Natural Disasters and State Aid

Compensation for damage suffered by undertakings as a result of a natural disaster constitutes State aid.

The compensation is compatible with the internal market only if, first, there is a causal relationship between the natural disaster and the damage and, second, the amount of compensation does not exceed the amount of the damage.

Introduction

Financial assistance in the form of compensation provided to undertakings harmed by a natural disaster is State aid if it satisfies all the criteria of Article 107(1) TFEU. It is irrelevant that such assistance is intended to make good the damage caused by the disaster. However, such compensation is declared by Article 107(2)(b) TFEU to be compatible with the internal market if it does not exceed the amount of the damage.

On 19 October 2022, the General Court delivered two judgments on the link between natural disasters and State aid: T-850/19, Greece v European Commission and T-347/20, Soja Ellas v European Commission. Both cases concern appeals against Commission decision 2020/394 which had found state aid granted by Greece to undertakings affected by large fires in the summer of 2007 to be incompatible with the internal market. Since the judgments are very similar, this article reviews only the judgment in case T-850/19.

In August 2007, in response to large fires that caused extensive damage estimated at EUR 2 billion, the Greek government declared a state of emergency and granted financial assistance to affected undertakings, mainly farmers. The assistance was in the form of subsidised loans and state guarantees for on those loans.

Some time after receiving a complaint in 2014, the Commission opened the formal investigation procedure which was eventually concluded with a negative decision. The Commission found that the financial assistance constituted State aid that was incompatible with the internal market on the basis of Article 107(2)(b). The reason was that the aid was not limited to the amount of the damage suffered by beneficiary undertakings. The aid had been granted to undertakings located in the affected regions regardless of whether they had actually suffered damage. In other words, for the sake of administrative simplification, they were presumed to have been damaged. Moreover, undertakings that had in fact suffered damage received aid that was not necessarily proportional to that damage.

Transfer of state resources

Although Greece did not contest that the interest subsidies involved transfer of state resources, it claimed that the guarantees did not have a negative impact on the state budget because any loss could be covered by additional revenue from taxation, applicants had to post security and because they had to prove that their business was viable.

The General Court rejected those arguments. First, it recalled that the granting of a guarantee may entail an additional burden for the state because a guarantee involves risk-taking, which is normally remunerated by an appropriate premium. In this case, the guarantees had been offered for free. [paragraphs 33-34 of the judgment]

The Court also observed that securities covered only 90% of the guaranteed amount [para 37], that the criteria of business viability were not precisely defined [para 39] and that the recipients did not have to pay for the guarantee [para 42].

Advantage

Greece contented that the assistance was granted in a context of market crisis. It was the state’s social responsibility to provide assistance. Moreover, the assistance conformed with the criterion of “long-term economic rationality”, meaning that the assistance helped the affected undertakings recover faster.

The General Court rejected this reasoning too. It pointed out that the concept of normal market conditions, which is used to establish the existence of an advantage, refers to the possibility for an undertaking to obtain on the market the same advantage as it derives from the aid, and not to the assessment of whether the market is functioning as usual or whether it is in crisis. [para 46]

Any interpretation to the contrary would amount to determining the existence of an advantage on the basis of the cause or aim of the aid, which would call into question the objective nature of the concept of advantage and, consequently, the application of Article 107(1) TFEU. [para 47]

The Court noted that although Greece acted in its capacity as a public authority, it tried to suggest that a private operator could have behaved in a similar manner. However, no provision of Article 107(1) TFEU excludes from its scope aid which satisfies the criterion of long-term economic rationality or falls within the state’s social responsibility. Such considerations may be taken into account only when assessing the compatibility of a measure with the internal market. [paras 48-49]

It is naturally contradictory of Greece to argue, on the one hand, that it was its obligation to assist those that were harmed by the fires and, on the other, to claim that a private investor would have offered the same financial assistance. Private persons do contribute to funds for disaster relief, but they do so voluntarily.

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Selectivity

Greece contended that the financial assistance was not selective because the undertakings that had been damaged by the fires were not in the same factual and legal position as other undertakings. Although this was potentially the most persuasive argument, it failed too.

The General Court, first, noted that measures by which advantages are granted only to certain undertakings that are determined by reference to their place of establishment are, a priori, selective. Unless the aid is granted by regional authorities that have sufficient institutional and financial autonomy or by a public undertaking that establish the conditions for the use of their goods or services, the applicable reference framework is the national framework and the assessment of the selectivity of a measure benefiting undertakings established in part of the territory of a Member State is carried out by comparison with undertakings in other parts of that Member State. [paras 56-57]

Greece argued that the financial assistance should not have been classified as State aid because it merely aimed to compensate for the damage caused by the fire and therefore conferred no selective advantage.

