State aid in the EU: lessons learned
Most EU Member States are considering financial measures to support sectors and industries in distress. Many of their measures will fall under the definition of state aid, which is essentially any aid granted by a Member State through state resources in any form whatsoever that distorts competition and affects trade between Member States.
If these conditions are met, the measure has to be notified to the European Commission (the Commission) and approved before it is granted. The process of approval is usually lengthy, but there are several exceptions where either aid does not need to be notified or it is subject to a simplified procedure.
During the financial crisis in 2008, when governments started to provide assistance to banks, the Commission acted fast to ensure that such assistance could lawfully be given, and relied on Article 107(3)b of the Treaty on the Functioning of the European Union (TFEU), which states that aid may be declared compatible if it is given to "remedy a serious disturbance in the economy of a Member State".
The Commission deemed the crisis a serious disturbance: in a very short time it provided guidance on how it would deal with aids to banks and at the same time dealt swiftly with notifications.
In the current pandemic, the lessons learned just over a decade ago will come in useful.
The Commission has now confirmed it recognises that:
- significant state measures will be needed to avoid companies going bankrupt and massive unemployment
- Member States can already take many measures under the current rules such as wage subsidies, suspension of payments of corporate and value added taxes
- the EU state aid regime allows Members States to compensate companies for the damage caused by 'exceptional circumstances' (specifically, Article 107(2)b) which would include measures for sectors such as aviation and tourism), and
- the current situation is so serious that Article 107(3)b TFEU mentioned above will be used to assess support measures in those Member States where the situation has deteriorated.
The EU temporary framework
In relation to this final point, on 19 March the Commission issued a communication titled Temporary framework for state aid measures to support the economy in the current COVID-19 outbreak. While 3 weeks were necessary to issue a framework for aid to the financial sector in 2008, this communication was issued in only a few days.
The framework enables Member States to ensure that sufficient liquidity remains available to businesses of all types and to preserve the continuity of economic activity in this period. In particular, it provides for five types of aid:
Direct grants, selective tax advantages and advance payments
Member States will be able to set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs.
State guarantees for loans taken by companies from banks
Member States will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them.
Subsidised public loans to companies
Member States will be able to grant loans with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs.
Safeguards for banks that channel State aid to the real economy
Some Member States plan to build on banks' existing lending capacities and use them as a channel to support businesses – in particular small and medium-sized companies. The framework makes clear that such aid is considered direct aid to the banks' customers (not to the banks themselves), and provides guidance on how to ensure minimal distortion of competition between banks.
Short-term export credit insurance
The framework introduces additional flexibility on how to demonstrate that certain countries are not-marketable risks, thereby enabling short-term export credit insurance to be provided by the State where needed.
On 12 March 2020, the Commission approved in only 24 hours the first scheme which was notified in relation to coronavirus. The measure dealt with compensation for event organisers in Denmark in case certain events were cancelled or postponed due to policies introduced to deal with the pandemic.
We are likely to see more cases of this type. Companies will have to become familiar with state aid rules: if an aid has not been notified or it has not been granted in accordance with the rules, the Commission can recover the aid (with interest) from the company which received it. In the last few days several schemes notified by EU Member States have been notified and approved in a matter of hours.
The position in the UK
Although the UK is no longer a member of the EU, EU state aid rules will apply until the end of the transition period. The UK Government has already announced that the measures announced by HM Treasury, the Chancellor and the Bank of England – such as the COVID Corporate Financing Facility and the Coronavirus Business Interruption Loan Scheme – will be notified.
For more information, see COVID-19: support for businesses.
The position in Germany
Companies that face liquidity problems due to the corona crisis should be able to resort to state financial aid. In this regard, the German Government has decided on a protective shield (Schutzschild) that is intended to stabilize companies in the crisis by means of cost reductions (through labor, tax and social law measures) and short-term loans. Additional measures are currently being developed at the individual state level.
The background to this is as follows: while the measures described in detail below are effective means of reducing expenditures, payments on principal and accrued interests or payments from ongoing long-term debt relationships (such as rent and leases) can continue to put a strain on liquidity.
The decline in operating business in the wake of the coronavirus crisis does not, in principle, offer the company either a special right of termination or a right to refuse performance, with the exception of (pre-) insolvency law structuring measures. Whether and to what extent MAC-clauses are triggered also depends on the structure of the individual case and is associated with legal uncertainties.
