Monti’s public health warning – state aid can damage economies

Date: 09/10/2003

Mario Monti has made waves across the Union with his crusade against state aid. Now the powerful competition commissioner unveils, in a Q&A with Peter Chapman, how the rules should be strengthened

Q: YOU have won the plaudits recently for getting tough with France, particularly in the Alstom case and now regarding Bull. But is 'tough' good enough? Are the current rules limiting how hard you can be on member states? Would you like to get tougher?

A: Our practice with respect to rescue and restructuring should, even more than before, focus on such large enterprises that trade across the EU. These enterprises usually have larger market share, and state support in their favour affects competition and trade more significantly.

Of course, there are other more technical issues with the current rescue and restructuring policy that need to be reformed. The Bull example you mention shows that we urgently need a uniform standstill period during which the aid recipient cannot rely on follow-up aid. The "one time last time principle" as it is currently drafted in our rescue and restructuring guidelines states that aid for long-term restructuring can only be granted once every ten years. The guidelines simply did not envisage that short-term rescue loans would be awarded during the ten-year standstill period. I will therefore propose that a uniform period of ten years must be kept between all forms of aid. This is also a socially responsible policy: it is hard to believe that companies which do not survive for ten years after their last restructuring effort provide stable employment.

Can you say precisely how you believe the state aid rules should be changed in order to allow the Commission to do a more effective job?

Let me give you one precise example: in a restructuring operation the aid beneficiary should be obliged to finance a large part of its restructuring cost. This means that the new guidelines will stress that in particular large undertakings, that are active throughout the Community and receive subsidies, have to make a significant contribution to their own restructuring - using funds they obtained by selling assets. We will be less strict on small- and medium-sized enterprises.

The 1999 guidelines do not address the issue of how substantial a company's own contribution to the restructuring effort should be. Therefore, we are thinking about a minimum percentage of the restructuring cost the undertaking has to carry itself. For large undertakings, the threshold of this contribution should be significant and we are currently working on quantifying it. For smaller undertakings whose activities do not distort competition within the EU in the same way, the thresholds may be lower.

What constraints are the Commission under in this respect, from member states and European Court of Justice rulings?

The policy on rescue and restructuring - which is the main focus of our reform efforts - is essentially a Commission policy. This is why the Commission adopted the rescue and restructuring guidelines. Because the Court gave us considerable discretion in this area, we felt the need to set forth our administrative policy and to make our rescue and restructuring decisions more predictable. That approach makes our decisions more foreseeable, and we bind ourselves vis-à-vis the member states. This reflects good administrative practice and fosters a discipline in our decision-making. We intend to keep that policy by issuing the new guidelines.

Member states, by having called at several European Councils for a reduction of aid levels and a reorientation of aid towards horizontal objectives - such as research and development - support our approach to orient state aid away from ad hoc aid measures, for example rescue and restructuring operations.

When will new procedures be in place?

The 1999 rescue and restructuring guidelines expire in October 2004. We are launching the project of revising these guidelines and hope that the requisite consultation with interested parties and the member states will be completed in time for adoption of new guidelines before summer 2004.

As both competition commissioner and an economist, do you think the Lisbon targets would stand a better chance of being achieved if big EU firms were allowed to fail?

Our policy is not so radical. We do not say that only market forces should govern our economy and that big companies that have amassed debt must automatically be disciplined by disappearing from the market altogether. The Community, which comprises many members with different economic policy approaches, has opted for an intermediate approach. The beneficiary of public funds needs to sell assets in order to reduce its presence on the market - necessary in order to mitigate the distortion of competition in the single market caused by the subsidies. But, of course, the company must not necessarily fail. I think that this approach strikes the right balance between economics and social awareness.

Would letting firms fail be less of a problem if labour markets were more flexible, such as in the UK and US?

Contrary to widespread belief, aid to rescue and restructure companies is not a very socially conscious act. To some extent, it is even anti-social behaviour. This is because one company's problems are simply hoisted upon other companies, most often in other member states. Jobs in one member state may be saved with public funds, at least for some time, but the labour problem is merely shifted to other member states.

As long as labour mobility in Europe is very limited, employment is often a zero-sum game - jobs temporarily saved in one area translate into jobs lost in another. More flexible labour markets and more mobility of labour would help when companies and whole sectors have to restructure.

But the EU is, and wants to remain, culturally and linguistically diverse and we have to confront the current reality in this respect.

Question and answer session with Mario Monti, European Commissioner for Competition.