The Limitations of EC State Aids Control
The European Union is one of the few jurisdictions in the world that has introduced specific provisions for the control of State aid. As a result European firms, constrained in their ability to receive State aid, may be at a competitive disadvantage with respect to outside competitors. A case can be made to extend to all jurisdictions a similar discipline, contributing to the creation of a level playing field in the world economy. While existing WTO provisions against State aid can be applied when subsidies affect exports only, a very rare event, European type provisions are much more general. However, the effectiveness of legal provisions depends very much on the way they are enforced. To this end the role of economic analysis as an interpretative tool is very important. And indeed the objective of the 2005 State Aid Action Plan was to enhance the role of economic analysis in State aid policy. Unfortunately the Commission did not go as far as suggesting that distortions of competition be noticeable before a State measure is declared incompatible. As a result, EU policy continues to be over extensive in addressing cases where the distortions of competition are minimal. This is particularly the case for restructuring aid, where the restoration of the healthiness of the firm is the final objective of the aid. However, in these cases, and recent decisions taken as a result of the financial crisis confirm it, the Commission uses competition type considerations only to overcome moral hazard by attaching a number of intrusive conditions to its authorisation decisions (prohibition of reducing prices before a competitor does, introduction of capacity or sales caps, merger prohibitions, managers salaries caps, etc). Very often these conditions reduce, not increase, the possibility of these companies to successfully restructure. Moral hazard can only be eliminated by not allowing the aid, by limiting the aid to what is strictly necessary or by making sure that it is a once and for all option, not by constraining the company from competing.
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