Individual Aid to Counter the Effects of Serious Economic Disturbance Is Legally Possible, but Is it Appropriate?

Individual aid need not be capable itself to remedy serious economic disturbance in the economy of a Member State. It is sufficient that it contributes to that effect.

Introduction

On 22 June 2022, in case T‑657/20, Ryanair v European Commission, the General Court confirmed once more that Member States have a right to grant State aid to the undertakings of their choice rather than to all undertakings that may need or somehow “deserve” State aid.[1]

Ryanair sought the annulment of Commission Decision SA.57410 concerning the recapitalisation of Finnair that was intended to offset the impact of covid-19. The measure was notified to the Commission in June 2020. Finland asked the Commission to assess the measure directly on the basis of Article 107(3)(b) TFEU because, although recapitalisation was allowed by the Temporary Framework, the measure did not satisfy all of the requirements of the Temporary Framework.

The recapitalisation was in the form of a right issue whereby new shares were offered to all the shareholders of Finnair on a pro rata basis in proportion to their existing shares in its capital. It followed the grant of a state guarantee for Finnair which the Commission, in Decision SA.56809, had declared to be compatible with the internal market. That state guarantee covered 90% of a loan of EUR 600 million obtained by Finnair.

The Commission decided not to raise objections to the measure on the grounds that it was compatible with the internal market pursuant to Article 107(3)(b) TFEU. The Commission assessed the compatibility of the overall transaction, namely the state guarantee and the recapitalisation. In particular, it examined whether any undue negative effects arose from the cumulative presence of the two measures.

Admissibility

Ryanair claimed that its procedural rights had been violated because the Commission had not opened the formal investigation procedure and, therefore, deprived it from making coments as an “interested party” in the meaning of Regulation 2015/1589.

The General Court confirmed that “(16) the applicant, a competitor of the beneficiary, has demonstrated that it was an interested party within the meaning of Article 1(h) of Regulation 2015/1589, with an interest in safeguarding the procedural rights available to it under Article 108(2) TFEU.”

Therefore, the action lodged by Ryanair was admissible.

Infringement of Article 107(3)(b) TFEU?

Ryanair alleged that the recapitalisation did not remedy a serious disturbance in the economy of Finland because it supported a single company.

The General Court, first, recalled that “(29) the Commission may declare aid to be compatible under Article 107(3) TFEU only if it can establish that that aid contributes to the attainment of one of the intended objectives, something which, under normal market conditions, the recipient undertaking would not achieve by using its own resources. In other words, the measure at issue cannot be declared compatible with the internal market if it brings about an improvement in the financial situation of the recipient undertaking without being necessary to achieve the objective laid down in Article 107(3)(b) TFEU, namely to remedy the serious disturbance in the Finnish economy”.

Then the General Court repeated a statement that it first made about a year ago in its judgment in case T‑388/20, Ryanair v European Commission. This judgment which is under appeal was reviewed here on 27 April 2021. It can be accessed at:

Individual Aid Measures to Combat Covid-19 – Free State Aid blog article – Read now! (lexxion.eu)

“(30) Article 107(3)(b) TFEU does not require that the aid in question should be capable, in itself, of remedying the serious disturbance in the economy of the Member State concerned. Once the Commission has established the reality of a serious disturbance in the economy of a Member State, that State may be authorised, if the other conditions laid down in that article are also satisfied, to grant State aid, in the form of aid schemes or individual aid, which help to remedy that serious disturbance. It could therefore involve a number of aid measures, each contributing to that end. Therefore, for an aid measure to be validly based on Article 107(3)(b) TFEU, it cannot be required, in itself, to remedy a serious disturbance in the economy of a Member State”.

In other words, the General Court is telling us two things: First, State aid under Article 107(3)(b) does not need to remedy the cause of disturbance. It can remedy the effect of the disturbance. And, second, State aid does not have to remedy the effect of the disturbance on the whole economy. It may remedy the effect in part of the economy.

Then the General Court referred to the objective of the guarantee and the recapitalisation. “(35) The purpose of those two measures is, in essence, to provide Finnair with sufficient liquidity to maintain its viability and its air transport services during the period in which the COVID-19 pandemic is causing a serious disturbance in the entire Finnish economy, and to prevent the possible insolvency of Finnair from further disrupting the economy of the Member State concerned”.

