateaidregimeshouldbethemaintenanceofthelevel-playingeld.

eissueisespeciallyrelevantintheaviationsector,whereMemberStatesgrantedmassiveaidtoairlinesand companies dealing with ground operations mostly to compensate damage suffered due to the restrictions on global movements. Aid was authorised under Article 107(2)(b) TFEU, but also under Article 107(3)(b) TFEUasinterpretedbytheCOVID-19TF,includingsignicantrecapitalisations.

Ryanair has brought several actions for annulment of Commission decisions authorising aid to its competitors before the CJEU (see P. Nicolaides, ‘Should Member States Respond to Crises with Individual Aid Measures?’). While in most cases Ryanair’s claims were dismissed, in three cases, the General Court annulled the Commission decisions. In thesecases,the General Court held that the Commission failed to provide anadequatestatementofreasonsonseveralpointsthusbreachingArticle296TFEU

• In KLM ( ), Ryanair successfully contested that the Commission did not engage with the fact T-643/20 that prior aid to the Air France-KLM group ( ) was likely to benet all companies pertaining to SA.57082 that group (paras 43-78). erefore, the General Court found that the analysis of prior aid to the group could have been relevant to assess whether aid authorised by the contested decision complied with the relevantconditionsoftheCOVID-19TF(para75).

• In TAP ( ), the General Court found that the Commission had failed to state reasons when T-465/20 examining whether the TAP’s difficulties could have been dealt with by the group internally, thus making theaidunnecessary,pursuanttoPoint22ofthe (para52). Rescue&RestructuringGuidelines

• In Condor ( ), the General Court found that the Commission failed to state reasons when T-665/20 establishing a direct causal link between the costs associated with the extension of the period of Condor’s insolvency following its abortive sale and the COVID-19 pandemic pursuant to Article 107(2)(b) TFEU (paras36-37).

However, in other cases, the CJEU has dismissed Ryanair’s claims that the Commission decisions authorising aid to airline companies amounted to a breach of the principle of non-discrimination on grounds of nationality set out in Article 18 TFEU For instance, in , the General Court found that Member States Finnair are at the liberty of deciding which companies to individually support on the basis of Article 107(3)(b) TFEU to the extent that they ‘contribute’ to remedying a serious disturbance in the economy. e General Court held that the measure did not amount to a breach of the principle of non-discrimination enshrined in Article 18 TFEU because the measure was necessary and proportionate to aain the objective pursued, namelytoremedyaseriousdisturbanceintheFinnisheconomy(paras132-149).

TwosolutionsforthefutureofStateaidintimesofemergency

e State aid decisional practice in the air transport sector during the COVID-19 crisis shows that Member States granted great support to national companies, thus harming services provided by cross-border companies such as Ryanair. is type of distortions of competition produced by the COVID-19 TF have led policy makers to nd alternative solutions for the future of the internal market, including proposals to allocate common resources, such as a ‘ ’ and a ‘ ’ , which truly European public support programme Solidarity fund would be based on mandatory contributions of Member States and to which EU companies could apply when in difficulty irrespective of their nationality. e legal basis could be Article 107(3)(b) TFEU, as the fund could be notied to the Commission and be declared compatible as an important project of common European interest (‘IPCEI’). e proposal appears to be shared among Member States Commission EVP M. Vestager has that not all Member States had the same ‘scal space’ to counteract the crises acknowledged and that the Union is aiming to set up a ‘collective European Fund’ to help EU businesses in a ‘fair and equal way ’ .

Another original solution conceived by policy makers has been , the biggest EU res- Next Generation EU ponse package ever implemented, which established an alternative use of State aid control in times of emergency. Most resources come from the Recovery and Resilience Facility Regulation (‘the Facility’), which mobilises €723.8 billion in grants and loans. e Facility’s mechanism is unparalleled for at least two reasons Firstly, the Commission borrows money from the markets directly EU funds will be available to Member States upon the presentation and implementation of the recovery national plans, which need to include country-specic reforms, and to achieve key industrial goals set out by the Union, e.g., the green and digital transitions. Secondly, the Facility requires measures presented in the context of recovery national plans to comply with EU State aid rules Indeed, national measures presented in the context of the Facility, except from some measures, such as infrastructure investments and direct support to citizens, need to be

notied to the Commission ex ante for prior approval, unless covered by one of the block-exemption provisions under the Such use of State aid control is unprecedented General Block Exemption Regulation because, according to Article 107 TFEU, one of the essential criteria for a measure to be classied as State aid is the existence of ‘State resources’. In other words, aid measures need to deploy part of national budgets or be imputable to the State to fall within the State aid net. Nonetheless,under the Facility’s mechanism, resources included in the recovery plans, which are funded by EU resources and not national budgets, must anyways comply with Article 107 TFEU Hence, the Commission applies the State aid regime to measures funded by EU resources, but nonethelessadministered by the Member States, to check whether EU resources are spent efficiently and comply both with Article 107 TFEU and the principle of non-discrimination enshrined in Article18TFEU.

Concludingremarks

While the COVID-19 TF has allowed Member States to keep companies aoat during the pandemic, the geographical and sectoral distortions produced by national measures approved under the COVID-19 TF are likely to affect the internal market for a long time. To avert further negative consequences, the Union should equip itself with proper emergency instruments to maintain the level-playing eld. In this regard, the set-up of common resources should be welcomed, both in the form of a Solidarity Fund and in the form of Next Generation EU, which has subordinated the use of EU resources, on the one hand, to the achievement of common goals and, on the other hand, to the scrutiny of distortions of competition and effects on trade through State aid rules. Next Generation EU could also be proposed as a long-term instrument to tackle objectivesofEUindustrialpolicywhilestillscreeningdistortivemeasures.

