EU tackling state aid is becoming ever more politicised

Margrethe Vestager, European Commissioner for Competition (Copyright: Friends of Europe from Brussels, Belgium, CC BY 2.0 , via Wikimedia Commons )

The EU was never perfect when it comes to policing state aid, but at least in the past, it regularly stopped member state governments from engaging in this trade distorting practice. Over the years however, the EU’s performance in this area has become weaker and weaker, and, worse, mired in politicisation.

Applying the EU Treaty ban on state aid is really at the heart of the European project, which revolves around the promotion of peace through scrapping barriers to trade between European countries. Apart from customs, tariffs, travel restrictions and protectionist bureaucracy, handing out state subsidies strongly distorts markets, therefore hurting consumers and taxpayers.

State aid is problematic not just because taxpayers pay for it, but also because it leads those companies who can no longer compete with their subsidised rivals to go out of business even if they are inherently superior in terms of service. On occasion, it can also serve as a way to keep foreign competitors out of national markets, even if a certain market is technically “open” to all. This is, for example, the case in telecoms, with Belgium owning a majority stake in its telecom operator Proximus, a situation which results in Belgians having to pay the highest telecom bills in Europe.

Another example is of course the croniest of crony markets – the energy market. Originally, Bulgaria used to be the EU’s bad boy in this regard, with its almost completely politically controlled energy sector. As a result, normal operators playing within the market rules prefer to keep a wide berth. Today, the likes of Germany and France are moving in this direction, nationalising parts of their energy sector in a panic move driven by the largely self-inflicted energy crisis.

The European Commission is waving the white flag

Despite occasional interventions to stop state aid, the EU Commission is waving the white flag more and more. In 2017, the supposedly “liberal” French President Macron decided to nationalise a shipyard in order to prevent a takeover by an Italian competitor. The EU has also regularly cleared bank bailouts, as the 5.4 billion euro state bailout of Italy’s fourth-largest lender, Monte dei Paschi di Siena as one of the more recent examples.

With the Covid crisis, all the brakes were off. In May 2020, Germany was even allowed to commit up to 33 percent of its GDP in support packages and guarantees, which was more than any other industrialised nation.

Despite the pandemic easing, European Competition Commissioner Margrethe Vestager simply continues on the same path, rubber-stamping a 1.7bn euro taxpayer cash injection for the recapitalisation of Berlin’s troubled new airport, with the justification that “airports have been hit particularly hard by the coronavirus”.

Vestager, the “EU tax lady”

This is all evidence of how the EU state aid regime has become ever more politicised, especially in recent years. When entering office in 2014, Vestager declared that she found “it only natural that competition policy is political”.

In contrast to her turning a blind eye to the blatant violations of EU state aid rules were her attempts to requalify special national tax arrangements provided by the Benelux and Ireland as ‘unfair state aid’, backed up by claims that that these tax arrangements were not really open to any company. In fact she lost a few of these cases at the top EU court, as the ECJ lower court declared in 2020 that the Commission failed to show “to the requisite legal standard” that Apple enjoyed preferential treatment which amounted to illegal state aid. Going after American companies in a bid to get them to pay more taxes, all based on grey areas in legislation, while ignoring clear violations of EU law, even led her to be dubbed the “EU tax lady” by former U.S. President Trump.

Arbitrary application of the rules?

Aside from the non application of state aid rules, another problem is applying them in an arbitrary, politicised manner. This is, for example, the case with a dispute over Spain refusing to pay subsidies to companies that invested in renewable energy installations under a 2007 Spanish subsidy scheme. After promising the subsidies, Spain changed the rules in 2013, badly damaging investors, who reacted by suing the Spanish government in international arbitration courts. Spain has lost a huge majority of these cases, and is now desperately exploiting every method in order to not to have to pay its dues. In this endeavour, it enjoys the support of the European Commission, which has gone so far as to reinterpret an award granted by an arbitration tribunal as “state aid”, thus claiming that this grants the investor an advantage equivalent to those provided for by the 2007 Spanish scheme.

The Commission claims that it would clear this state aid as legal had it been notified thereof by Spain in 2007 – something Spain failed to do – but this is besides the point. It is one discussion whether a certain regime should qualify as “state aid” or not; it is yet another for Spain to simply default on its obligations, unilaterally, six years after promises have been made. Spain ended its support in 2013 after it had realised the financial implications. This therefore had nothing to do with the EU declaring it then to constitute illegal state aid.

Even if subsidies are an undesirable tool for policy, arbitrary changes to these subsidy regimes simply constitute state defaults. It is regrettable to witness the European Commission instrumentalising its own poorly applied state aid policies to prop up Spanish finances, in the process also challenging international arbitration courts – European Commission officials have even been urging the Spanish government not to comply with the ruling. Another huge irony here is that Spanish businesses actually profit from this international arbitration system to which Spain is a signatory, with Spanish BBVA bank just having won a case against Bolivia over pension nationalisation. This while the Spanish state refuses to comply with the judgements it loses. Fortunately, not all EU member states behave like this. Croatia, for example, just pledged to comply with an arbitration ruling.

Brexit really revolved around the question of whether the upsides of EU membership still compensated for the downsides. In its wisdom, the UK public decided that was no longer the case. It would be wrong to predict that any other EU member state is about to follow the British any time soon, but similar trade-offs are ultimately also being made in the EU27. The EU ban on state aid, enshrined in the EU treaties, isn’t just a side aspect of the EU project. It constitutes the core of it, and has played a great role in the economic benefits EU integration has provided. Politicising the process of state aid by not applying the rules or applying them at will, depending on whatever is politically expedient, is therefore an attack on the heart of EU cooperation.