Covid-19 state-aid rules harm poorer member states

The easing of state-aid rules in the Covid-19 crisis has tilted the competitive playing-field away from those member states where Euro-disaffection is already growing.

Since March the European Commission has granted large exemptions to EU state-aid rules. This gives companies in rich member states an immense advantage over their competitors. Offsetting requires fair burden-sharing on the EU level. Until such measures are forthcoming, the commissioner for competition, Margrethe Vestager, should do more to ensure a fair distribution of state aid among the member states.

Under the normal state-aid regime, governments are not allowed to support their own companies, unless this is justified by reasons of general economic development. At least in theory, the rules promote efficiency and growth by driving out of the market weaker competitors which would not have survived otherwise. The rules also prevent states helping their businesses to obtain a competitive advantage over firms in other member states, creating a level playing-field in the EU.

Serious worry

It is a serious worry when the commission, as in the aftermath of the 2008 financial crisis, loosens its state-aid rules. One of the commission’s first crisis-fighting measures, in fact, was to create a Temporary Framework which allows member states to implement—subject to clearance by the commission—a wide range of state aid. This can take the form of direct grants and tax cuts, but also involve such measures as wage subsidies, deferrals of tax and social-security contributions and cheap loans, as well as specific aid for healthcare research and Covid-19 related medical products. In addition to the Temporary Framework, member states have used a direct state-aid exemption for ‘damage caused by natural disasters or exceptional occurrences’—in particular vis-à-vis the health, tourism, transport, retail and cultural sectors.

All these aid measures have been widely used in the past several weeks, but much more by some member states than by others. With the commission issuing clearance decisions daily, the total amount of aid granted in the Covid-19 crisis stood at around €1.9 trillion in early May. In general, all member states enjoy the same freedom to use the new rules. But, as in the wake of the 2008 crisis, once again there is a marked inequality in how state-aid measures have been used and granted.

While wealthy member states are responsible for the majority of the cleared measures, other member states are left behind. Germany alone accounts for 52 per cent of aid approved. Spain, which has been one of the hardest hit by the virus, has so far only promulgated a €20 billion guarantee scheme and yet to be clearly calculated umbrella schemes. These inequalities are exacerbated by other measures not qualifying as state aid in the first place, such as suspensions of payments of corporate and value-added taxes or social-welfare contributions, to the benefit of all undertakings.

Impossible choice

The EU’s internal market now presents member states such as Italy and Spain with an impossible choice. They can create a safety net for their firms which matches those available to their French and German competitors. For this, however, they would need to increase their public debts, often already dangerously high. The other option is that their firms will come out of this crisis severely weakened. They may lose a sizeable share of their economy, as companies default, are driven out of the market or face foreign takeovers.

How will increased economic inequalities affect the EU after the crisis ends? It seems very unlikely Spanish citizens will continue to favour a single market whose benefits are distributed so unfairly.

By relaxing state-aid rules and clearing measures at an astonishing speed, the current Temporary Framework enables exactly those inequalities state-aid policy is meant to prevent. The Spanish economy minister, Nadia Calviño, has rightly complained about this. Even the French president, Emmanuel Macron, despite the generous state aid available to French companies, has admitted that it undermines the internal market. Surprisingly, even Vestager, whose directorate-general is responsible for state aid, is openly concerned that EU inequalities will further increase in the aftermath of the Covid-19 crisis.

But there is not a consensus on this. The Austrian finance minister, Gernot Bluemel, wants temporarily to abandon state-aid rules altogether. Such a position is short-sighted, however, since a fair distribution of emergency measures also benefits Austrian exports and ensures a stable future for the EU.

Fair distribution

There are two ways in which such a fair distribution can be ensured. One is to design emergency measures on the EU level which consist almost exclusively of loans. With private and public debts already at record highs, this will not however be adequate. Alternatively, the EU should simply ensure that member states have sufficient funds to take effective national measures. This can be done through EU-level fiscal measures or central-bank activism.

European competition rules are an exclusive EU competence, which makes it an area where the commission has immense power. If no fair approach takes shape in the coming weeks, Vestager should reconsider the generous state aids available to companies in rich member states or take active measures to offset their effects—whether via a state-aid solidarity fund which also provides aid to competitors in other member states or future compensatory exemptions which would benefit member states that made less use of the Temporary Framework.

For once, the commission cannot blame current imbalances on the member states—it is its responsibility to solve them.

For a more detailed discussion of the legal aspects of Covid-19 state-aid measures see our earlier Verfassungsblog post