Corona and EU economic law: State aid

By Wouter Devroe and Joris Gruyters

The COVID-19 crisis calls for urgent State action. Member States are adopting various measures to compensate for losses suffered by the outbreak of the virus, such as compensation for temporary closure of businesses (e.g. shops, catering and hotels), introduction of State guarantees, or temporary relief of tax or social security payments. Ever more undertakings are calling upon their governments for financial support to overcome the economic impact of the virus. Increased public spending for both hospital services and the compensation of economic harm raises the question of how Member States can still comply with EU State aid law in times of corona.

In our opinion, governments and potential beneficiaries alike are well-advised to categorize their COVID-19 related State measures as follows:

  • State measures which do not require notification with the European Commission because they do not constitute State aid;
  • State measures which do not require notification with the European Commission because, even though they do constitute State aid, they are block exempted;
  • State aid measures which do require notification.

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We structure this post along these categories. We are fully aware that the matter evolves almost on an hourly basis, as the European Commission is (fortunately) showing a hands-on approach.

The EU has first mobilised and refocused its own existing tools (EIB, EIF, structural funds, measures for SMEs) to maximise EU aid. Inter alia, the Commission announced a “Coronavirus Response Investment Initiative” (CRII) with up to EUR 37 billion in cohesion funds to fight the economic fallout of the COVID-19 outbreak. However, as EU resources are much more limited than Member State resources, the Commission is now putting the EU State aid rules to good use in its fight against corona. Over the past days, the institution has outlined its policy in Communications, in Decisions for individual cases, and in press releases which are more than press releases. On 13 March, it issued its “Coordinated economic response to the COVID-19 Outbreak” and later (today or tomorrow), the Commission will issue the more comprehensive “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”, which it already circulated to Member States.

No need to notify if the State aid rules do not apply

Much is possible outside the State aid rules.

1. For example, State measures that directly compensate citizens instead of undertakings are not State aid measures. In the COVID-19 context, the Commission itself mentions as an example “financial support for consumers for cancelled services or tickets that are not reimbursed by the operators”—even though we all know that such support could indirectly benefit service providers or the organizers who sold the tickets.

Similarly, grants to non-economic activities—a category which the ECJ has stretched so far as to include social security services (including compulsory health insurance)—are not State aid either. And a measure such as the French general suspension of payment of social and tax contributions in times of COVID-19, does not constitute State aid as long as it is general and not selective.

This first category of ‘aid but not State aid’ measures is really much broader than often assumed. The prerequisites for a State measure to become a State aid measure are well known: selective advantages quantifiable in monetary terms, granted by the State and through State resources, to a recipient undertaking, affecting trade between member states and risking to distort competition. Nevertheless, national authorities still too often jump directly to the (often wrongly) presumed ‘safe haven’ of exemptions. They are well-advised to first carefully assess whether their measures constitute State aid measures in the first place.

2. Still in this category is State compensation for public service obligations or services of general economic interest (SGEIs). The Commission defines SGEIs as “economic activities identified by public authorities as being of particular importance to citizens and that would not be supplied (or would be supplied under different conditions) without public intervention”. The definition leaves Member States much discretion in identifying SGEIs. Several sectors that are particularly affected by COVID-19 such as hospital services, elderly care, and residential care come under the scope of this regime and can benefit from ‘softer’ treatment under the ECJ’s Altmark judgment and the Commission’s Second Altmark Package. A State measure will not constitute State aid at all and should not be notified as such if it fulfils the criteria set out in the Altmark judgment. This will be the case if the recipient undertaking is required to discharge a clearly defined public service obligation; the compensation thereof is calculated on the basis of pre-determined objective and transparent parameters and is proportionate; and the provider of the public service should be selected on the basis of public procurement or benchmarking.

3. Finally, we should also mention here the general (€ 200,000/3 years per undertaking) and SGEI (€ 500.000/3 years per undertaking) de minimis regimes. Indeed, trade between Member States is not deemed to be affected and/or there is no treat of distortion of competition if the aid remains below those thresholds. The thresholds only concern the aid component and therefore can apply to measures that involve much higher amounts. For example, the aid component in an interest subsidy is limited to the difference between the market interest rate and the rate applied in the aid measure.