Bend it until it breaks: Flexibility of Temporary Crisis Framework in the context of the Russian Invasion of Ukraine Dzhuliia Lypalo 1

It has become a constant practice of the European Commission to use so-called temporary State aid frameworks (TF) in subsequent crisesduring the past 15 years It is no surprise that the Commission has also acted quickly to set up a temporary framework at the outset of the Russian war in Ukraine e Temporary Crisis Framework (TCF), rst approved on 23 March 2022, has to date been amended twice to increase the permied amount of aid per undertaking and to include new types of aid. While the TCF is currently applicableuntil31December2023,itwillbemodiedandextendedonceagainattheendofJanuary2023.

As in other temporary frameworks, the Commission lays down the different types of aid available for Member States and the conditions under which such aid is justied. e TCF covers measures under Art. 107(3)(b) TFEU, which concerns aid granted to ‘remedy a serious disturbance in the economy of a Member State’ In addition, the Commission uses Art. 107(3)(c) TFEU for the rst time in State aid temporary frameworks to approve aid for the ‘development of certain economic activities or of certain economic areas’. eTCFcurrentlycoversthefollowingtypesofaid:

• Limited amount of aid in different forms It is currently capped at €2 million per undertaking (€250,000 foragricultureand€300,000forsheriessectors).

• Guarantees on loans or subsidised loans covering up to 15% of the beneciary’s average total annual turnoveror5%ofenergycostsovertheprevious12months.

• Compensation for additional costs due to the increase in energy prices. e Commission sets a limit of 50% of eligible costs and up to €4 million per undertaking, while it can be increased for ‘energy-intensive businesses’asdenedinAnnexIoftheTCF.

• Aid to accelerate the rollout of renewable energy for projects started as of 20 July 2022 (introduced in the rstamendmenttotheTCFon20July2022)

• Aid to induce the decarbonisation of industries and limit the reduction of greenhouse gas emissions (also introducedintherstamendmenttotheTCF).

1.DzhuliiaLypaloisanAcademicAssistantattheCollegeofEurope

• Aid for additional reduction of electricity consumption to reach the targets under Regulation 2022/1854 (introducedinthe totheTCFon28October2022). secondamendment

Contrary to the , the TCF does not cover aid under Art. 107(2)(b) TFEU. Instead, the Com- Covid-19 TF mission will assess such aid on a case-by-case basis, and the TCF provides useful guidance on the general principlesofsuchassessmentinpara 31-38.

Stateaidinnumbers

e Commission has already issued more than 180 decisions authorising State aid measures of more than €627 billion in the context of the TCF. is is comparable to the volume of State aid granted during the Covid-19 crisis, which amounted to in 2020 (and around in total). e more than €636 billion €3.2 trillion amount of aid granted under the TCF should also be considered together with the expenditure devoted to tackling the source of the crisis, i e the Russian aggression, for which the EU and 27 Member States have so farcommied inmilitary,nancial,andhumanitarianaidtoUkraine. nearly€52billion

When reviewing the State aid measures approved by the Commission to date, it is clear that Germany provided the most governmental support both by the total amount of aid and relative to its GDP Germany alone has granted more than €319 billion, that is, 50% of the total aid approved by the Commission under the TCF, which is to the share of German State aid approved under the Covid-19 TF. Fig. 1 below comparable highlights the signicant discrepancies between Member States in the use of the TCF, which could potentially be caused by the available budget, diverging policy approaches to State aid or the level of state decit. Nevertheless, there was no direct correlation between the amount of State aid awarded and the level of dependency on Russian gas. For example, Germany had a particular dependence on Russian gas, assessed as 13,2% of its total energy supply, and its State aid measures currently amount to almost 9% of GDP. However, Slovakia had a much higher dependency of , and yet it granted State aid corresponding to less than 1% 28,2% ofitsGDP

e discrepancy in the amount of aid granted by the Member States puts into question the purported nondistortive nature of these subsidies. e Commission itself notes that it is crucial for the integrity of the internal market to avoid ‘the races, where the Member States with deeper pockets can outspend neighbours to the detriment of cohesion within the Union’ (TCF, para 25). However, it is not clear how the stated objective correlates with the observed distortive outcome. is is neglected because the Commission does not analyse the notied aid measures in the context of the total amount of State aid granted under the TCF, but it assessesonly the compliance of each measure with the criteria set in the TCF individually. If the goal of maintaining a level-playing eld within the internal market is genuine, either a coordinated EU-wide approach (and another potential joint borrowing) or increased scrutiny of the combined effects of State aid grantedbyMemberStatesiswarranted.

