lectures on competition policy – state aid louvain-la-neuve 16 march 2007 1 european commission,...
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Lectures on Competition Policy – State aidLouvain-La-Neuve 16 March 2007
European Commission, DG CompetitionState aid to network industries, liberalised sectors and services
State Aid Economic analysis
Loretta Dormal Marino
2European Commission, DG Competition
Outline
The legal and procedural framework Statistics and trends State aid in competition policy Economics of State aid and policy objectives Economics of State aid: the balancing test for
compatibility Future architecture of state aid rules
3European Commission, DG Competition
The legal framework - Introduction
The Treaty: State aid in principle prohibited (negative presumption)
Rationale avoid undue distortions of competition– Prevent negative cross-border effects – Single market: Maintain level playing field for all
companies– Promote competition to ensure long-term benefit for
the consumers
4European Commission, DG Competition
The legal framework-notion of Stet aid: Art 87 (1)
Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any forms whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market
5European Commission, DG Competition
The legal framework – notion of State
– transfer of State resources– economic advantage (selectivity)– distorts or threatens to distort competition – affects trade between member states
One criteria missing State intervention is not State aid!
6European Commission, DG Competition
The legal framework – compatibility
Art. 87 (2)Compatible: natural disaster, aid of social character to individuals, etc.
Art. 87 (3)Possibly compatible: areas with low living standard or aid to facilitate the development of certain economic activities, etc.
for R&D&I for SMEs for risk capital for employment for training for environmental
protection regional aid For specific sectors
(shipbuilding) For rescue & restructuring
General provisions Specific Provisions (Guidelines, Block exemption regulations)
7European Commission, DG Competition
The legal framework: procedural aspects (1)
Ex ante control: Member States have to notify
Aid can be granted after Commission approval
When the notification is complete, the Commission decides within 2 months: approval or, in case of doubts, opening of an in depth investigation (2nd phase)
8European Commission, DG Competition
The legal framework: procedural aspects (2)
What if a Member State grants an aid without prior approval of the Commission?
The aid is illegal
It can be declared compatible
9European Commission, DG Competition
Some statistics
In 2006, DG Competition:
– Received 495 notifications
– Started 44 in depth investigations (on notified and non notified measures)
– Received 227 complaints
– Prepared 436 decisions of the Commission
10European Commission, DG Competition
…and trends
Note: Credit Lyonnais case in France excluded. Otherwise kink in 1997
.4.6
.81
1.2
Tota
l a
id/ G
DP
1992 1994 1996 1998 2000 2002 2004year
total aid w/o railw. total aid w/o agric., fish., transp.
Total aid per GDP declined
0.6%
EUR 57 bln
11European Commission, DG Competition
… and trends (2)
Total aid without agriculture, fishery and transport, EU-15; Credit Lyonnais case in France excluded. Otherwise kink in 1997.
40
50
60
70
80
Hori
zon
tal aid
in
% o
f to
tal aid
1992 1994 1996 1998 2000 2002 2004year
Share of horizontal aid increased
12European Commission, DG Competition
State aid in Competition policy
State aid control: an integral part of EU competition policy
But is different insofar….
– the “actors” are member states– economic as well as social objectives
a distinct perspective, also in terms of economic analysis
13European Commission, DG Competition
State aid in Competition policy (2)Policy standards
Mergers and antitrust: consumer welfare
State aid: social welfare =well being including distribution appreciation
Shadow cost of taxation
Social welfare of EU =common interest
economic as well as equity objectives
14European Commission, DG Competition
State aid - Policy objectives
Efficiency (“making the cake bigger”) Equity (“dividing the cake better”)
Do not necessarily involve a trade-off
Efficiency
economic (efficiency) objective : R&D risk capital…
social (equity) objective, such as cohesion
Overlap: equity and efficiency objectives coincide
15European Commission, DG Competition
Economics of State aid: a « new » approach
“Less and better targeted aid” - political mandate (EU Council)
increase effectiveness of state aid to achieve economic and social objectives limit distortions of competition and trade
Commission: State Aid Action Plan (2005)
16European Commission, DG Competition
Economics of State aid: basic approach
Does a state measure constitute State aid?
If yes, should the aid be approved?: Balancing test for compatibility (to be introduced into guidelines and used in examination of individual cases)
17European Commission, DG Competition
Economics of State aid - Market investor principle
Does a measure constitute aid? – De minimis
– Would a private investor have taken the same decision as the state (for instance in case of a capital injection or a debt write-off)?
If the member State acts as a normal market economy investor no state aid
18European Commission, DG Competition
Economics of State aid: compatibility
a. Existence of well-defined market failure / equity objective
b. Targeting of state aid (is the aid well design to deliver the objective/adress the market failure?)
a. Are the ‘distortions of competition’ and ‘effect on trade’ sufficiently limited so that the aid measure is on balance not contrary to the common interest?
—> balance between the positive and negative effects
19European Commission, DG Competition
Economics of State aid - Market failure
… when the market fails to provide a good or a service and the economic benefits are superior to the costs
– Externalities: R&D, training, …– Asymetric information: financing for SMEs– Public goods: Public TV, postal services, SGEI – Coordination problems: innovative clusters
State intervention can improve the economic result
20European Commission, DG Competition
Economics of State aid - Objective of common interest
Must be well defined (ex: cohesion, growth, employment, environment)
The aid must well target the identified objective of common interest :
– It must be an appropriate policy instrument – It must have an incentive effect– It must be proportionate to the problem tackled
21European Commission, DG Competition
Economics of State aid – distortions of Competition
Reducing effective competition between firms
Keeping inefficient firms afloat
Distorting dynamic incentives to invest
Reducing effective competition by increasing market power
Push efficient firms out of the market
Distorts competition between Member States …
22European Commission, DG Competition
Distortion of competition How to evaluate: - procedural aspects - market conditions (market share,entry
barriers) - amount of aid - type of aid (subsidy, operating aid,
guarantee…) …
23European Commission, DG Competition
SAAP: future architecture of state aid control More generous « de minimis »
More economic approach in guidelines
More block exemptions
More in-depth economic approach for important cases (ceiling in guidelines)
Streamline of procedures
24European Commission, DG Competition