“(36) In that regard, […], the Commission found that the insolvency of or a default by Finnair would be likely to cause a serious disturbance in the Finnish economy owing to its major role in the national and international connectivity of the country and its economic and social weight for many suppliers and workers in Finland. The Commission therefore concluded that the measures from which Finnair benefited contributed to the attainment of one of the objectives referred to in Article 107(3) TFEU, namely to remedy a serious disturbance in the economy of that country”.

This statement is a bit confusing. The serious disturbance was caused by covid-19. But would a default of Finnair cause a new serious disturbance? I suppose what the Court meant is clearer from paragraph 35 in that a default of Finnair would exacerbate the situation of the Finnish economy. However, the statement in paragraph 36 creates a contradiction with what the Court stated earlier in paragraph 30: that it is sufficient that individual aid contributes to remedying a serious disturbance rather being capable of preventing a new disturbance. Perhaps the Court wanted to emphasise that even though it is not necessary of individual aid to remedy itself the disturbance, if it can prevent further disruption so much the better.

Infringement of section 3.11 of the Temporary Framework on recapitalisations?

Ryanair claimed that the Commission should have had doubts about the compatibility of the aid measure because it departed from certain requirements laid down in section 3.11 of the Temporary Framework.

The General Court, first, explained that “(62) while the Commission, in the area of State aid, is bound by the guidelines that it issues, the adoption of such guidelines does not, however, relieve it of its obligation to examine the specific exceptional circumstances relied on by a Member State, in a particular case, for the purpose of requesting the direct application of Article 107(3)(b) TFEU.”

As may be recalled, Finland notified the measure under Article 107(3)(b) TFEU.

“(64) The parties’ disagreement thus relates to the requirements laid down in section 3.11 of the temporary framework which the Commission did not apply. […] The Commission and the Republic of Finland submit, on the contrary, that specific circumstances existed which, […], justified the direct application of Article 107(3)(b) TFEU to the facts of the present case and, therefore, the non-application of the abovementioned requirements.”

“(65) In that regard, it should be noted, as a preliminary point, that the measure at issue was part of a regulatory framework that was impacted by the exceptional circumstances caused by the COVID-19 pandemic and, in addition, that it had very particular specific features that were unique to it.”

“(67) The economic repercussions of those exceptional circumstances required immediate action at both Member State and EU level. […] That framework, in the light of the extremely urgent circumstances that existed when it was adopted, could not foresee all the measures that the Member States might adopt for economic operators affected by the crisis caused by the COVID-19 pandemic.”

After examining the reasons for the deviation from the Temporary Framework, the General concluded that it was justified. [paragraphs 68-76 of the judgment].

Infringement of the obligation to weigh the positive and negative effects of the aid?

Ryanair argued that the Commission was required to weigh the expected positive effects of the aid in terms of achieving the objectives of Article 107(3)(b) TFEU against the adverse effects in terms of distortions of competition.

It also argued that section 1.2 of the Temporary Framework obliged the Commission to do so. The Court dismissed this part of the argument on the grounds that the Temporary Framework does impose such an obligation.

The General Court observed that “(106) under Article 107(3)(b) TFEU, ‘the following may be considered to be compatible with the internal market: […] aid […] to remedy a serious disturbance in the economy of a Member State’. It follows from the wording of that provision that its authors considered that it was in the interests of the European Union as a whole that one or other of its Member States be able to overcome a major or even an existential crisis which could only have serious consequences for the economy of all or some of the other Member States and therefore for the European Union as a whole. That textual interpretation of the wording of Article 107(3)(b) TFEU is confirmed by comparing it with Article 107(3)(c) TFEU concerning ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’, in so far as the wording of that latter provision contains a condition relating to proof that there is no effect on trading conditions to an extent that is contrary to the common interest, which is not found in Article 107(3)(b) TFEU”.

“(107) Thus, in so far as the conditions laid down in Article 107(3)(b) TFEU are fulfilled, that is to say, in the present case, that the Member State concerned is indeed faced with a serious disturbance in its economy and that the aid measures adopted to remedy that disturbance are, first, necessary for that purpose and, second, appropriate and proportionate, those measures are presumed to be adopted in the interests of the European Union, so that that provision does not require the Commission to weigh the beneficial effects of the aid against its adverse effects on trading conditions and the maintenance of undistorted competition, in contrast to what is laid down in Article 107(3)(c) TFEU. In other words, such a balancing exercise would have no raison d’être in the context of Article 107(3)(b) TFEU, as its result is presumed to be positive. Indeed, the fact that a Member State manages to remedy a serious disturbance in its economy can only benefit the European Union in general and the internal market in particular.”