No need to notify if the aid is block exempted or is existing rather than new

1. Since the completion of State aid modernisation, the vast majority of State aid measures is no longer notified to the Commission (in 2017, Member States spent 116,2 billion on State aid, with only 230 million of notified aid). As long as they respect block exemption regulations, Member States have surprisingly wide powers to devise aid measures on their own, without any notification being required. Two such block exemptions regulations should be mentioned here.

– The General Block Exemption Regulation (GBER), otherwise the single most important tool for exemption of State aid, does not appear to be the preferred option for COVID-19 measures, mainly because it does not apply to (a) compensation for “exceptional occurrences”, nor to (b) rescue and restructuring aid. Certain provisions on regional aid and aid to SMEs might be of use though.

– The SGEI Block Exemption Regulation (which, because of its legal basis, is labeled a ‘Decision’, but functions as a block exemption Regulation) allows for a general compensation up to EUR 15 million per year for entrusted undertakings. However, and most relevant in the current crisis, no threshold applies to compensation for the provision of SGEIs by “hospitals providing medical care, including, where applicable, emergency services” or to those “providing SGEIs meeting social needs as regards health and long term care, childcare, access to and reintegration into the labour market, social housing and the care and social inclusion of vulnerable groups”.

2. National governments should also make maximum use of existing State aid schemes, for example in favour of SMEs, that had already been approved by the European Commission before the COVID-19 outbreak. Such aid is not ‘new’ under Article 108(3) TFEU but ‘existing’ under Article 108(1) TFEU and therefore it requires no notification to the Commission.

Notification and exemption under the Treaty provisions

Only COVID-19 related State measures that (a) constitute State aid under EU law, (b) are not covered by a block exemption, and (c) are ‘new’ under Article 108(3) TFEU, have to be notified to the European Commission.

The Commission may then apply one of four provisions:

  • Article 107(2)(b) TFEU, which exempts “compensation for damages suffered by natural disasters or exceptional occurrences”;
  • Article 107(3)(b) TFEU, which allows exemption of “aid to remedy a serious disturbance in the economy of a Member State”; and
  • Article 107(3)(c) TFEU, which allows exemption of “rescue and restructuring aid” to individual companies facing, for example, severe liquidity shortages.

In addition, exemption after notification may be possible under the Altmark package. We summarize the current situation for each of these.

Exemption in case of ‘exceptional occurrences’ (but corona is not a ‘natural disaster’)

On 12 March 2020, a first COVID-19 aid scheme was notified to the European Commission. It concerned a Danish reimbursement scheme of EUR 12 million to compensate for the cancellation of events with more than 1000 participants and targeting elderly and vulnerable people, who are particularly susceptible to COVID-19. The Commission, in less than 24 hours, decided to exempt the measure, qualifying COVID-19 as an ‘exceptional occurrence’ under Article 107(2)(b) TFEU. By way of follow-up, the institution published two press releases clarifying the application of State aid rules to corona measures.

We learn from the Commission’s decision in the Danish case that the Commission sees COVID-19 as an ‘exceptional occurrence’ and not as a ‘natural disaster’. This is relevant because (a) ‘compensation for natural disasters’ is covered by the GBER (article 50) and, as a consequence, does not have to be notified, whereas (b) compensation for ‘exceptional occurrences’ does have to be notified. By labeling the COVID-19 outbreak an ‘exceptional occurrence’ the Commission makes it clear that any compensation measures will have to be notified.

‘Exceptional occurrences’ are extraordinary, unforeseeable events that have a significant economic impact. Within art. 107(2)(b) TFEU, they constitute the residual category, while ‘natural disasters’ cover earthquakes, avalanches, landslides, floods, tornadoes, hurricanes, volcanic eruptions and wildfires of natural origin.