Source:

UnlimitedexibilityoftheTCFobjectives

e TCF is a rapidly developing instrument, and the Commission has already exponentially increased the limits of aid per undertaking from €400,000 to €2 million. However, the most important amendments concern the very objective of the TCF, as this change in perception can inuence the future of State aid in general. While the initial TCF is reminiscent of the Covid-19 TF – covering liquidity support measures in various forms – the subsequent amendments introduced new types of aid linked to the objectives of REPowerEU Unlike other types of aid covered by the TCF, the measures to decrease the dependence on Russian fossil fuels and facilitate the green transition (under sections 2.5 to 2.7) are justied under Art. 107(3)(c)

TFEU as they facilitate the ‘development of certain economic activities or of certain economic areas’. erefore, these types of aid do not address the economic hardships of undertakings caused by the Russian aggression–thecrisistheTCFinitiallyaimedtoaddress

e TCF is therefore transformed from a crisis mitigation tool into a policy instrument with a two-fold objective: to ensure the liquidity of undertakings affected by the war and to decrease the dependence on Russian gas, thus accelerating the green transition. e extension of the TCF beyond the direct or indirect consequences of the war could raise questions regarding the suitability of the TCF to tackle these issues Instead, a more proportionate solution could involve modifying the existent block exemptions under Art. 109TFEUorcarryingoutanin-depthcase-by-caseassessment.

Against this background, it is not surprising that the Commissionis currently planning to extend the scope of the TCF further and dilute its denition of ‘crisis’ President von der Leyen that the ‘combina- seems to hint tion of higher energy prices in Europe and the impact of the [US Ination Reduction Act (I)]’ will become the next crisis in the Commission’s understanding. e Commission is not only planning to amend the TCF to include the concerns stemming from the US I, but it might stick to this by the end of January approach ‘for some years’ as indicated by the President herself in a to the EU leaders before the leer European Council in December 2022. Covid-19 TF and the each lasted for less than 3 Financial crisis TF years,butthecurrentTCFmaycontinuebeyondthat.

Fig. 1 Total State Aid expenditure under TCF by Member State (as a percentage of 2021 GDP)

Eurostat, State Aid Scoreboard 2021 and European Commission State aid case register

While France and Germany seem to have more appetite for subsidies to support the EU businesses, some States without ‘deep pockets’ are voicing their about the erosion of the level-playing eld Nevert- concerns heless, the Commission is to unveil the revamped omnipotent ‘Temporary Crisis and Transition expected Framework’ tailored to ‘take account of subsidies provided outside the EU’, notably by offering ‘antirelocation investment aid’. Just as Milton Friedman wrote, ‘nothing is so permanent as a temporary governmentprogram ’

WhatisleofArt.107TFEU?

While the Commission is growing increasingly wary of the permacrisis, the constant expansion of the TCF calls into question the prohibition of State aid contained under Art. 107 TFEU Following Kotnik (case C-526/14) and drawing by analogy from the banking crisis, the Commission must authorise an aid that complies with the conditions set out in the TCF. By extending the scope of the TCF, the Commission not only limits its discretion but also creates a sort of exemption for sectors where the potential economic damage does not justify distorting the internal market. At the point where the exception is growing bigger andbigger,onecanquestioniftheStateaidprohibitionisstilltheprinciple

Conversely, it is important to highlight that State aid measures related to the impact of the war can still be cleared under the normal procedure outside of the TCF. Any such aid not covered by the TCF (including aid justied under Art. 107(2)(b) TFEU and solvency support measures) will be assessed case-by-case e Commission already approved aid to ll the energy storage (case ), aid for the recapitalisation of SA.103012 failingenergycompanies( and )andothersolvencysupport( ). SA.103791 SA.105001 SA.104831

However, the Commission considers that the framework is not fast or predictable enough. In notications under Art. 107 TFEU, the provides for a deadline of 2 months for preliminary Procedural Regulation examinationandanon-bindingdeadlineof18monthsforformalinvestigationprocedures.Inthisregard,the assessment of war-related State aid outside of the TCF took the Commission, on average, 50 working days. is contrasts with the time between the aid notication and the no-objections decision under the TCF, which reached from surprising 3 to 90 working days with an average of 20 working days In April 2022, a week aer the adoption of the TCF, it notably took the Commission only 5 working days to greenlight a French Stateaidschemeof€155billion(case )–remarkablepromptnessforStateaidapproval. SA.102395

Conclusion

For the sake of creating a ‘simpler, faster and even more predictable State aid framework’, the Commission continues to bend the EU State aid control e TCF is transformed from a temporary instrument mitigating the economic disturbance caused by Russian aggression into a semi-permanent tool acting as an exemption from state aid control in order to aain other policy objectives. While these objectives might be legitimate, themeanschosenbytheCommissionwouldleadtoincreaseddistortionsintheinternalmarket.

Race to the very boom?

e EU response to Foreign Crisis Subsidies

1

Lena Hornkohl

In the past een years, we have experienced a ‘crisis of the century’ every few years. e banking and nancial crisis of 2008, the Covid-19 crisis in 2019-2022 and the Russian invasion of Ukraine in 2022 resulted in far-reaching social consequences and widespread economic shocks in the EU In response, the Commission has adopted a State aid temporary framework dedicated for each crisis (e.g., the Financial Crisis Temporary Framework Covid-19 Temporary Framework Ukraine Temporary Framework , the , and the ). ese temporary frameworks interpret the exemptions set out in Articles 107(2) and (3) TFEU (mainly Article 107(3)(b) TFEU, but also Article 107(2)(b) TFEU to some extent) and allow wide-ranging forms of State aid State support is certainly necessary to address market failures – as demonstrated inter alia by A Bouchagiar’s – but also within the EU should not be ignored: generously-handled post regional inequalities exemptionstoEUStateaidrulesgiveanimmenseadvantagetoMemberStateswithdeeperpockets.

