State Aid Economic analysis

1. State Aid Economic analysis Loretta Dormal Marino

2. 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

3. 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

4. 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

5. 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!

6. 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 The legal framework – compatibility General provisions Specific Provisions (Guidelines, Block exemption regulations)

7. 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)

8. 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

9. 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

10. …and trends 0.6% EUR 57 bln Note: Credit Lyonnais case in France excluded. Otherwise kink in 1997

11. … and trends (2) Total aid without agriculture, fishery and transport, EU-15; Credit Lyonnais case in France excluded. Otherwise kink in 1997.

12. 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

13. 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

14. State aid - Policy objectives • Efficiency (“making the cake bigger”) • Equity (“dividing the cake better”) • Do not necessarily involve a trade-off social (equity) objective, such as cohesion economic (efficiency) objective : R&D risk capital… Efficiency Overlap: equity and efficiency objectives coincide

15. 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)

16. 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)

17. 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

18. Economics of State aid: compatibility • Existence of well-defined market failure / equity objective • Targeting of state aid (is the aid well design to deliver the objective/adress the market failure?) • 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

19. 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

20. 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

21. 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 • …

22. Distortion of competition • How to evaluate: • - procedural aspects • - market conditions (market share,entry barriers) • - amount of aid • - type of aid (subsidy, operating aid, guarantee…) • …

23. 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