Article 107(2) TFEU lists so-called ‘automatic exemptions’ which grant the Commission less discretion than the ‘facultative exemptions’ in 107(3). An exemption must be granted as soon as the conditions for applicability are fulfilled. Nevertheless, the Commission has made it clear that it will also check the proportionality of the aid, i.e. whether the compensation does not exceed what is necessary to compensate for the damage suffered. Moreover, the aid must be directly linked to the damage suffered because of the exceptional occurrence. Economic losses can be covered but the compensation must be precisely calculated.

In 2013, the Commission has issued a checklist to clarify the notification requirements for aid measures based on article 107(2)(b) TFEU. This checklist sets forth which information should be provided ex ante (i.e. before granting the aid), and which elements should be reported ex post. On Monday, this checklist has been ‘updated‘ in the follow-up to the Danish case, focussing specifically on the “exceptional occurrence” hypothesis.

The way forward: COVID-19 fallout as a ‘serious disturbance in the economy’

During the 2008-2011 financial crisis, we witnessed a gradual move from State aid measures exempted under Article 107(2) to measures exempted under Article 107(3). Whereas the first, most urgent, national measures were notified and approved as compensation for exceptional occurrences, later measures had to stand the stricter test of 107(3). This paragraph lists so-called ‘facultative’ exemptions, which leave much more discretion to the Commission. Back then, and now again, the Commission has indicated that it will base its “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreakon Article 107(3)(b) TFEU, which allows Member States to grant aid to remedy serious disturbances to the economy.

When last week, the Italian government created a fund to guarantee loans to small businesses, as part of a EUR 28 billion plan to remedy the current economic setback, the Commission also announced that the Italian COVID-19 crisis is of a nature as to allow the use of 107(3)(b).

Although the broad lines of the upcoming Temporary Framework are known by now, we prefer to return here with a second blogpost as soon as the document is adopted in final form.

Unchanged: rescue and restructuring aid for individual companies

A third Treaty provision which can serve as a basis for exemption of COVID-19 related State is Article 107(3)(c) TFEU, the most generally worded of all exemption grounds, referring to “aid to facilitate the development of certain economic activities”. One of the subcategories under this broad umbrella is rescue and restructuring aid, for which the Commission has developed specific Guidelines (both for financial and for non-financial undertakings in difficulty). These will remain unchanged and are complementary to the other exemptions, as they concern aid to individual undertakings rather than to aid schemes. As is well-known, the Commission is very strict towards all forms of ‘operating aid’ which undertakings need to survive on a day-to-day basis.

Pro memoria: notification and exemption under the Altmark package

State aid to e.g. hospitals, that does not fulfil the criteria of the Altmark judgement (otherwise it would not be State aid) and that cannot benefit from either the SGEI de minimis or the SGEI block exemption ‘Decision’ (supra) can still be exempted, after notification, under the so-called “Altmark package”.

Prospects?

Three categories and nine subcategories: Multiple avenues are available for Member States to grant aid to those hit by COVID-19, and to do so in conformity with EU law. Governments will choose the most appropriate regime in function of a bundle of criteria: does the aid measure involve a scheme or an individual company; does it compensate for direct or indirect damage, were the undertakings concerned in difficulty before the crisis or not, etc. Further guidance from the European Commission is to be expected soon. The Temporary Framework which will undoubtedly become the most important exemption mechanism. It is good to see that the Commission, having learned from the financial crisis, appears well-organised and focused. No need for any temporary suspension of EU State aid rules—on the contrary.

Wouter Devroe is full professor of Substantive EU law and Competition law,  as well as Chair of the Economic Law Department, at KU Leuven Law. He is also full professor of Competition law at Maastricht University, an expert member (“assessor”) at the Belgian national competition authority and an attorney at the Brussels Bar (Allen & Overy). He started his career as a law clerk at the Court of Justice of the European Union in Luxembourg and now represents public and corporate clients before the EC, CJEU, and national authorities and courts.

See Joris Gruyters’ bio below.

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Joris Gruyters

Joris Gruyters is a Ph.D. researcher at the Institute for Consumer, Competition & Market of KU Leuven Law. Joris has studied at the University of Namur (LL.B) and at the KU Leuven (Research Master in Laws). His research focuses on State aid law. Joris has completed various internships in the field of EU Economic Law (Allen & Overy, NautaDutilh).

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