Yet, crisesare not limited to the EU but oen affect the entire world in a globalised society. Non-EU countries oen also respond to crises by implementing various forms of nancial aid Switzerland, for example, known as the ‘ ’ , issued extensive subsidies to overcome the economic impact of the land of subsidies Covid crisis during the pandemic. e new US-American (I), the ‘ Ination Reduction Act most signicant climate legislation in US history’, includes a huge crisis reaction subsidy package for energy security and climate protection. It is likely that future crises, or the worsening of current crises, such as the climate crisis or a new pandemic, will be followed by additional nancial aid measures from EU and non-EU countries Crisis subsidies from non-EU countries also have an impact in the EU, for example, when EU companies are excluded from third country crisis subsidies or third-country subsidised companies operate on the EU internal market. is can impact the level-playing eld in the EU internal market and lead to further regional disparitiesbetweenMemberStates

IstheEUrespondingeffectivelytothesechallenges?

eForeignSubsidyRegulationandCrisisSubsidies:AreeyEnough?

On 12 January 2023, the new (FSR) entered into force. e FSR follows an EU Foreign Subsidy Regulation amicable goal: it aims to protect the level-playing eld on the internal market by preventing and mitigating distortions caused by non-EU Member State subsidies. It complements EU State aid law, which does not apply to aid granted by non-EU Member States. At the same time, the concepts and objectives are at least

1.LenaHornkohlisaTenureTrackProfessorforEuropeanLawattheUniversityofVienna

broadly tools built on EU State aid law – or at least that was the legislators’ aempt. e FSR foresees three enforced by the Commission: one general ex officio and two special notication-based tools for mergers and public procurement procedures. Distortions on the internal market can be remedied with redressive measuresandundertakingscanalsoproposecommitments

e FSR provides that any subsidies from non-EU countries that disrupt the EU internal market can be evaluated and corrected, so that the nancial responses of non-EU countries during a crisis will not negatively affect the EU internal market, distort the level-playing eld, or result in regional disparities (particularly whenoneMemberStatecreatesaparticularlyfavourablelegalenvironmentforforeigninvestments).

But does the FSR serve its purpose in crisis situations? To answer this question, we must look a bit deeper into the of the new Regulation. e Commission rst needs to assess whether the measure substantive test constitutes a foreign subsidy in the sense of Article 3 FSR, which is composed of ve cumulative criteria: (1) undertaking engaging in an economic activity in the internal market; (2) nancial contribution; (3) provided by a third country; (4) benet; and (5) selectivity. e amplitude of the denitions seems to catch many foreign crisis subsidies. However, the fact that the subsidies will have to be provided to an undertaking engaging in an economic activity in the internal market limits the application, for example, for crisis subsidy policies such as the US I. e subsidy package under the I is only available for companies using US products or producing in the US. erefore, the FSR would only be applicable to I measures if the producers receiving those US subsidies would sell their products or services on the EU internal market. is will not be the case, as the I provides incentives for American consumers to purchase new and used electriccars, modernheatpumps,orothercleantechnologies(“buy American”)ratherthanprovidingdirect payments to businesses operating in other countries. e subsidies nevertheless could have an impact on the EU internal market because they could draw businesses away from the EU to the US market and impact technologycompetition.

is sparks the question: is the FSR extraterritorial enough? e FSR wants to create a level-playing eld on the internal market but cannot catch distortions caused by non-EU Member State subsidies when undertakings are not active on the internal market. International law indeed some connection to the State or requires regional organisation to limit the extraterritorial application of laws However, under the effects theory applied in EU competition law enforcement, foreseeable, immediate and substantial effects in the internal market of an extraterritorial competition law violation are sufficient. An impact to technology competition on the EU internal market caused by US I subsidies could cause such effects. However, since the FSR explicitly requires the undertaking to be active on the internal market, the transposition of the effects theory totheFSRisoffthetable

Looking beyond this issue, further possibility to issue foreign crisis subsidies becomes apparent in the FSR. Even if a measure constitutes a foreign subsidy according to Article 3 of the FSR, the substantive test of Article 4 requires a distortion of the internal market. is is the case where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition. ird-country crisis measures, such as subsidies for climate protection for undertakings active on the internal market, could lead to such distortions, when undertakings cannot receive similar aid in the EU e FSR remedies can then, in principle, ensurealevel-playingeldontheEUinternalmarketandeliminatethesedistortions

So far, so good, but what about exemptions to the legal test of distortions? Contrary to EU State aid law, the FSR generally does not foresee exemptions such as Article 107(2) and (3) TFEU. Rather, Article 6 FSR includes a general balancing test. e only exception where the FSR foresees a State-aid-like exemption is Article 4(4) FSR, which includes an exemption for crisis aid Article 4(4) FSR is mirrored on Article 107(2)(b) TFEU and States that ‘ a foreign subsidy may be considered not to distort the internal market to the extent that it is aimed at making good the damage caused by natural disasters or exceptional occurrences.’ Crisis subsidies are therefore more likely to be allowed under the FSR; although it will depend on how Article 4(4) FSR is interpreted and applied in practice For example, will there be temporary frameworks for third-country subsidies in the future as well? Do the natural disasters or exceptional occurrences have to occur on the internal market, or can they happen anywhere and therefore allow, for example, crisis subsidies to tackle climate change issues at the other end of the globe? In any case, contrary to the other exceptions provided in Article 107(2) and (3) TFEU, crisis subsidies occupy a special position. e concept chosen by the FSR underlines the understanding of the EU authority, already prone in State aid law, that crises are to be tackledwithStatesubsidies.

