State Aid – Analysis of the Temporary Framework

When the COVID-19 pandemic hit, immediately member states  of the EU began providing extra supports to domestic businesses and the public at large. Closest to home, the Covid-19 unemployment benefit provision allowed the Irish state to support those most affected by the loss of wages during this time. In normal circumstances, the EU commission prevented the state from adding extra capital to domestic industries through its development of EU State Aid law. This is mainly encapsulated in Article 107 TFEU. The EU Commission provided a Temporary Framework that provided sweeping exceptions to Article 107 TFEU allowing unprecedented exceptions to the state aid rules.

            Prior to the Temporary Framework, the tools available to member states in order to support their relative economies were Article 107(2)(b) TFEU (exceptional occurrence or natural disaster), Article 107(3)(b) TFEU (remedy a serious disturbance in the economy of a member state), the GBER and the de minimis rules. It was clear from the outset of the pandemic that the rules already in place were simply not adequate for the protection of domestic industries. This was evident from the Commissions acceptance of only 10 of the initial 120 measures brought in by member states were done so under Article 107(2)(b).

The framework, now in its sixth amendment, has seen significant change in its ceilings and subsidy caps since its initial inception, and it is further evident that in each amendment the Commission has recognised a need for added support for certain sectors in order to allow Member States to adequately assist their economies. In its first amendment we  saw the Commission recognise public health as a key factor in the support of the economy. This was evident by the adoption of direct grant allowances for R&D and support in the form of tax advantages and grants for the construction and upscaling of testing facilities for vaccines.[1] The third amendment provided enhanced support for ‘small and micro companies’ as well as start-ups who were facing liquidity issues.[2] The fifth amendment significantly increased the ceilings of aid granted to undertakings and brought in the ability for the conversion of repayable instruments into direct grants.[3] This effectively provided Member States the ability to help the economy broadly by assisting struggling companies beyond the interest free debt to overall state financing. In the initial beginning period of the pandemic, there were clear inequalities both between larger Member States and undertakings whereby Germany and France accounted for €700bn (Germany accounting for 45% of the overall State aid expenditure[4]) of the initial €890 bn in state aid passed through, and smaller states like Spain accounting for a mere €20bn.[5]

            The Commission has made has made a policy objective to support of SMEs through the GBER and de minimis.[6]The Temporary Framework was no exception to this policy objective.[7] SMEs were of the most heavily affected businesses by the pandemic[8] and due to supply-chain disruptions and impact on the demand side, otherwise profitable SMEs faced liquidity problems early on in the pandemic.[9] Further it appears that “the GBER block exemption is not enough for SMEs given the amount public money to be injected.”[10] Under the ‘normal EU state aid rules regime,’ governments are prevented from supporting domestic companies on the view that stronger competitors drive out weaker ones from the market.[11] In the Parliament’s Impact Report, one of the recommendations emphasised ‘specific focused’ protection to SMEs as the vast majority of State aid previous focus was on large companies.[12]

The Commission has made a policy objective to support SMEs through the GBER and de minimis.[13] The Temporary Framework was no exception to this policy objective.[14] SMEs were of the most heavily affected businesses by the pandemic[15] and due to supply-chain disruptions and impact on the demand side, otherwise profitable SMEs faced liquidity problems early on in the pandemic.[16] Further, it appears that “the GBER block exemption is not enough for SMEs given the amount public money to be injected.”[17] Under a ‘normal EU state aid rules regime,’ governments are prevented from supporting domestic companies on the view that stronger competitors drive out weaker ones from the market.[18] In the Parliament’s Impact Report, one of the recommendations emphasised offering ‘specific focused’ protection to SMEs as the vast majority of State aid previous was focus on large companies.[19]

Despite this attempt at allowing Member States to help SMEs, the Temporary Framework has not been sufficient as the definition of SME is not coherent throughout the internal market.[20] Since the Commission only gave a Recommendation[21] upon the definition of SMEs, the Law of Entrepreneurs in Poland defines SMEs differently to that which the Temporary Framework aims to assist.[22] Due to this constraint, the Temporary Framework has not been adequate at helping the Polish State assist its economy via SMEs and the Commission falls short over its policy objectives.

