The financial crisis has led the European Commission to introduce greater flexibility it its control of state aid and even to resort to a provision of the EC Treaty applicable only at the time of a serious disturbance in the economy.

“The past six months have shown that state aid control plays a key role in tackling the challenges of the economic crisis in a coordinated way across Europe. The EU’s tried and tested state aid rules have clearly been part of the solution.” Competition Commissioner Neelie Kroes justified in those words the central role of checks of the compatibility with EU law of state aid measures granted to cope with the financial crisis. The Commission’s checks have not been suspended but adapted, largely under pressure from the member states.

The aid measures first targeted the banking sector, then as the crisis spread, other measures were adopted to provide support for the real economy, with special emphasis on the automotive sector.

PRIORITY ON BANKS

At the start of the crisis, the Commission applied the standard rules - EC Treaty Article 87.3(c) and EU state aid guidelines 2004 - when reviewing individual aid measures aimed at preventing the failure of certain financial institutions. In this context, for example, it endorsed the rescue plan for WestLB, which received a €5 billion guarantee from the German state. As the situation grew worse and the number of notifications rose, the Commission had to speed up the pace of its review process. Neelie Kroes was therefore authorised to rule on aid measures for banks without referring to the rest of the Commission. Certain aid plans were authorised in record time, sometimes in 24 hours or over a weekend.

EXCEPTIONAL LEGAL FRAMEWORK

In October 2008, as the crisis became systemic and liquidities dwindled, support for loans to protect the banking sector was considered the greatest urgency. The member states drew up comprehensive rescue plans for the sector. The Commission then adopted a pragmatic approach to monitoring these general schemes, reviving a treaty provision used only once previously: the exception for aid to remedy a serious disturbance in the economy (Art. 87.3(b) of the EC Treaty). On 13 October 2008, it published a communication on the banking sector laying down the conditions for the compatibility of such aid, which had to be targeted, proportionate and designed to limit the negative impact for competitors. Aid measures also had to be limited to six months and matched with a mandatory restructuring plan.

The measures taken can be grouped into two large families: recapitalisations and guarantees. Measures of the first type, aimed at providing banks with funds to enable them to respect their solvency ratio, were adopted in Denmark, Slovenia, France and Italy. They included state shareholding in banks, even up to nationalisation. In the case of the Royal Bank of Scotland (RBS), nationalisation resulted from the massive injection of capital - €41 billion – by the United Kingdom.

The second family of measures, guarantees on interbank lending and/or deposits, ensure that the lender will recover the funds. Their use also requires the absence of any distinction between national financial institutions and the subsidiaries of foreign institutions. Finland, Ireland, Latvia, the Netherlands and Portugal opted solely for such guarantee schemes. Some member states – Austria, Germany, Hungary and Spain - combined the two types of measures. The Commission also approved, on 19 November 2008, on the same legal basis, guarantee measures totalling €150 billion and €6.4 billion in recapitalisation measures in support of Dexia, granted jointly by Belgium, France and Luxembourg.

Since aid schemes varied significantly from one state to the next, the Commission found it necessary to provide more detailed guidelines on the compatibility of certain forms of recapitalisation in a communication published on 5 December 2008. Last March, it launched on the basis of that communication a detailed investigation into the restructuring plan for Dexia.

MEASURES ON IMPAIRED ASSETS

At the end of 2008, with the value of investments still at rock bottom, certain states proposed asset relief measures. The Commission was considered too dogmatic by the member states, which pressured it to approve these new measures. On 25 February 2009, it adopted a communication on impaired assets in which it proposed European guidelines for the treatment of banks’ toxic assets. Such measures had to be limited in time (six months), present detailed information on the valuation of the impaired assets and a viability assessment and restructuring plan for each beneficiary institution within three months of its admission to the relief plan. The aim was to limit the use of public funds to the strict minimum needed for banks in real trouble and on the condition they implemented a restructuring plan. In practice, the Commission accepted a fair amount of flexibility in the treatment of potential impairments of assets, letting the member states judge the advisability of setting up hive-off structures or guarantee schemes. So far, Ireland has been the only member state to announce (on 8 April) plans to create a hive-off structure, the National Asset Management Agency. The idea is to place the toxic assets in quarantine, consolidate banks’ balance sheets and maintain the real economy’s access to credit.

A BILL OF 3,000 BN EURO

The crisis measures adopted to prop up financial institutions and approved so far by the Commission add up to around €3,000 billion. This figure represents the total maximum of the guarantee systems (up to €2,300 billion), recapitalisation plans (nearly €300 billion) and one-off rescue and restructuring measures for certain banks and financial institutions (around €400 billion).

TEMPORARY RULES FOR REAL ECONOMY

The other sectors of the economy affected by the credit crunch also benefited from temporary rules aimed at simplifying the treatment of state aid measures. Set up in December 2008, this framework facilitates access to loans for SMEs and large companies until the end of 2010 and enables member states to inject fresh money into their economies. To date, the Commission has approved around 25 measures in ten member states designed to stabilise companies and employment in the real economy.

The United Kingdom, for example, set up a low-interest scheme for companies that manufacture ‘green’ products. The German federal, regional and local authorities granted subsidised guarantees for investment loans and working capital loans.

AUTOMOTIVE SECTOR: SPECIAL FOCUS

These measures focused in the main on the automotive sector, which was reeling from the impact of the crisis. On 25 February 2009, the Commission adopted a specific communication for this sector, in which it outlined different measures to improve access to lending and spelled out rules for state aid schemes. Its objectives were to stimulate demand for new vehicles through coordinated national action, minimise the social cost, keep qualified workers on the job and defend fair competition on open markets.

Under the temporary framework, the automotive sector can receive different types of aid, including state guarantees, reduced-interest loans, loans for the manufacture of more environmentally acceptable cars and risk capital measures. For example, the Commission authorised, on 28 February, a French plan for the sector in the amount of €7.8 billion, of which €6 billion in loans at preferential rates. It also cleared an €800 million Spanish scheme offering low-interest loans for ‘green’ cars and a Swedish support plan amounting to €2.65 billion consisting mainly of lines of credit.

Although these state aid measures for the banking sector and the real economy have helped keep the European economy afloat during the economic storm, it is important to keep in mind that they have a sizeable budgetary impact, as highlighted by the latest statistics on government deficit.

To date, the Commission has approved around 25 measures in ten member states designed to stabilise companies and employment in the real economy

Special reference to air transport

The crisis has not spared air transport, a sector already struggling to cope with exceptionally high crude oil prices during the first half of the year. In January 2009, the Commission approved a rescue plan structured as a state loan guarantee for Austrian Airlines, which enabled it to raise funds on the market despite the credit squeeze and to maintain its activity until the Commission rules on its privatisation plan. The decision was based on the guidelines for rescue and restructuring measures.