Lastly, a crisis measure might not fall under the (in principle) quite narrow case of ‘natural disasters or exceptional occurrences’, e g., in case of general measures to prevent the climate crisis in the future In these instances,thebalancingtestofArticle6FSRcanstillkickin.Article6FSRforeseesthatpositiveeffectsonthe development of the relevant subsidised economic activity on the internal market can outweigh the negative effects. Furthermore, and importantly for foreign crisis subsidies, Article 6 also allows the Commission to consider other positive effects of the foreign subsidy, such as the broader policy objectives in the balancing exercise. Recital 16 FSR mentions the ‘high level of environmental protection’ as one of the other positive effects to be considered, which would cover such preventive climate subsidies. Contrary to the disaster subsidy provision, Article 6 is more openly worded and therefore also includes general preventative measures. It is also interesting to note that when it comes to Article 6 FSR, the positive effects do not necessarily have to occur on the domestic market, which could be particularly relevant in the case of global effects, such asclimateprotection.

Where does this leave us? Generally, the FSR tackles distortive third country (crisis) subsidies and levels the playing eld on the EU internal market. However, the I example has shown that possible distortive crisis subsidies are not always sufficiently targeted. e exemptions and balancing provisions further reveal that the FSR is prominently more lenient when it comes to crises subsidies. us, the provisions demonstrate the implicitunderstandingthatthelevelplayingeldissuddenlynotsoimportantaerall,oncethereisacrisis.

FromaLackofIndustrialPolicytoanInternationalSubsidyWar

If the foreign crisis subsidies cannot be countered with the FSR, the question arisesas to what other methods the EU can use to respond e EU reactions to the American I serves as a negative example and shows that we are heading for a climate subsidy war between the US and the EU. Leading EU politicians gave several suggestions to react to the I. Already last year, von der Leyen to adapt EU State aid rules to proposed match the US green subsidy scheme under the I and subsequently also a plan to step up EU announced funding.EVPVestagerwasmorecautiousinthebeginningandinitially againstasubsidywarwiththe warned US. Recently, the Commission threw caution to the wind by a new ‘Temporary Crisis and Transi- proposing

tion Framework’, which originally sought to remediate the effects of the Ukrainian crisis, but now will also servetocombattheI.

Even if one ignores the question of regional differences in the EU caused by such State aid simplications (see A. Lamadrid’s ), internationally, the EU response might cause a subsidy race to the boom, which post painfully reminds us why subsidy and State aid control are vital. Subsidies can create distributional issues, particularly when it comes to cross-border externalities, such as rent shiing, which ultimately leads to subsidy races While it might be individually ‘rational’ to match US subsidies, to aract or keep rms in the EU-territory, subsidies are collectively wasteful States try to surpass each other for rent shiing purposes and taxpayers’ money is certainly not spent wisely that way. Economics 101 tells us: in a prisoners-dilemma situation,allStatesarebeeroffiftheycommitnottousesubsidiesforsuchrentshiingpurposes.

Even though EVP Vestager wants to a subsidy race, at this stage, there are no foreseeable measures in avoid the proposal to avoid a subsidy race, such as proposed dialogue forums with the US. e climate and environmental crisis in particular will probably demand further government spending from all States in the future. However, the EU, and its Member States, will have to spend enormous and untargeted sums if their only concern is to keep up with third-country measures e focus should be rather on sensible State-funded climateandenvironmentalprotectionmeasureswithreducedbureaucracy.

Conclusion

So how to deal with (crisis) subsidies from third countries?Besidesthe FSR, which is limited, the EU will not be able to solve the subsidy war problem unilaterally. e now proposed I-countermeasures might at least push the US back to the to deal with the vexed issue of global regulation of trade WTO negotiating table subsidies However, it would arguably be more benecial to develop a strong and consistent EU industrial policy,whichisnecessary,particularlyfordealingwiththisandfuturecrises.

e ‘Green Deal Industrial Plan’ as an interplay between crisis regulation and existing State aid rules

Christopher Montgomery Vollert 1

On 1 February 2023, the European Commission presented the Communication ‘A Green Deal Industrial Plan for the Net-Zero Age’ e ‘Communication’ is a package of measures designed to help the EU industry make progress in the transition to climate neutrality and strengthen its position in global competition, since subsidies abroad are distorting the playing eld in the single market. e Communication is based on four pillars (cf. chapter 2): (i) a predictable and simplied regulatory environment; (ii) faster access to sufficient funding; (iii) skills; and (iv) open trade for resilient supply chains. In this context, the European Commission decided to expand and accelerate access to nance for net-zero industry (cf chapter 2.2 of the Communication, pillar (ii)). In addition to measures from the area of EU funding (REPowerEU, InvestEU, Innovation Fund) and private funding, the Communication also addresses national funding. e purpose of this contribution is to show what changes the Commission envisages with regard to national funding and how theyareinlinewiththeexistingStateaidlaw

I.eEnvisagedMeasuresintheCommunication

In order to achieve the objectives set out in the Communication, the Commission intends to adapt State aid rules, subject to conditions necessary to limit distortions to the Single Market, to avoid greater regional disparities and to ensure compliance with international obligations. A large part will be implemented through the proposed amendment of the State aid Temporary Crisis Framework (‘TCF’), which will be transformedintoaTemporaryCrisisandTransitionFramework(‘TCTF’).

