between efficiency, equity and competition EU State Aid Control – between efficiency, equity and competition Szymon Gębski – 1st year researcher Law Department

Research question 1.How to legitimise state aid in the common market? 2.State aid as a tool of public policy: policy-making at the EU level or on national level?

Initial approach to state aid control (i) Justification for a supranational state aid control: Preserving effective competition Internal Market rationale Cross-boarder externalities National commitment problems Objectives of common interest Is inefficient state aid a sufficient reason for control?

Initial approach to state aid control (ii) Two-steps mechanism: Prohibition of state aid in art. 87(1): broad definition including transfer of state resources, economic advantage, selectivity, distortion of competition and trade between Member States Exemption: Art. 87(2) – automatic exemption Art. 87(3) – discretionary power of the Commission to exempt particular categories of aid and to adopt rules of guidance

Initial approach to state aid control (iii) Legal test applied to art. 87(3)(c): Art. 87(3)(c) allows to grant aid that aims to “facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest” Positive effect in terms of the common interest: no legal definition – relates to the broad range of EU objectives as stated in art. 2 TEC both equity and efficiency Negative effect: Distortion of competition and trade – a single criterion Effect on trade: actual and potential effect Distortion of competition: basic competition analysis

Initial approach to state aid control (iv) Balancing test applied to art. 87(3)(c): Principle of compensatory justification (Philip Morris): balancing common interest v effect on trade and competition: Proportionality Necessity

Initial approach to state aid control (v) Balancing test in secondary law: Form-based approach: Overly broad common interest Lack of detailed analysis of the impact on trade and competition Lack of explicit balancing mechanism Presumed legality when aid is compatible with filters, safe harbours, catalogue of eligible costs Balancing test and national public policies: Reflects pattern of negative integration Broad enough to embrace heterogeneous public policy objectives Succeeded to make national spending subject to supranational control A starting point for a more pro-active approach?

Modernised balancing test (i) SAAP (2005) calls for ”less and better targeted state aid” and brings two complementary elements: Focus of state aid on Lisbon Agenda: SAAP privileges state aid targeted at particular objectives More refined economic approach: Effects-based approach embedded in a three steps test assessing: market failure or another objective of common interest design of state aid (appropriateness, proportionality, necessity) effect on competition

Modernised balancing test (ii) Economic rationale behind state aid policy: Welfare standard as a guiding principle that helps better assess positive and negative effects of aid Possible welfare standards in state aid: Effect on rival’s profits Consumer welfare (Martin, Strasse) including the cost to taxpayers (Friederiszick and Röller) Social welfare Total welfare - distortion of competition is generated when the sum of consumer surplus and the recipient’s profit is lower than the sum of the cost incurred by taxpayers, reduction of competitor’s profits and costs linked with administering aid Variety of welfare standards reflects wide range of objectives

Modernised balancing test (iii) Welfare-improving effects of state aid: Efficiency rationale - clarifies conditions under which a competitive economy results in Pareto efficient allocation of resources Equity rationale - defines conditions under which a redistribution of resources leads to Pareto optimal outcome

Modernised balancing test (iv) Step 1: Is there a well-defined market failure (MF) or another objective of common interest? Concept of market failure: market fails to provide the optimal level of a good or service because assumptions which allow markets to provide optimal outcomes do not hold Total welfare demands efficiency oriented MF - market fails when it does not lead to an economically efficient outcome in terms of prices, output and use of resources, even though economic benefits outweigh the economic costs Social welfare requires equity oriented MF – market does not maximize the chosen social welfare function, i.e. unequal distribution of income, products or services

Modernised balancing test (v) Step 2: Is the state aid well-designed to target market failure? Is it an appropriate policy instrument? state aid is the second best option burden of proof on Member States Is there an incentive effect? counterfactual scenario to assess the change in aid recipient’s behaviour and the possibility to remedy MF Is it proportionate? aid intensity shall depend on the seriousness of MF

Modernised balancing test (vi) Step 3: Assessing magnitude of the effect on competition and trade on the basis of: procedure for selecting beneficiaries criterion of selectivity, i.e. open tender characteristics of the market and of the beneficiary market share, relevant market amount and type of aid amount, intensity, duration, repetition, eligible costs

Modernised balancing test (vii) Modernised balancing test and national public policies: Lack of MF excludes further analysis of anti-competitive effect? Is the Commission allowed to assess the trade-off between efficiency and equity? Subsidiarity view and traditional justification of state aid control Difference between application of the test when drafting new rules and dealing with notified state aid Towards positive integration in state aids?

Modernised test in the R&D&I Framework Step 1: functional approach For the purpose of the Framework total welfare and efficiency as ultimate objective Exhaustive list of market failures concerning R&D&I: positive externalities, public good, imperfect and asymmetric information, coordination of network failures Step 2: clarification of incentive effect Step 3: methodology to assess distortion of competition: aid amount, closeness to the market, selection process, exit barriers, incentives to compete for a future market, product differentiation, intensity of competition, market share, market structure, level of entry barriers, buyer power The test is to be applied in its entirety

Modernised test in the Regional aid guidelines Art. 87(3)(a) focused on equity: aid to promote economic development in regions with low standard of living or serious underemployment No explicit balancing test: factual circumstances justify aid – form-based approach focus on decreasing aid but not on its targeting detailed examination only for large aid schemes beyond 25% market share Potential benefits of effects-based approach: aid better targeted on MF explicit analysis of costs and benefits But when equity is concerned the final decision concerning value for society is a policy question

Conclusion A structured rule of reason in state aid: Three-step test: Welfare standard and market failure per aid category Form-based mixed with effects-based approach: welfare standard as a framework for the balancing test complemented with detailed guidance Three-step test: More pro-active policy by the Commission, which sets policy standards (i.e. market failure, appropriateness of a measure) More stringent conditions for exemption for some categories of aid Orientation on market failure: potential problem in justification and a competence problem