One may also say that the negative effects of the aid are kept to the minimum by ensuring that the aid is proportional.

Did Finnair have significant market power?

Ryanair contended that the Commission did not assess the market power of Finnair correctly.

The General Court concluded that “(117) the Commission was therefore right to find, […], that, in order to determine Finnair’s market power, it could examine the presence or, conversely, the absence of competitive constraints on that airline at the airports where it held slots. The Commission carried out that assessment, inter alia, on the basis of the level of congestion at the airport concerned and the share of slots held by Finnair at that airport.”

“(118) The Commission found that Finnair principally provided passenger air transport services to and from its main base and hub, Helsinki Airport.” “(120 Finnair’s share of slots, out of the total number of slots at that airport, was less than 25% in 2019 […] Furthermore, as is apparent from the contested decision, there is no congestion at that airport, even at peak hours […] Slots are available at any time of the day for new entrants, including those wishing to compete with Finnair on one route or another.” “(121) For those reasons, the Commission concluded that Finnair did not have significant market power at Helsinki Airport”. “(122) That finding is not called into question by the applicant’s argument based on the fact that Finnair carried a total of 68.4% of all the passengers departing from and arriving at Helsinki Airport in 2019.”

Infringement of the principle of non-discrimination?

Since Ryanair was excluded from the aid measure in question, it claimed that the aid infringed the principle of non-discrimination.

The General Court began its analysis by recalling that “(134) the principle of non-discrimination requires that comparable situations must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified.” “(135) The elements which characterise different situations, and hence their comparability, must in particular be determined and assessed in the light of the subject matter and purpose of the EU act which makes the distinction in question. The principles and objectives of the field to which the act relates must also be taken into account.”

“(136) Furthermore, it should be borne in mind that the principle of proportionality, which is one of the general principles of EU law, requires that acts adopted by EU institutions do not exceed the limits of what is appropriate and necessary in order to attain the legitimate objectives pursued by the legislation in question […] where there is a choice between several appropriate measures, recourse must be had to the least onerous and the disadvantages caused must not be disproportionate to the aims pursued.”

Then the Court held that, although “(137) other airlines contribute to a certain extent to Finland’s connectivity and that they are affected just as much as Finnair by the COVID-19 pandemic and the travel restrictions resulting from it […] the fact remains, as the Commission submits, that there is no requirement for Member States to grant aid to remedy a serious disturbance in the economy, within the meaning of Article 107(3)(b) TFEU […] In addition, as stated in paragraphs 30 and 31 above, aid may be intended to remedy a serious disturbance in the economy of a Member State, in accordance with Article 107(3)(b) TFEU, irrespective of the fact that it does not, in itself, remedy such a disturbance. The Republic of Finland cannot therefore be required to grant aid to all the undertakings which contribute, in some way or other, to the connectivity of its territory.”

Then the Court acknowledged the particularly discriminatory nature of individual aid. “(138) Individual aid such as the measure at issue, by definition, benefits only one undertaking, to the exclusion of all other undertakings, including those in a situation comparable to that of the recipient of that aid. Thus, by its nature, such individual aid introduces a difference in treatment, or even discrimination, which is inherent in the individual character of that measure. To maintain, as the applicant does, that the individual aid at issue is contrary to the principle of non-discrimination amounts essentially to calling into question systematically the compatibility with the internal market of any individual aid solely on account of its inherently exclusive and thus discriminatory nature, even though EU law allows Member States to grant individual aid provided that all the conditions laid down in Article 107 TFEU are satisfied.”

“(139) In any event, even if, as the applicant claims, the difference in treatment established by the measure at issue, in so far as it benefits only Finnair, may amount to discrimination, it is necessary to ascertain whether it is justified by a legitimate objective and whether it is necessary, appropriate and proportionate in order to attain that objective. Similarly, in so far as the applicant refers to the first paragraph of Article 18 TFEU, it must be pointed out that, under that provision, any discrimination on grounds of nationality within the scope of application of the Treaties ‘without prejudice to any special provisions contained therein’ is prohibited. Therefore, it is important to ascertain whether that difference in treatment is permitted under Article 107(3)(b) TFEU, which is the legal basis for the contested decision. That examination means, first, that the objective of the measure at issue satisfies the requirements of that provision and, second, that the detailed rules for granting the measure at issue, namely, in the present case, the fact that it benefits only Finnair, are such as to enable that objective to be achieved and do not go beyond what is necessary in order to attain it.”

