The current coronavirus pandemic is rocking the global economy, sending financial markets into freefall, and leaving its mark on all sectors.
As companies struggle to adjust to the financial woes they will undoubtedly encounter, European authorities are scrambling to prepare measures to aid such companies in combatting the inevitable economic disruption. However, what measures can governments take without falling foul of EU state aid law? Moreover, what is the EU’s approach in helping its member states?
By way of background, state aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national authorities. As a general rule such aid is illegal as it distorts competition, by giving an uncompetitive advantage to one undertaking over others.
An exception to this is found in article 107 TFEU (Treaty of the Functioning of the European Union), which allows deviation from this general rule. Article 107(b) specifies that aid is legal and compatible with the internal market if such aid is to make good the damage caused by natural disasters or exceptional occurrences. Therefore, one must pose the question: does a global pandemic constitute a natural disaster or exceptional occurrence?
Up until the COVID-19 outbreak, the EU Commission had always been consistent and somewhat restrictive in its interpretation of what is considered to be a ‘natural disaster’. Over the years, natural occurrences such as earthquakes (see Commission decision of 25/07/1990, Italian Aid scheme for compensation for damage caused by the earthquake of Abruzzo of April 6, 2009) and floods (see Commission decision of December 9, 1998 regarding aid for natural disasters in the Netherlands, NN 136/98, Official Journal C72, 6/3/1999) have qualified to fall within the scope of article 107(b) TFEU.
In ‘Greece v Commission’, the ECJ held that the content of article 107(2) must be construed narrowly, “only economic disadvantages directly caused by natural disasters or by exceptional occurrences qualify for compensation.”
On March 13, the EU Commission issued a press release indicating its plan for combatting the effects of COVID-19 and outlining the state aid measures that can be adopted by member states.
Among several measures, the EU Commission declared member states are allowed to implement measures in line with current EU rules such as wage subsidiaries, and suspension of payments of corporate and value added taxes or contributions. Furthermore, the current framework allows member states to grant financial support directly to consumers. This falls outside the scope of state aid and does not require prior approval.
Given the gravity of the situation, the Commission approved the aid within just 24 hours
Currently there is also the possibility of member states providing aid to those companies who are facing liquidity shortages and are in need of urgent aid. These would mostly be sectors such as aviation due to the closing of borders across Europe.
Additional aid may be given under the Commission’s Rescue and Restructuring Guidelines as established by article 107(3)(c) which gives power to member states to grant urgent and temporary assistance in the form of loan guarantees or loans to all types of companies in difficulty.
On March 9, European Commission president Ursula von der Leyen held that the Commission is exploring manners in which state aid is permitted to combat the effects of COVID-19, by allowing it to fall under the exceptional circumstances provision. EU officials are also drafting a wide array of targetted options that member states could use to alleviate the losses that certain sectors of the economy will face.
This has already been seen in practice in Denmark where the Commission approved an aid scheme of €12 million to compensate organisers for damages suffered due to cancellation of events with more than 1,000 participants or targetted at designated risk groups.
In this instance, the Commission assessed the situation at hand under Article 107(2)(b) which allows it to approve state aid measures to compensate specific areas or sectors for damages caused directly by exceptional circumstances. While such measure would usually receive approval within months, given the gravity of the situation, the Commission approved the aid within just 24 hours.
More recently, on March 19, the Commission adopted a temporary framework to enable member states to use the fully flexibility foreseen under state aid rules to support the economy in the context of the COVID-19 outbreak. The legislative basis of this framework is article 107(3)(b) which allows state aid to remedy a serious disturbance in the economy of a member state.
The severity of the current situation is particularly evident given the fact that the framework was adopted in a matter of days, in contrast to the framework adopted during the 2008 financial crisis which took weeks. The aid under this framework may be granted to undertakings that were not in difficulty on December 31, 2019, as to ensure that only undertakings that faced difficulties or entered in difficulty thereafter as a result of the COVID-19 outbreak benefit.
The framework allows five types of aid: direct grants, selective tax advantages and advance payments; state guarantees for loans taken by companies from banks; subsidised public loans to companies; safeguards for banks that channel state aid to the real economy; and short-term credit insurance.
The temporary framework seeks to complement the many other state aid measures that already exist as discussed above. The framework will be in place until the end of December 2020, and may be extended should the Commission feel that it is necessary.
Chris Grech is fourth year LL.B Hons student