Accordingtothe ,theproposedamendmentsmainlyconcern: Commission’spressrelease

• First, expanding renewable energy and decarbonising industry In particular, this will be implemented by (i) supporting the use of all renewable energy sources; (ii) granting support for less mature technologies (such as renewable hydrogen) without competitive tendering, provided that certain safeguards are put in place to ensure the proportionality of public support; and (iii) by incentivising investments that lead to signicant emission reductions by providing for higher aid ceilings and simplied aid calculations (g., aid wouldsimplybecalculatedasashareofinvestmentcosts).

1. Christopher Montgomery Vollert is a German Rechtsanwalt and Associate in State aid law at a German law rm in Munich. He has published articleson EU competition law, including mostrecently‘Aid for Condor rescueservescommon interestandis compatible with EU law, EuropeanJournal of Business Law 2022, p 825’ and ‘Participation of (third) country-beneciary economic operators in public procurement procedures, Gewerbearchiv 2022,p.496’(bothinGerman).eviewsexpressedarehisownanddonotreecttheviewsofhisemployer/rm.

• Second, supporting investment in the production of strategic equipment necessary to accelerate the transitiontoanet-zeroeconomyandthusovercomethecurrentenergycrisis

is proposal is currently before the Member States, which are to comment on it, and is expected to come intoforceinthecomingweeks.

According to the , public funding, combined with further progress on the Commission’s announcement European Capital Markets Union, should be able to unlock the huge amounts of private funding needed for the green transition. us, since the 2012 , the Communication on State Aid Modernisation (‚SAM’) Commission therefore rightly continues to take the approach that State aid must always have an incentive effect on private parties and address an existing market failure ese points also appear in the CEEAG Communication IPCEI Communication (chapter 3.1.2 and margin note 10) and the (margin notes 3, 15 and37).

1.1.Expansion:eTCTF

e transformation is intended to further simplify the granting of aid for the use of renewable energy and for efforts to decarbonise industrial processes is will be addressed by extending the catalogue of eligible technologiesandbydispensingrestrictivemandatoryrequirements.

e Commission also intends to exceptionally allow the granting of higher amounts of aid than would otherwise be the case if this is necessary to compensate for aid received by a third country competitor of a European company in the eld of net-zero strategic technologies. is ‘matching mechanism’, which responds to the US Ination Reduction Act and complements the recent Foreign Subsidies Regulation, is unfamiliar to known State aid law. e Communication now conates two objectives that were previously considered independently: it (i) addresses the protection of the level-playing eld in the single market against (external) foreign subsidies; and (ii) envisages an extension of maximum (internal) Member State aidamountsthathavegrownupoveryearsofeconomicpractice.

e TCTF would also allow for more targeted subsidies to large new production projects in strategic netzerovaluechains emeasureswouldtargetsectorswhereariskofdelocalisationtothirdcountrieshasbeen identied. For this purpose, the Commission intends to nd appropriate conditions to verify a risk of relocation of investment outside the EEA. If this risk of relocation exists in a certain sector, the TCTF should in the future make it possible to introduce schemes to support new investment in production facilities in thosenet-zerosectors,includingviataxbenets

As the Commissions’ on the CEEAG shows in Chapter 6.8.2.1, this risk of Impact Assessment Report delocalisation is not unknown. It was frequently raised as an argument in the consultation process on the CEEAG when it came to changes from the list (cf. Annex I of the CEEAG) of sectors eligible for aid under section 4.11 of the CEEAG In the event of a change, the risk was recognised that the sectors concerned would migrate, so the change would be a push factor out of the single market. In the laer case, the Commission remained intransigent in view of the objective pursued at the time. Now, in contrast, the situation is different. Unlike at the time of the CEEAG guidelines revision, there is an increased risk of migration due to thepullfactorof(additional)foreignsubsidies,suchastheI,whichhastobedecisivelycounteracted

Moreover, the allowable aid amounts are modulated with higher aid intensities and higher aid amount ceilings is is subject to the condition that investments are made in eligible areas to contribute to the objective of convergence between Member States and regions is is the so-called ‘spillover effect’ Similar to the IPCEI Communication (note 18), the Commission makes State aid more aractive in those areas whichultimatelyshouldandwillservethedeepeningofthesinglemarket.

1.2.Acceleration:IncreasingGBERresholds

e Communication envisages an increase in the notication thresholds for State aid in key sectors of the Green Deal (i.e., hydrogen, carbon capture and storage, zero-emission vehicles, and energy performance of buildings) by revising the General Block Exemption Regulation (‘GBER’). e approach is therefore to acceleratethegrantingofStateaidbyincreasingnoticationthresholds,thusreducingbureaucracy.

