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The New Political Economy of EU State Aid Policy

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Abstract

Despite its importance and singularity, the EU’s state aid policy has attracted less scholarly attention than other elements of EU competition policy. Introducing the themes addressed by the special issue, this article briefly reviews the development of EU policy and highlights why the control of state aid matters. The Commission’s response to the current economic crisis notably in banking and the car industry is a key concern, but the interests of the special issue go far beyond. They include: the role of the European Commission in the development of EU policy, the politics of state aid, and a clash between models of capitalism. The special issue also examines the impact of EU policy. It investigates how EU state aid decisions affect not only industrial policy at the national level (and therefore at the EU level), but the welfare state and territorial relations within federal member states, the external implications of EU action and the strategies pursued by the Commission to limit any potential disadvantage to European firms, and the conflict between the EU’s expanding legal order and national.

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Notes

  1. With rare exceptions, such as Doern and Wilks (1998), the same has been true of political science and competition policy more generally (see Allen 1983). Lavdas and Mendrinou (1999: 3) observed two decades ago that as a result of their neglect political scientists had ignored the role played by competition policy in the organization of the European political economy, the forms and degrees of concentration of economic policy, and, at EU level, the relations between national political economies and European and global developments. The restrictions that EU rules impose on national policies and policy making, the power of EU institutions, the relationship between competition policies and policies in other domains, and inter- and intra-institutional interaction in competition policy have been similarly overlooked. Recent work by Wigger (2008), Karagiannis (2008, 2010), Blauberger (2008, 2009a, b), Cini and McGowan (2010), Buch-Hansen and Wigger (2011) suggest that political scientists are finally recognizing the importance and interest of this area.

  2. For example, number of the classic texts on EU competition law, make no mention of the control of state aid. We thank our colleague, Pinar Akman, for drawing this to our attention.

  3. Thus, Brander and Spencer (1985) show that a competitive subsidy race by national firms competing in a third party international market leads to a reduction in domestic social welfare, even if an individual country might gain from profit shifting if there was no retaliation. Collie (1998, 2002) demonstrates that when there are domestic consumers and the distortionary effect of taxation is sufficiently low, the subsidy can be beneficial by reducing the oligopoly distortion. As with subsidising monopolies, this is very much a second-best analysis, which takes the oligopolistic distortion as given. Subsidy games get more complex when there is investment such as R&D involved (Spencer and Brander 1983), depending on whether rivals respond by increasing their own investment levels or find it more profitable to cut back. Besley and Seabright (1999) offer an insightful review, while Dewatripont and Seabright (2006) use political economy approach to show that wasteful aid can be useful to politicians wanting to show commitment to supplying public goods.

  4. For a review, see European Commission (2011).

  5. The crisis coincided with the completion of a long process of rationalisation of EU policy. To paraphrase the comments of one observer, the Commission began to allow the rescue of UK banks, when not so long ago it had condemned Polish shipyards.

  6. This is the theme that is most advanced in the previous literature (see, e.g. Dewatripont and Seabright 2006).

  7. See Lavdas and Mendrinou (1999) for an excellent discussion of the evolution of EU state aid policy.

  8. Hence Cini and McGowan’s description of state aid control as ‘the most original of the EU’s competition policies’ (1988: 135).

  9. For discussion of the Treaty provisions, see Blauberger (2008, 2009a), Hancher et al. (2006), Buts et al. (2013).

  10. ‘Within a common market’, he continued, ‘competition policy is more extensive, more complex and more necessary than in single markets where single economic area, single economic policy, one legal system, and a common legal procedure. Common market forged out of separate national markets. To prevent distortion of competition and to avoid unequal starting conditions, competition must create circumstances similar to those present in national markets.’

  11. A further clause permits the Council, acting by qualified majority, to add other categories, but only on the basis of a Commission proposal.

  12. The Commission delivered only two negative decisions in the first decade.

  13. Governments had widely differing policy traditions, contrasting views on what would be efficient or welfare enhancing, and could not agree on what types of aid should be admissible. Moreover, the Commission was divided internally on the importance that should be given to the redistributive aspects of regional aid (Blauberger 2009a: 722).

  14. Von der Groeben (1987: 59, fn 52) noted that: ‘the prominent representatives of industry and middle classes [were] sceptical or even hostile towards the competition policy and the competition rules of the Treaty’ and observed that ‘French industrialists in particular feared that individual sectors would not be able to survive increased competition within the common market without a long transitional period’.

  15. Von der Groeben (1987: 64) recalled that member governments argued that the Commission should limit itself to consideration of general schemes, while the Commission insisted it should be able to decide on individual measures.

