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Lectures on Competition Policy – State aidLouvain-La-Neuve 16 March 2007

European Commission, DG CompetitionState aid to network industries, liberalised sectors and services

State Aid Economic analysis

Loretta Dormal Marino

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Outline

The legal and procedural framework Statistics and trends State aid in competition policy Economics of State aid and policy objectives Economics of State aid: the balancing test for

compatibility Future architecture of state aid rules

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The legal framework - Introduction

The Treaty: State aid in principle prohibited (negative presumption)

Rationale avoid undue distortions of competition– Prevent negative cross-border effects – Single market: Maintain level playing field for all

companies– Promote competition to ensure long-term benefit for

the consumers

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The legal framework-notion of Stet aid: Art 87 (1)

Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any forms whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market

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The legal framework – notion of State

– transfer of State resources– economic advantage (selectivity)– distorts or threatens to distort competition – affects trade between member states

One criteria missing State intervention is not State aid!

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The legal framework – compatibility

Art. 87 (2)Compatible: natural disaster, aid of social character to individuals, etc.

Art. 87 (3)Possibly compatible: areas with low living standard or aid to facilitate the development of certain economic activities, etc.

for R&D&I for SMEs for risk capital for employment for training for environmental

protection regional aid For specific sectors

(shipbuilding) For rescue & restructuring

General provisions Specific Provisions (Guidelines, Block exemption regulations)

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The legal framework: procedural aspects (1)

Ex ante control: Member States have to notify

Aid can be granted after Commission approval

When the notification is complete, the Commission decides within 2 months: approval or, in case of doubts, opening of an in depth investigation (2nd phase)

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The legal framework: procedural aspects (2)

What if a Member State grants an aid without prior approval of the Commission?

The aid is illegal

It can be declared compatible

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Some statistics

In 2006, DG Competition:

– Received 495 notifications

– Started 44 in depth investigations (on notified and non notified measures)

– Received 227 complaints

– Prepared 436 decisions of the Commission

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…and trends

Note: Credit Lyonnais case in France excluded. Otherwise kink in 1997

.4.6

.81

1.2

Tota

l a

id/ G

DP

1992 1994 1996 1998 2000 2002 2004year

total aid w/o railw. total aid w/o agric., fish., transp.

Total aid per GDP declined

0.6%

EUR 57 bln

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… and trends (2)

Total aid without agriculture, fishery and transport, EU-15; Credit Lyonnais case in France excluded. Otherwise kink in 1997.

40

50

60

70

80

Hori

zon

tal aid

in

% o

f to

tal aid

1992 1994 1996 1998 2000 2002 2004year

Share of horizontal aid increased

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State aid in Competition policy

State aid control: an integral part of EU competition policy

But is different insofar….

– the “actors” are member states– economic as well as social objectives

a distinct perspective, also in terms of economic analysis

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State aid in Competition policy (2)Policy standards

Mergers and antitrust: consumer welfare

State aid: social welfare =well being including distribution appreciation

Shadow cost of taxation

Social welfare of EU =common interest

economic as well as equity objectives

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State aid - Policy objectives

Efficiency (“making the cake bigger”) Equity (“dividing the cake better”)

Do not necessarily involve a trade-off

Efficiency

economic (efficiency) objective : R&D risk capital…

social (equity) objective, such as cohesion

Overlap: equity and efficiency objectives coincide

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Economics of State aid: a « new » approach

“Less and better targeted aid” - political mandate (EU Council)

increase effectiveness of state aid to achieve economic and social objectives limit distortions of competition and trade

Commission: State Aid Action Plan (2005)

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Economics of State aid: basic approach

Does a state measure constitute State aid?

If yes, should the aid be approved?: Balancing test for compatibility (to be introduced into guidelines and used in examination of individual cases)

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Economics of State aid - Market investor principle

Does a measure constitute aid? – De minimis

– Would a private investor have taken the same decision as the state (for instance in case of a capital injection or a debt write-off)?

If the member State acts as a normal market economy investor no state aid

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Economics of State aid: compatibility

a. Existence of well-defined market failure / equity objective

b. Targeting of state aid (is the aid well design to deliver the objective/adress the market failure?)

a. Are the ‘distortions of competition’ and ‘effect on trade’ sufficiently limited so that the aid measure is on balance not contrary to the common interest?

—> balance between the positive and negative effects

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Economics of State aid - Market failure

… when the market fails to provide a good or a service and the economic benefits are superior to the costs

– Externalities: R&D, training, …– Asymetric information: financing for SMEs– Public goods: Public TV, postal services, SGEI – Coordination problems: innovative clusters

State intervention can improve the economic result

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Economics of State aid - Objective of common interest

Must be well defined (ex: cohesion, growth, employment, environment)

The aid must well target the identified objective of common interest :

– It must be an appropriate policy instrument – It must have an incentive effect– It must be proportionate to the problem tackled

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Economics of State aid – distortions of Competition

Reducing effective competition between firms

Keeping inefficient firms afloat

Distorting dynamic incentives to invest

Reducing effective competition by increasing market power

Push efficient firms out of the market

Distorts competition between Member States …

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Distortion of competition How to evaluate: - procedural aspects - market conditions (market share,entry

barriers) - amount of aid - type of aid (subsidy, operating aid,

guarantee…) …

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SAAP: future architecture of state aid control More generous « de minimis »

More economic approach in guidelines

More block exemptions

More in-depth economic approach for important cases (ceiling in guidelines)

Streamline of procedures

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