II.Internalvs.ExternalCompetitiveness

Executive Vice-President Margrethe Vestager said in presenting the plan that, “Competitiveness in her speech Europe cannot be built on State aid (…). And with a need to preserve cohesion and competition to safeguard a level playing eld in the Single Market” e European Commission thus seems to align its future State aid control policy with the needs of the single market. Some initiatives, such as the International Procurement Instrument(’IPI’) ForeignSubsidiesRegulation(‘FSR’) orthe ,reectthisdirectiontoo.

e discussed simplication brought forward by the Communication are not based on a purely marketeconomy approach but are politically motivated Relaxing conditions and raising notication thresholds does not lead to less distortion of competition in the single market; rather the opposite, as State aid inherently distorts competition. at is why State aid is generally prohibited (Article 107(1) TFEU) and can only be declared compatible with the single market in ‘exceptional circumstances’, under the public justication grounds set out in Article 107(2) and (3) TFEU. ‘Noble objectives’, such as climate protection, have experienced simplications in the Commissions’ decisional practice in recent years As Maria Segura wrote in a recent , such rules are a step in the right direction towards article in EU Law Live’s Competition Corner ensuring sustainability and climate protection in State aid maers. ‘Unwelcome measures’, such as rescue and restructuring State aid, in contrast, are traditionally subject to strict requirements. e increase of notication thresholds does not entail major changes in the basic structure us, such a measure in the area of ‘good subsidies’ is the simplest and most exible means to enable State subsidies in these areas on a larger scaleintheshortterm.

e increased distortion on the internal marked caused by simplication and relaxation of State aid rules seems to be accepted to pursue external competitiveness vis-à-vis the US but also other capitalist States, such as China. Yet, in times of crises and further external threats to the single market, the mandate given to the Commission by the TFEU has not changed. State aid law has neither the task nor the objective of protecting the single market from foreign distortions of competition; that is precisely the role of the Foreign Subsidy Regulation. While State aid operates under the objective of the internal market and we have seen a more-economic-approach in recent years of State aid enforcement underpinning the internal market objective, it may be likely that the internal level-playing eld, including economic analysis, will play a minor

role in the future. In light of the Communication, it may be possible that the internal market approach will simply fade away in favour of an EU industrial policy to strengthen external competitiveness e coming years will show whether the long-promoted approach of granting “ as much as necessary, as lile as possible” Stateaidcanmeettheincreasinglystrongneedforgreaterstateinterventioninthesinglemarket.

e new rules would apply until 31 December 2025 – at least that is the current roadmap. It remains to be seen whether crisis management and transition will no longer be necessary in 2026 and whether the transitional framework will then have served its purpose – in any case, the interplay between crisis regulation and existingStateaidrulesis,untilthen,tobecontinued.

Sustainability, climate protection and the State aid practice in times of crisis: a chimera?

1

Maria Segura

Climate change and environmental degradation constitute an existential threat to and the world. Europe Faced with these challenges, the Commission presented the (EGD) in 2019 to European Green Deal transform the EU into a modern, resource-efficient, and competitive economy, ensuring zero net greenhouse gas emissions by 2050 and economic growth. In this endeavor of transforming the Union, no person and no place would be le behind. Under this moo, social, economic, and environmental sustainabilityarereconciledwithinasingleframeworkforaction.

To achieve the policy objectives foreseen under the EGD, the Commission adopted the European Green Deal Investment Plan and the Just Transition Mechanism to complement the national resources available at the level of the Member States. Whether the funds stem from European or national resources, public support must respect State aid rules A revision of relevant State aid ruleswasforeseen to provide a clear, fully updated and t-for-purpose enabling framework for public authorities to reach the policy objectives of the EGD, while making the most efficient use of limited public funds. State aid rules support the transition by fostering the right types of investment and engaging the right aid amounts, encourage innovation and the deployment ofnew,climate-friendlytechnologies.

enewenvironmentalaidguidelinesandbeyond

e most important rules to be revised were the Guidelines on State aid for climate, environmental protection and energy 2022 (CEEAG). e new CEEAG cover all categories of investments and technologies that Member States can support to deliver the European Green Deal. ey introduce new aid instruments, such as Carbon Contracts for Difference, and allow for aid for the closure of coal, peat, and oil shale plantstofacilitatedecarbonisationinthepowersector AnyStateaidmeasureproposedbyaMemberStatein line with the conditionslaiddown in the CEEAG will be suitableto achieve the objectivesforeseen under the EGDandconsideredcompatible.

In response to the energy market disruptions caused by the war in Ukraine and to reduce dependence on fossil fuels and accelerate the energy transition foreseen under the EGD, in May 2022, the Commission presented the . Public support to projects addressing these challenges under the current REPowerEU Plan additional pressure regarding timing will mainly be considered compatible on the basis of the new CEEAG andwillthusadheretosustainabilityandclimateprotectionconsiderations.

1. Maria Segura is a lawyer specialised in State aid maers and regularly participates at conferences and publishes articles in specialised legal publications

Member States can, however, intervene in many areas of the economy with a variety of actions and instruments that do not fall under those foreseen by the CEEAG e question arises as to what extent other State aid measures align with the objectives of the EGD and with climate protection. ere are no benchmarks to consider a State aid decision in line with sustainability considerations but the Commission can take into account such considerations as well as the objectives of climate protection in the assessment of compatibility ofanyStateaiddecision.

is is not an obvious task. is Op-Ed will just catch a glimpse of the challenges to ensure compliance with sustainability and climate protection policies in the State aid decision-making practice of the Commission beyondtheCEEAG.

elimitsoftheassessmentofcompatibilityinStateaiddecisions

e Commission is the only authority that can assess whether a measure is compatible with the State aid rules foreseen under Article 107 and 108 TFEU and has thus the exclusive competence to authorise or prohibit State aid. e Commission adopts guidelines on the interpretation and application of the State aid rules. eseguidelines,binding on the Commission, provide guidance on the assessment of a particular type ofaidorsector

Not all the guidelines – probably rightly so – take on board the need to ensure sustainability and climate protection in the review of compatibility and the balancing exercise. Indeed, the fact that sustainability is not a requirement for compatibility in the guidelines does not mean that the Commission could not take it into account in its State aid assessment. e guidelines give leeway to the Commission. is is the case for instance of the . In the assessment of State aid measures that fall within the provi- Regional Aid Guidelines sions of the Regional Aid Guidelines, the Commission may take into account, where relevant, the circumstance that on top of its contribution to regional development and cohesion, the aid contributes substantially in particular to transition towards environmentally sustainable activities, including low carbon, climate neutralorclimate-resilientactivities.