“(140) The objective of the measure at issue, namely to maintain Finnair’s viability and its air transport services, was capable of remedying the serious disturbance in the Finnish economy.”

“(141) As for the detailed rules for granting the measure at issue, […], Finnair contributed in a significant manner to Finland’s economic development and foreign trade, by means of both its major role in the country’s national and international connectivity and its economic and social weight for many Finnish suppliers and workers.”

“(143) It must be held that ensuring the continuity of Finnair’s economic activities was more likely to contribute to remedying the serious disturbance in the Finnish economy than maintaining the operations of other airlines which operated – to a lesser extent than Finnair – in Finland. In particular, it is not apparent from any document in the file before the Court that the applicant or any other airline, owing to their role in the national and international connectivity of Finland or their economic and social weight for that country, was of comparable importance to that of Finnair for the Finnish economy and its recovery.”

“(144) As far as concerns the question whether the measure at issue goes beyond what is necessary to achieve the objective pursued, […][it] did not go beyond restoring Finnair’s capital structure as it existed on 31 December 2019, that is to say before the COVID-19 pandemic.”

And, the General Court concluded that “(146) there is no obligation on the Commission to assess whether the Republic of Finland, aside from maintaining Finnair, should have widened the circle of beneficiaries of the aid since the decision on the State guarantee and the contested decision establish, to the requisite legal standard, the need to preserve Finnair’s contribution to the Finnish economy.”

The General Court also examined and rejected other pleas alleging infringement of the freedom to provide services and the freedom of establishment.

Given that none of the pleas of Ryanair was upheld, the General Court dismissed the appeal in its entirety.

A few thoughts

It is now amply clear after this and last year’s judgments on appeals by Ryanair that Member States do not have to grant aid to all undertakings affected by a serious economic disturbance. That is the law, even if it appears to be unfair. As the General Court also pointed out, Member States do not have unlimited resources to support all affected undertakings. Undoubtedly, the need of undertakings has to be balanced against the capacity of Member States to support them. The question is how to carry out that balancing effectively and legally.

In order to do that effectively, Member States have to intervene in a way that maximises social benefits per euro spent. The General Court in its judgments of 2021 and 2022 has not imposed such an obligation on Member States. In fact, Member States do not have to prove that the chosen means of intervention are the best in terms of efficiency or effectiveness. Legally, Member States can choose to whom they grant aid, as long as the aid can contribute to remedying the serious economic disturbance.

Yet, the General Court has also ruled that the aid must be proportional. In the present case, the General Court confirmed that the aid did not make Finnair better-off than before the pandemic broke out. However, the Court also recalled the case law on the principle of proportionality according to which “where there is a choice between several appropriate measures, recourse must be had to the least onerous and the disadvantages caused must not be disproportionate to the aims pursued”.

Within its budget constraint, it is certainly conceivable that Finland could have extended aid to several airlines on a pro rata basis according to their market share. It seems that such an approach would have ensured that the disadvantages caused would also be proportionate [and therefore would not be disproportionate].

One may retort, however, that the General Court has also ruled that Member States are not prohibited from granting individual aid. Being required to grant pro rata aid would contradict their right to grant individual aid. My response to this is that it all depends on the objective of the state intervention. For example, the rescue of an important company or the funding of an infrastructure project, by definition, would require individual aid. In the case of regional development aid, the Commission itself has held that individual or ad hoc aid is unlikely to contribute to the development of a whole region and of the various sectors of its economy.

Can a serious economic disturbance be remedied by individual aid measures? As the General Court observed, a series of such measures can collectively have a positive impact through their contributions, even if they are partial.

My conclusion is that one-off interventions in favour of individual undertakings can cause disproportionate disadvantages. So the compatibility of individual aid should be assessed in light of the objective of the aid. If the objective is to maintain national connectivity or prevent worsening of an economy-wide disturbance, the scope of the intervention should be equally wide. The only exception should be a binding budget constraint which means that spreading thinly a fixed amount of money across several undertakings can undermine the effectiveness of aid. But in the current case it is hard to believe that AA+-rated Finland would have had any difficulty in borrowing cheaply whatever amount was necessary.

[1] The full text of the judgment can be accessed at:

CURIA – Documents (europa.eu)

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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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