Developments in State Aid Control and Policy
The European Commission’s State Aid Action Plan (SAAP), launched in the Summer of 2005, induced a shift away from the legal, form-based approach towards a more economic, effects-based approach to State aid control. The so-called “refined economic approach” seeks to balance the costs and benefits of State aid by answering the following questions:
- Is the State aid measure aimed at a clearly defined “objective of common interest” (e.g., correcting a market failure);
- (Is the State aid measure the appropriate tool for achieving the objective (i.e., correcting the market failure); and
- What is the effect of the State aid measure on competition and trade?
A well-targeted aid measure with limited negative effects on competition and trade can pass the test when its benefits (i.e., correction of market failure) outweigh its costs (i.e., distortion of competition and trade).
Recently, economists have stressed that a social welfare standard should be applied in assessing the countervailing effects on competition. The EC seems to acknowledge deficiencies of the ‘effect on rivals standard’ it applied in the past, but does so far only provide limited guidance as to how a social welfare standard could be applied in practice.
A major challenge for applied economists therefore remains in developing practical tools to assess aid measures that are based on a social welfare standard. There are several open questions in the ongoing reform effort:
A full analysis of a total welfare standard requires an analysis of the cost to tax payers. There are currently no agreed to tools to pursue this analysis and there are no indications that the Commission will consider these effects in a quantitative way;
Article 87(1) effectively acts as a screening device as the “Article 87(1) test” identifies whether a measure is considered as State aid or not. The current interpretation of 87(1) is not compatible with a total welfare standard;
Some commentators favor a more pronounced economic analysis of the effect on trade in order to screen out cases that seem inappropriate for the Commission to deal with (often reference is made to the “Austrian dentist case”, “Brighton piers”, “swimming pool Dorsten” or similar cases);
The Commission is vague regarding the extent to which equity considerations should be considered as objectives of common interest. There seems to be a divergence of the objectives considered depending on the policy area;
In some areas remedies and compensatory measures are employed. Their role under a more coherent economic framework requires further development;
There is an ongoing discussion as to how aid provided by countries outside the EU should be considered in State aid proceedings.
In this ENCORE brainstorm Rainer Nitsche (CRA International) will discuss these open issues and also present some tangible results of the SAAP. His comments are based on his ‘Study on methods to analyze the impact of State aid on competition’ with Paul Heidhues (University of Bonn) for the European Commission and subsequent work in several working groups on State aid reform with State aid economists and lawyers.
In relation to the refined economic approach, more economically founded and practical definitions of legal concepts in EU State aid rules will be discussed, such as those on Services of General Economic Interest (SGEI). While Member States have some discretion of defining Services of General Interest as being economic (SGEI) or non-economic (SGI), the form of State aid and consequently it effects on competition may differ substantially, depending of the definition chosen. Recent cases, in for example education, have unraveled the effects on competition of different definitions and have stressed the need for further definition of SG(E)I.
Edwin Schotanus (Van Doorne Advocaten) will discuss the current status of State aid rules for SGEI and the effects that different definitions of SG(E)I may have on competition by means of a case study.
The brainstorm session will be held at the Ministry of Economic Affairs at March 6.
This brainstorm is a closed session.