Further, not all state aid measures can be assessed on the basis of guidelines; some must be examined directly onthebasisoftheprovisionsoftheTreaty

One example concerns aid measures in green transport that can currently only be assessed on the basis of Article 93 TFEU directly. e objectives of the EGD, climate protection and sustainability can be endorsed in the State aid assessment of the measure as evidence at least two decisions regarding intermodality. e Commission approved a Belgian to improve the efficiency and reliability of inland waterway scheme transport and to reduce the share of road transport for container transported to or from seaports and an Italian seeking to streamline support of intermodal rail and waterborne freight transport, whilst measure enhancing the support to freight intermodal solutions for rail transport and ports. In these decisions, the Commission made specic reference to (i) the Communication on “e European Green Deal” and noted that “As a maer of priority, a substantial part of the 75% of inland freight carried today by road should shi onto rail and inland waterways” and (ii) the Communication on a “Sustainable and Smart Mobility Strategy

– puing European transport on track for the future” and noted the need for “decisive action to shi more activity towards more sustainable transport modes” In the compatibility assessment, the Commission valued very positively that the objectives of the aid measures were aligned with the Union overarching policy goal to make the Union transport system achieve its green and digital transformation and reach the climate targetsasdenedintheEGD.

Another example can be found in a decision regarding a German for the earlier phasing out of coal- scheme red power, assessed directly under Article 107(3)(c) TFEU. e Commission noted positively in this decision that in the context of developing generation of electricity from alternative sources, such as renewables, the Communication on the Sustainable Europe Investment Plan, which is part of the European Green Deal, recognised that the closure of coal-red power installations is a crucial area to achieve the transformationtowardsaclimate-neutraleconomy.

In most of the State aid decisions adopted where sustainability issues played a role, the Commission concluded that the measure was compatible with the rules of the Treaties or did not constitute State aid within the meaningofArticle107TFEU

edecision-makingpracticeoftheCommissionisinlinewiththecaselaw

e case law of the European Courts has to date been quite restrictive when it comes to the role of climate protection and environmental considerations in the assessment of State aid measures, in particular, if the measures did not fall within the scope of application of the environmental aid guidelines (predecessor of the CEEAG).

In a recent judgment concerning an action for annulment lodged by Austria ( ), the General Case T-101/18 Court upheld a State aid decision adopted by the Commission in March 2017 regarding support for the development of two new nuclear reactors at the in Hungary Austria argued, Paks II nuclear power plant amongst others, that the Commission had not taken due account of the effects of the proposed public support on the environment. e General Court noted that the Commission was not obliged, when identifying the negative effects of the measure at issue, to take account of the extent to which it was unfavorabletotheaainmentoftheprinciplesofenvironmentalprotection.

e General Court made reference to the judgment in Case (Hinkley) that addresses the C-594/18 P relevance of various provisions of the Treaties regarding environmental protection, especially Articles 11 and 194 TFEU. According to Article 11 TFEU, environmental protection requirements must be integrated into the denition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development. Furthermore, Article 194(1) TFEU, requires the Union policy on energy to have regard to the need to preserve and improve the environment. In the Hinkley judgment, the Court of Justice recalled that the principles of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability are not laid down in that Treaty (paragraph 40).

is interpretation of the Courts is aligned with the Nuova Agricast ( ) case law that had claried C-390/06 that State aid which contravenes provisions or general principles of EU law cannot be declared compatible withtheinternalmarket.

e Commission is not obliged to check that any form of aid or any circumstance connected with the aid, which are not inextricably linked to it, does not infringe any provision or general principle of Union law. e assessment of a contravention of a provision or general principles of law is thus still very open when it comes to climate protection and sustainability. Maybe the Court of Justice will shed some further light on this issue followingAustria’snewestappealincase . C-59/23P

Conclusion

Whether the State aid rules are applicable in a sustainable manner can necessarily only be answered in an inconclusiveway Higherstandardsinthebalancingexerciseandtheinclusionofa “sustainabilityandclimate protection” element in the test across the variety of measures and sectors assessed in State aid decisions wouldbebenecial.

e CEEAG are a step in the right direction towards ensuring sustainability and climate protection in State aid maers e adopted on 1 Communication on the Green Deal Industrial Plan for the Net-Zero Age February 2023 is an opportunity to further reinforce the tools at the disposal of the Commission and direct thepoliciesoftheMemberStates.

In order to make a difference, this “sustainability and climate protection” element cannot be ringfenced to support for green investments As José Luis Buendía put it in a recent , the power of the Weekend Edition Commission regarding the assessment of compatibility of State aid is, by nature, political. In the choice of whether it puts the focus on some positive aspects to the detriment or ignorance of other negative effects, the Commission has the key as to whether sustainability and climate protection in the State aid practice remain a chimera

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