  16. The Council would reject a proposal for an enabling regulation for a second time in 1972.

  17. As Doleys (2013) observes, this data enabled the Commission to establish ‘references for a concept that had previously had no clear empirical core’.

  18. Soft rules have no legally binding force, but can still influence action. By contrast, ‘hard state aid law that exempts certain categories of state aid from European control is based on Article [109] of the EC Treaty and has direct effect’ (Blauberger 2008: 8).

  19. In 1971, the Commission issued a follow-up communication, indicating how Articles 107(3(a) and (3)(c) applied to systems of regional aid in the Member States.

  20. It was not sufficient only for aid to be consistent with the objectives set out in Article 107(3), but compensation for the beneficiary over and above the effects of normal market forces had to be justified and the indispensability of the state aid to the achievement of the objective in question had to be demonstrated.

  21. France, Italy and the UK challenged the legitimacy of this request before the Courts, but were unsuccessful.

  22. The 1997 Multisectoral Framework (MSF), which closed the loophole that allowed governments to provide incentives to individual investors through sectoral policy frameworks, is an important example.

  23. See http://ec.europa.eu/competition/state_aid/studies_reports/studies_reports.html.

  24. European Commission (2005)

  25. The social objectives come from the Treaty. Sources of market failure widely accepted in the economics literature are set out in the SAAP: externalities; public goods; imperfect information; coordination problems; market power.

  26. They cover respectively: SMEs, research, innovation, regional development, and training, employment and risk capital.

  27. Competition Commissioner Neelie Kroes (2008: 3) reported that 65% of all aid measures were block exempted in 2007 compared with 40% in 2002.

  28. Buts et al. (2013) find that by 2007 Commission decisions were in line with the SAAP approach.

  29. The data are taken from the EC State aid scoreboard: http://ec.europa.eu/competition/state_aid/studies_reports/studies_reports.html

  30. The jump in 1997 was due to a huge spike in French sectoral aid. Ganoulis and Martin (2001) argue that much of the decline in manufacturing aid in the 1990s was due more to fiscal discipline than to state aid control.

  31. The criteria for a firm in difficulty is that it should have lost half its capital and more than a quarter of its capital over last 12 months.

  32. Individual companies are not eligible to receive other types of aid directly.

  33. Compensation is discussed in Lyons and Zhu (2013). The ‘one time, last time’ condition has not proved a credible principle. For example, airline companies have repeatedly sought and received state aid over the years (see Kassim and Stevens 2010: ch 9).

  34. Speech by Commission Vice-President Joaquin Almunia, 8th May 2012.

  35. See especially Smith (1998, 2001), Lavdas and Mendrinou (1999), and Cini and McGowan (2010).

  36. For further examples of the economics literature, see Spector (2009), Ganoulis and Martin (2001), and Neven and Verouden (2008).

  37. See Hayward (1995), Kassim and Menon (2006), and Kassim and Stevens (2010). McLaughlin and Maloney (1999) contend that the Commission has ‘broken up long standing institutionalized government-industry relationships’. See Clift and Woll (2012) for an alternative view.

  38. Streb (2009) is an exception.

  39. The special issue has not, of course, exhausted the field. It does not include, for example, sector-specific analyses, investigation of the role of EU state aid rules in bringing about restructuring and liberalization, the role of ‘compensatory measures’, member state perspectives on developing the state aid rules, examination of the influence of state aid control on areas of social and welfare policy, consideration of EU state aid control as industrial policy, or accounts of the EU state aid review.

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Acknowledgments

We should like to thank the ESRC Centre for Competition Policy, University of East Anglia, for funding the workshop, ‘The EU and State Aid: the Current Crisis and Beyond’, 9–10 July 2009, on which the contributions (with the exception of Buts et al 2013) that appear in this special issue are based. We are very grateful to all who participated over the 2 days. Our greatest debt is to the authors of the articles that follow for their equanimity in dealing with our editorial requests and patience in seeing the project through to publication.

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  1. School of Political, Social and International Studies, ESRC Centre for Competition Policy, University of East Anglia, Earlham Road, Norwich, NR4 7TJ, UK

    Hussein Kassim

  2. School of Economics, ESRC Centre for Competition Policy, University of East Anglia, Earlham Road, Norwich, NR4 7TJ, UK

    Bruce Lyons

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  1. Hussein Kassim
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Correspondence to Hussein Kassim.

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Kassim, H., Lyons, B. The New Political Economy of EU State Aid Policy. J Ind Compet Trade 13, 1–21 (2013). https://doi.org/10.1007/s10842-012-0142-9

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