State aid running out of control

Date: 19/03/1998

Alec Burnside argues that despite the Directorate-General for competition's good intentions, its results continue to fall short of expectations

THE European Commission's school report for merger control reads 'very good'.

Its track record in combating cartels, restrictive agreements and abuse of market dominance has consistently been judged as 'fair', although its parents have been asked why the pupil's outstanding performance in merger control has not been repeated in these other areas.

When it comes to control of state aid, however, there is considerable cause for concern. The report reads 'tries hard, but results are poor'. Despite the Directorate-General for competition's (DGIV) will to achieve, its results continue to fall short of expectations.

Undeniably, the pupil has made progress in recent years. But the ad hoc adoption of various guidelines and notices, and the accretion of some case-law, have not been sufficient to keep up with the ever-increasing demands on the system caused by factors such as enlargement, the reunification of Germany, recession and unemployment.

As a result, and as the Commission's own fifth state aid survey published last year recognised, overall levels of state aid are not falling and may even be rising. Individual amounts of aid are increasing and more aid is granted by the wealthier member states, increasing disparities between EU countries in direct conflict with the 'cohesion principle'.

There have been a number of high-profile débâcles such as the Crédit Lyonnais case, and various examples in the airline industry (covered by the Directorate-General for transport) in which political expediency is the only credible explanation for allowing member states repeatedly to step in and rescue ailing, or terminally ill, national champions.

It is true that state aid control is very different from DGIV's other tasks, which tend mainly to involve the interests of private companies. State aid, on the other hand, pits the Commission directly against member states.

This is the most obvious but not the only explanation for the lower success rate. Another is the open-ended character of the prohibition in the treaty, which has remained the only formal legal text in this area.

In other words, state aid law has for far too long been 'soft' law. A serious effort needs to be made to convert it into 'hard' law.

At present, the rules exist only as general statements of principle into which arrangements based on political expediency can all too easily be made to fit.

The result has been inconsistent decisions, each one based on the political needs of the moment, which together do not amount to a coherent body of principle.

This is in contrast to the EU treaty Articles 85 and 86 concerning anti-competitive agreements and abuse of a dominant position. Their meaning has been highly refined by the Commission and the Courts so as to form a more or less consistent framework.

This is not to suggest that political considerations can ever be completely expunged from a system of state aid control. This is not the case even in other areas of competition law in which countries have less directly at stake. Nevertheless, they should cease to wield the clout they have at present.

It is widely agreed in this context that the Commission's 18 February proposal for a procedural regulation is, or could have been, an extremely significant event.

'Procedural' here does not mean merely administrative and technical. Rather, it is a regulation which could play a large part in determining the future direction of state aid policy by giving the system teeth. In the event, the Commission's proposal does little more than codify the existing order, which is an opportunity missed.

As far as time-limits are concerned, the adoption of a procedural regulation in principle offers a choice between two distinct approaches already found in DGIV.

One is the approach taken under Articles 85 and 86, characterised by an absence of deadlines and long periods of uncertainty for those involved. The other approach is seen in merger control. Here there are not only strict deadlines, but the time allowed is as short as is reasonable given the consultation requirements and the complexity of the issues concerned. The former procedure is much criticised; the latter has contributed to a system which generally enjoys the respect and support of the business community.

The Commission's proposal on state aid, by affirming the status quo, falls somewhere between these two, and as such will do little to diminish political pressures.

The existing two-month 'Lorenz period' for initial consideration is to be formalised, with an official decision to be taken at the end of that period. However, no time-limit has been set for completion of any in-depth investigation. This not only perpetuates the long periods of uncertainty, but it also allows politically delicate issues to be shelved indefinitely and provides more time for political pressure to be brought to bear.

Nor does the new proposal deal satisfactorily with the involvement of third parties. Given the considerable political pressure from member states to approve state aid, consistent and predictable decisions based on legal and economic principles can only be ensured if third parties play an active, counterbalancing role. This may be direct, through representations to the Commission, or via national or European Court actions.

It would be useful for the Commission to have powers to request information directly from third parties - including aid beneficiaries - in relation to both notified and non-notified aid. This might also have the beneficial side-effect of making member states more forthcoming with information themselves.

Transparency is also currently lacking at a number of levels. There is insufficient information available in a timely manner on what aid is being granted, what procedures are followed and precisely what substantive rules are to be applied. It would be very simple for a notice of all proposed aid over given thresholds to be published in the Official Journal or on DGIV's website.

If transparency is increased, a virtuous circle will be set up.

It will be harder for political pressure to be exerted. A reduction in political pressure will in turn lead to greater consistency of decisions which, likewise, will improve transparency.

Successful procedural reform could open the way for effective action on several fronts where the Commission has been hamstrung by political pressure.

Cases involving rescue and restructuring aid often involve national champions and so tend to be highly politicised: Crédit Lyonnais is the archetypal example. To allow the bank to collapse was unthinkable for France, and the Commission gave every appearance of having caved in under French pressure.

Similar examples could be given involving most, if not all the member states. New guidelines on rescue and restructuring aid are to be adopted, but policy is unlikely to change unless the Commission's hand is considerably strengthened.

Another delicate proposal likely to be fiercely resisted by some member states is that of using the state aid rules to combat tax competition between member states.

Because of the notorious difficulty in achieving the necessary unanimity on tax issues, the Commission is threatening to bring state aid proceedings against countries which attempt to attract investment through favourable tax regimes. This may well be a good idea, but the prospect of success would be altogether greater under a hard law system.

The Commission seems to be letting the opportunity to obtain substantive changes to its powers slip through its fingers. If it does, then we will not have seen the last of the institution's state aid fiascos.

Alec Burnside is the head of the Brussels office of the international law firm Linklaters, which is assisting the British Chamber of Commerce in organising a seminar on state aid on 26 March at the Sheraton Hotel in Brussels.

Major feature. Author is head of the Brussels office of the law firm Linklaters.