According to the General Court, to reject the selectivity of the measure solely on the basis of the objective of remedying the damage caused by the fires and rehabilitating the economy of the affected regions would exclude a priori any possibility of classifying as selective the advantage granted to undertakings established in the areas affected by the 2007 fires. [para 59]

Consequently, if such an approach were followed, a measure of remedying the situation of undertakings affected by a natural disaster would, in principle, be non-selective and would escape the application of Article 107(1) TFEU from the outset, which, as a result, would have the effect of depriving the exception provided for in Article 107(2)(b) of all its substance. [para 60]

Then the General Court referred to recital 118 of the Commission decision according to which damage by fires constituted normal business risk whose cost had to be borne by undertakings themselves. Greece argued that those fires represented systemic risk and that its intervention was justified by the logic of the system, without explaining what made up that system.

The General Court, first, acknowledged that the concept of State aid does not cover public measures which differentiate between undertakings and are, therefore, a priori selective, when that differentiation results from the nature or general scheme of the system of which they form part. [para 63]

Then it stated that the measures in question were intended to respond, on an ad hoc basis, to the consequences linked to the fires in the affected regions there was no attempt by the Greek authorities to establish or define a general system on the basis of which to adopt those measures. Consequently, Greece did not demonstrate that the differentiation introduced by those measures resulted from the nature or general scheme of the system of which they formed part and that the advantages they conferred were not specific in nature. [para 64]

This is an important statement. For a measure to be general it must be derived from a framework of rules established ex ante that in principle can apply to any undertaking in any sector or region of the country which are in the same situation in view of the objective of those rules. For example, compensation for damage caused by fires would have been a general measure had Greece established beforehand objective criteria on the basis of which assistance could be granted to any undertaking that was damaged by forest fires. But this was not what happened in this case. Undertakings in other parts of Greece which had been damaged by forest fires were not eligible to receive compensation.

Furthermore, the compensatory nature of the measures at issue could not prevent them from being characterised as State aid, so the fact that the contested measures were intended to restore the situation before the fires of 2007 could not succeed. [para 68]

Compatibility of the aid under Article 107(2)(b) TFEU

Greece contended that the aid was compatible with the internal market under Article 107(2)(b) TFEU.

The General Court, first, recalled that two conditions are required for the exception provided by Article 107(2)(b) TFEU to apply. First, there must be a direct link between the damage caused by the natural disaster and the State aid and, second, the assessment of the damage must be as precise as possible. [para 96]

In the present case, the aid was granted without the beneficiaries having to prove the existence of a causal link between the damage suffered and the fires of 2007. Greece considered that it was sufficient to require that the aid beneficiaries were established in the affected areas, since it was presumed that all undertakings in those areas had suffered damage.

However, the Court observed that being established in the affected areas was not a sufficient proof of whether the amount of the aid did not exceed the amount of the damage actually suffered. [para 99]

The fact that officials of the European Union had stated that the fires of 2007 constituted unprecedented events or that it was necessary that the state would use all available means to help the victims and the local economy had no bearing on the lawfulness of the contested decision. [para 102] Such statements could not justify deviation from the conditions for the application of Article 107(2)(b) TFEU. [paras 102-103]

Moreover, the statements of EU officials could not give rise to legitimate expectations on the part of the aid beneficiaries that the financial assistance did not constitute State aid or that the aid was compatible with the internal market.

Since all of the pleas of Greece were unsuccessful, the General Court rejected the appeal on its entirety.

The full text of the judgment in languages other than English can be accessed at:

https://curia.europa.eu/juris/fiche.jsf?id=T%3B850%3B19%3BRD%3B1%3BP%3B1%3BT2019%2F0850%2FJ&nat=or&mat=CONC.AIDE%252Cor&pcs=Oor&jur=C%2CT%2CF&for=&jge=&dates=%2524type%253Dpro%2524mode%253D8D%2524from%253D2022.10.15%2524to%253D2022.10.23&language=en&pro=&etat=clot&cit=none%252CC%252CCJ%252CR%252C2008E%252C%252C%252C%252C%252C%252C%252C%252C%252C%252Ctrue%252Cfalse%252Cfalse&oqp=&td=%3BALL&avg=&lgrec=en&lg=&cid=621014

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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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