Expert Opinion – State aid in response to COVID-19 and implications for competition

With the adoption of the initial Temporary Framework on 19 March, the European Commission (“EC”) enabled Member States to take swift action to mitigate the economic fallout, by applying State aid rules flexibly and approving notified aid measures at record speed. The EC has so far approved more than €2.5 trillion across around 200 national aid schemes, mainly under the

Temporary Framework, which since its adoption has been amended three times. In setting up the Temporary Framework and widely approving the notified aid measures, the EC has made extensive use of the room for manoeuvre that the rules afford it in the specific context of the COVID-19 crisis.

As State aid linked to COVID-19 becomes more targeted, what will be the

most controversial issues of debate?

The 2020 State aid Temporary Framework is more generous when compared with that which was adopted during the 2008/2009 financial crisis, mainly because it allows for significantly larger amounts of compatible aid. The initial framework, which allowed Member States to adopt general support measures, applicable across economic sectors, included guarantees and subsidies on loans, direct grants, tax advantages, repayable advances and short-term export credit insurance. The

Temporary Framework has been amended three times to date.

The first amendment of 3 April supplements the initial framework by widening the scope of general aid to tax (including VAT) and social security deferrals, wage subsidies as well as support of R&D activities and production of goods and services directly related to the mitigation of the pandemic. General support measures have accounted for about 95 percent of the volumes of State aid granted so far, with only the remaining 5 percent going to single-firm beneficiaries.

The second amendment to the Temporary Framework enables Member States to provide aid in the form of recapitalisations and subordinated debt to companies with urgent liquidity needs. These kinds of support measures are generally considered to pose a greater threat to competition and, although safeguards have been put in place to try to protect the level playing field, some measures have already attracted intense controversy. The most prominent example so far is the Lufthansa bailout approved by the EC, which signalled a shift toward sizeable interventions targeted more specifically at individual, predominantly large companies. These support measures, and the conditionality attached to them to avoid undue distortions of competition, will undoubtedly continue to be the focus of debate. Ryanair has already lodged five appeals before the EU General Court against EC decisions approving State aid granted to various carriers.

The recently introduced third amendment softens the conditions associated with recapitalisation measures to encourage private capital injections and company participations in order to limit the need for State aid and the risk of competition distortions. It also allows for support of certain small enterprises, including start-ups that were already in difficulty before the end of 2019. The EC argues that these companies have been particularly affected by the liquidity shortage, exacerbating their existing difficulties to access financing compared to larger enterprises.

Whilst the EC should be commended for taking swift and decisive action, there is nevertheless a risk that the wide reach of the State aid measures taken contributes to the entrenchment of companies with longstanding structural problems unrelated to the current crisis. All EU economies have some “zombie firms” (e.g., firms that are unable to repay their loans but are kept alive by weak banks concerned about their own financial stability). Zombie firms are not only inefficient and unable to grow, they also crowd out more efficient companies, denying them the opportunity to grow and to diffuse technological innovation. Instead of allowing for a quicker regeneration of the European economy, State aid without requirements for adequate restructuring may slow down aggregate productivity and growth.

Read more in a paper authored by Jorge Padilla (Compass Lexecon) and Nicholas Petit (European University Institute) on the implications of COVID-19 for competition policy and economic growth:

The views expressed in this report are those of the authors Urs Haegler, Senior Vice President at Compass Lexecon and Georges Siotis, Consultant of Compass Lexecon and Associate Professor at the Universidad Carlos III de Madrid.