State aid (European Union)

State aid was formally introduced into European Union statute law by the Treaty of Rome where it classified state aid as being any state intervention that distorted competition law.[3] The definition was later updated by the Treaty on the Functioning of the European Union in 2007. It stated that any aid given to a company by a state within the EU would generally be incompatible with the EU's Common Market. Within the new law under the treaty, the first chapter of it defines what is not allowed to be done with state aid and the second chapter defines actions that can be done within legal limits.[1] 1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.[1]

The intent of this was that in order to avoid favouring a certain company or commercial group, an EU member state should not provide support by financial aid, lesser taxation rates or other ways to a party that does normal commercial business. For example, it would be considered illegal state aid by the EU if a government took over an unprofitable company with the sole intent to keep it running at a loss.[4] However state aid can be approved by the European Commission in individual circumstances.[5] but the aid reclaimed by the EU if it breaches the treaty.[2]

There are specific exemptions to the treaty's provisions with regard to state aid.[6] State aid can be given to parties involved in charity or "to promote culture and heritage conservation".[7] The treaty also stated that aid given in response to natural disasters would be lawful. An exemption was given to allow Germany to provide aid providing the aid was used in relation to promoting development in former East German locations affected by the division of Germany after Germany's loss in the Second World War.[1]

The EU jurisdiction is a rare case where specific binding legal provisions were introduced for controlling state aid. These provisions in principle require the Commission to authorize all grants of aid, which has proven to be a difficult if not an impossible task with 27 EU member states. This control may seem unnecessary as most subsidies (tax breaks) are supposed to "induce new firms to locate in the subsidizing state".[8] The argument is that since countries are keen to compete for bringing firms into their territory by providing good infrastructure, education, health care, etc., state aid should not differ much (e.g., locational aid).[8] Even though the argument cannot be dismissed prima facie, it is based on " the assumption that the lengths of the political and the economic cycles are the same".[8] This assumption is incorrect since political cycles are much shorter than economic cycles and even under rigorous fiscal disciplines policy-makers keep up the positive incentives to grant an "excessive amount of state aid (in comparison to real advantages)".[8] Introducing limitations and controlling state aid is necessary to hinder the issuance of excessive state aids, which is especially relevant in the case of the Union that lacks a strict balanced budget constraint and mainly operates with a single currency (the euro). According to Alberto Heimler and Frédéric Jenny, "State aid provisions are a discipline for member states."[8] However, the Commission may temporarily exempt aids that remedy serious economic disturbances provided the disturbance is narrowly and strictly defined. The European Court of Justice further disciplines the EU member states and enforces the limitation. Introduction of state aid provisions would be beneficial for all countries but governments tend to distance themselves from imposing disciplining devices unless there is an international treaty that does so. For countries that are not part of the EU, aid limitations arise from the World Trade Organization agreements which prohibit subsidies exclusively when they are directed to the distortion of international trade as strictly defined.[8] These agreements also recognize what is known as the actionable subsidies that can be prohibited when the complaining country shows the adverse effect the subsidy has on its interests. In particular, the prohibition may occur when a serious injury is caused on:

• "the importing country's domestic industry"
• "rival exporters in a third country trying to compete with a subsidized exporter"
• "exporters trying to compete with subsidized domestic firms"[8]

However, due to the lack of specifications, definitions and in some cases clarifications, the WTO case is highly controversial and more of an exception than a rule. A solution to this would be a more thorough regime somewhat in line with that of the European Union. In that case, the prohibition of state subsidies would occur if the subsidies were anti-competitive and affected international trade.[8]

• 2015 EU and EFTA scoreboard, page 10