Is the Commission Abusing its Discretion, or Should Member States be Allowed to Waste their Own Money?

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The European State Aid Law Institute is celebrating the eleventh anniversary of its annual conference. For the past decade a perennial issue in EStALI events but also in similar events organised by other institutions has been the complaint of national officials that the rules on state aid are too intrusive and that the European Commission attempts to exert too much control over the Member States. National officials, especially those from large Member States, stand up and with confident arrogance [there are no milder words to describe their behaviour] declare that it is their prerogative to waste their own money if they so wish.What amazes me is not so much the audacity of national officials, but the insouciance and even politeness of Commission officials who bear the brunt of these comments. They probably hear these outbursts with such regularity that they must have developed some kind of immunity. Perhaps they remain calm because they know they have the upper hand. EU courts have acknowledged that the Commission has exclusive power to determine the compatibility of state aid with the internal market and they are not likely to reverse this position.However, I wish Commission officials would not be so accommodating. They do a disservice to the European Union and the smaller Member States that do not have money to waste. They should defend more vigorously the principles on which the Union is founded.

When the Commission exercises its power, it enjoys wide discretion because it has to ensure that free competition and state aid are reconciled [SIDE v Commission, T‑348/04]. Moreover, the Commission may even change its interpretation of Article 107(2) or (3) without being bound by earlier decisions [Freistaat Sachsen v Commission, C-57/00P; Regione autonoma della Sardegna, T-171/02].

EU law is very clear that all aid is incompatible with the internal market unless it achieves an objective that cannot otherwise be achieved under free market conditions. No aid may be granted, even if it is consistent with one of the objectives of Article 107(3)(a) to (d), if it is not necessary for achieving that objective [Regione autonoma della Sardegna, T-171/02; Italy v Commission, T-211/05; SIDE v Commission, T‑348/04]. If aid is unnecessary, it necessarily affects trade to an extent that it is contrary to the common interest.

When national officials waste their own money, in fact they cause a bigger distortion of competition. Other things being equal, an undertaking is attracted to the location where it can receive the largest amount of aid. In reality, wasting of money in one Member State imposes a cost on another. The latter can reduce this cost by offering more money itself. The purpose of state aid control is precisely to prevent this kind of subsidy race.

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Competition is distorted not only by explicit policies that subsidise firms, but also by weak administrative procedures that fail to ensure that subsidies are the smallest possible for any given specific objective. A subsidy has the same impact on competition irrespective of whether it is granted intentionally or unintentionally.

The need to secure that competition is not distorted fully justifies the view of the Commission that Member States should not grant aid that is not necessary and has no incentive effect. Anything that goes beyond what is necessary is wasteful.

In fact, it is in the interest of any Member State not to waste money. During ten years of EStALI conferences, I have heard many times national officials arguing that state aid ceilings should be higher. They want the possibility to grant larger amounts of amount. This is understandable and may even be justified. The Commission has singularly failed to explain how it determines the various state aid ceilings. Perhaps the optimum amount of aid is too little or too much. We simply do not have convincing evidence either way.

But in these ten years, I have not heard at all any reasonable explanation why it would be in the Member States’ interest to waste their money. I have often wondered whether those national officials who berate the Commission would also stand with the same confidence in front of their own taxpayers and declare that they have the right to waste their money. How long would they remain in office or out of jail?



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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