State aid inquiries fuel concern

Date: 19/10/1995

By Tim Jones

THE European Commission is on the brink of settling the two big disputes which have soured its relations with the Spanish government in recent months - but the battles over SEAT and Iberia have left the EU's poorest member states feeling victimised.

The full Commission is expected to accept a recommendation from the Competition Commissioner Karel Van Miert to approve a 285-million-ecu subsidy to aid a major restructuring of Volkswagen's loss-making SEAT subsidiary at its last meeting this month.

But Transport Commissioner Neil Kinnock is likely to decide in November to approve only a small part of a requested subsidy of 806 million ecu to Spain's national airline Iberia.

Resolution of the two issues will ease tensions between Madrid and Brussels, but will leave a legacy of resentment in Spain and the authorities in the other poorer EU member states, which are beginning to feel victimised by the Commission's pursuit of state aid investigations.

In its recent survey of state aid, which totals 94 billion ecu or 2&percent; of Union gross domestic product every year, the Commission found industrial subsidies to be increasing in the EU's largest and richest states, while it was falling in those member states benefiting from the 15-billion-ecu Cohesion Fund: Spain, Portugal, Ireland and Greece.

The Irish Business Bureau, for example, calculates that state aid per person employed in Germany is twice that in Ireland, while German state aids to the manufacturing sector alone total more than 12 billion ecu a year.

Yet recently the most high-profile and controversial state aid cases have concerned Spaniards and Greeks.

A Commission decision on the SEAT aid at its 31 October meeting will end a three-month investigation into the legality of the subsidy, conducted under Article 93 of the Treaty of Rome.

Spanish central and regional authorities stepped in to pay the aid to SEAT last year as it teetered on the brink of collapse following losses of almost a billion ecu in 1993. When the subsidy was first made ostensibly for research and development, the Commission ordered its repayment. This is because it had been allocated for developing future models and most of it had already been advanced by a state bank and Catalonia's government before notification to the Commission. To delay repayment, Madrid reclassified the subsidy as part of a restructuring package; a type of aid sometimes allowed under EU rules. In fact, under SEAT's 1993-97 restructuring plan, output has been halved to 390,000 cars a year and 9,000 jobs will be cut.

The cuts centre on SEAT's Zona Franca car paint shop in Barcelona. This was the most uncompetitive part of the company and SEAT had already started investing heavily in its Martorell plant to allow work to be transferred there.

At a meeting on 4 October with Competition Commissioner Karel Van Miert, Spanish Industry Minister Juan Manuel Eguiagary confirmed to the Commission's satisfaction that the Zona Franca plant would close. Van Miert was convinced this would exact the required 30&percent; reduction in capacity at SEAT and a 5-6&percent; cut in capacity of the parent group, Volkswagen AG.

The secondary aim is to reduce SEAT's European market share and this too seems to be well under way. Figures published last week show that, in the first nine months of this year, the firm's European market share has dipped to 2.4&percent; from 2.6&percent; in the same period last year.

With the SEAT decision set to be cleared, Madrid has still to confirm whether it will lift its opposition to the Commission's decision in July to extend its framework for state aid in the car industry for two years from January 1996, even though this was intimately linked to the SEAT aid problem. At the end of September, the Spanish government filed a complaint at the Court of First Instance against the extension and, in particular, the fact that it was applied retrospectively from January this year to cover the fact that the previous framework had expired.

Although other member states were convinced by a Commission promise to carry out an independent review of the programme, Spain was not. Officials complained vociferously about the retrospective extension of the programme and the setting of a low 17-million-ecu threshhold for the notification of aids in the sector. Some of the subsidies to SEAT were paid during this period and made in small batches, although still above the new threshold.

In the Iberia case, Kinnock is expected to approve less than 200 million ecu worth of subsidies to the national airline, just a quarter of the total requested. The cut results from the Spanish government's failure to abide by its pledge not to return to the Commission with a request for more state aid for Iberia on top of the 750 million ecu approved in 1992.