It is evident that Article 107(3)(b) was the most appropriate article to use in the context of the Temporary Framework. I argue, however, that it is not wholly adequate given the inequalities in purchasing power between larger and smaller member states. The burden upon the Spanish government if they want to pursue such a protection of industries to the level of Germany or France, would have it incur substantially more public debt thus than France or Germany.[23] This brings to light the substantial inequality between the richer and poorer Member States, and each one’s ability to protect their respective economies and the lack of ability of the Temporary Framework to prevent such distortions of competition.[24]

I argue that the lifting of ceilings and allowance of more aid under de minimis has indeed helped Member States best support their economies while fulfilling the Union policy objectives at the same time, but this support is limited to the Commission’s lack of competence in defining its scope like that of SMEs.

[1] Delia Ferri, 'The Role of EU State Aid Law as a “Risk Management Tool” in the COVID-19 Crisis' (2020) European Journal of Risk Regulation 1

[2] Practical Law Competition, 'COVID-19: Commission adopts fifth amendment to Temporary Framework to support the economy' (Thomson Reuters, 28/01/2021) <https://uk.practicallaw.thomsonreuters.com/w-029-4245?transitionType=Default&contextData=(sc.Default)&firstPage=true> accessed 28/04/2021

[3] Ibid

[4] M. Honoré, 'State Aid and COVID-19 – Hot Topics' (2020) 19 European state aid law quarterly 111

[5] Lena; van’t Klooster Hornkohl, Jens, 'With Exclusive Competence Comes Great Responsiblity: How the Commission’s Covid-19 State Aid rules Increase Regional Inequalities within the EU' (VerfBlog, 29/04/2020) <https://verfassungsblog.de/with-exclusive-competence-comes-great-responsibility/> accessed 28/04/2021

[6] Herwig CH Hofmann and Claire Micheau, State aid law of the European Union (Oxford University Press 2016)

[7] José Luis Buendía and Angela Dovalo, 'State aid versus COVID-19: The commission adopts a temporary framework' (2020) Eur St Aid LQ 3

[8] Jan van Hove, Impact of state aid on competition and competitiveness during the COVID-19 pandemic: an early assessment, European Parliament, December 2020. It can be accessed at: <http://www.europarl.europa.eu/RegData/etudes/STUD/2020/658214/IPOL_STU(2020)658214_EN.pdf >

[9] Ferri, 'The Role of EU State Aid Law as a “Risk Management Tool” in the COVID-19 Crisis'

[10] Ibid

[11] Hofmann and Micheau, State aid law of the European Union

[12] Communication from the European Parliament – ‘Impact of State Aid on competition and competitiveness during the COVID-19 pandemic: an early assessment’ PE (2020) 658.214

[13] Herwig CH Hofmann and Claire Micheau, State aid law of the European Union (Oxford University Press 2016)

[14] José Luis Buendía and Angela Dovalo, 'State aid versus COVID-19: The commission adopts a temporary framework' (2020) Eur St Aid LQ 3

[15] Jan van Hove, Impact of state aid on competition and competitiveness during the COVID-19 pandemic: an early assessment, European Parliament, December 2020. It can be accessed at: <http://www.europarl.europa.eu/RegData/etudes/STUD/2020/658214/IPOL_STU(2020)658214_EN.pdf >

[16] Ferri, 'The Role of EU State Aid Law as a “Risk Management Tool” in the COVID-19 Crisis'

[17] Ibid

[18] Hofmann and Micheau, State aid law of the European Union

[19] Communication from the European Parliament – ‘Impact of State Aid on competition and competitiveness during the COVID-19 pandemic: an early assessment’ PE (2020) 658.214

[20] Magdalena Porzeżyńska, 'Can the EU’s SME Definition be Limited?: Comments on the Background of the Polish Financial Shield' (2020) 19 European state aid law quarterly 339

[21] Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises [2003] OJ L124/36.

[22] Porzeżyńska, 'Can the EU’s SME Definition be Limited?: Comments on the Background of the Polish Financial Shield'

[23] Hornkohl, 'With Exclusive Competence Comes Great Responsiblity: How the Commission’s Covid-19 State Aid rules Increase Regional Inequalities within the EU'

[24] Sophie Meunier and Justinas Mickus, 'Sizing up the competition: explaining reform of European Union competition policy in the Covid-19 era' (2020) 42 Journal of European Integration 1077