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Brussels, 7th June 2005

State Aid Action Plan – frequently asked questions

(see also IP/05/680)

What are the main challenges for reforming state aid policy?

First, Member states need a clear, comprehensive and predictable framework to be able to grant public subsidies which contribute to competitiveness, cohesion and improving public services. State aid policy has to support the Lisbon Strategy for growth and jobs. This requires incorporating a refined economic approach into state aid control, to support a better targeting of state aid towards the types of interventions where financial markets are more reluctant to lend money that improve economic performance and competitiveness or create sustainable jobs. But this also requires improving social and regional cohesion, favouring environmental protection and promoting cultural diversity.

State aid policy also needs to be adapted to the new requirements of an enlarged Europe, to be more efficient to reduce the administrative burden on Member States and to focus the action of the Commission on the areas where it really matters. There is a need to strengthen the commitment of Member States to their obligation to enforce state aid rules.

Finally, the increasing complexity and number of various different rules and guidelines progressively adopted by the Commission over time have created a need to streamline state aid policy and to clarify its core principles. State aid policy should become comprehensible to all, so that all interested stakeholders can get involved and act against unlawful aid, in particular before national judges.

What are the basic rules of state aid policy?

State aid policy is an important part of EU competition policy. State aid control comes from the need to maintain a level playing field for all undertakings active in the Single European Market, no matter in which Member State they are established, and to avoid Member States getting locked into a contest where they try to outbid each other to attract investment. Preserving competitive markets is the best way for European citizens to get the products they want, at low prices and to foster innovation and growth in the EU.

The Treaty prohibits any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain firms or the production of certain goods in so far as it affects trade between Member States. A number of exceptions are however allowed. The Commission has the exclusive power to declare state aid compatible with the Treaty provided it fulfils clearly defined objectives of common interest and does not distort intra-community competition and trade to an extent contrary to the common interest.

Approval of aid under the state aid rules provides legal certainty for Member States and the recipients of state aid. This provides a safe legal environment for aid that can benefit the economy.

However state aid measures may also prevent or delay the market forces from rewarding the most competitive firms, thereby decreasing overall European competitiveness. They may also constitute an inefficient use of tax payers’ money, taking away resources from limited national budgets which are needed for many essential purposes, such as the educational system, the health system, national security, social protection and others. It is therefore necessary to make choices transparently and to prioritise action. A state aid framework helps to control unfair subsidy races among Member states, creation of unemployment abroad, delocalisation, market foreclosure.

Why is the Commission in charge of controlling state aid?

Member States have different traditions of state intervention and different levels of financial resources. The European Commission, as an independent body, is best able to represent the common interest of all European citizens and to control the way national governments use state aid to serve the common interest. Member States have to notify a proposed state aid to the Commission, before it can be implemented. The Commission may authorise the aid, if on balance the presumed benefits for the common interest outweigh the distortions to competition and trade.

What are the main changes that are being proposed by the Commission?

The Commission proposes changes to most of the current rules governing state aid policy and procedures. Regular updates have in any event to be made to state aid rules, to adapt them to evolving institutional, economic and legal developments. But instead of dealing with each area separately, the State Aid Action Plan proposes a comprehensive and consistent reform whereby the same general principles are applied in all instruments. The objective is to make state aid policy clearer, simpler and easier to understand. One important element of the document is therefore to communicate the guiding principles of the reform.

The reforms intend to provide Member states with a clear, comprehensive and predictable set of rules which will allow them to support initiatives contributing to the Union’s cohesion and competitiveness. The objective of less and better targeted aid will be pursued in all state aid fields. This is linked to a refined economic approach, which tries to focus state aid to areas where it improves the functioning of markets. Changes will consequently be made to facilitate the targeting of aid towards areas contributing to growth and employment, notably R&D and innovation and risk capital. At the same time, rules will also be adapted to ensure high-quality public services, modern transport and energy infrastructures, and social and regional cohesion.

In addition, the reform will tackle the practice and procedures of state aid, to make it more efficient, more transparent, and to improve its enforcement by Member States. This requires a partnership with Member States, who play a critical part in the effectiveness of state aid administration. The Commission intends to simplify, consolidate and extend as much as possible the use of block exemptions and adapt its assessment to the impact that aid has on competition and trade. It intends to use a refined economic approach in order to concentrate its resources on the cases that are creating more important distortions of competition and trade, and to facilitate and accelerate the authorisation of aid that is liable to distort competition less. As a consequence, fewer aid measures will need to be notified to the Commission while other measures will be subject to a control which will be proportionate to their effect on competition and trade.

How is this approach different to that which went before?

The reform is not a complete break away with past practice but rather an attempt to improve the existing framework, so that it is more efficient and better suited to the present challenges (enlargement, Lisbon Strategy). It represents an effort to better explain the policy, to use a refined economic approach to improve the rules by clarifying on what basis a measure qualifying as state aid should be authorised by the Commission, or on the contrary be declared incompatible with the Common Market. In addition, the Commission is demonstrating the importance of European citizens in the process, by putting its reform programme out for consultation and by seeking views on the proposals.

How does the SAAP fit in with the review of the regional aid guidelines?

The process of reforming the Regional Aid Guidelines already began in 2003 and is due to be finished this year. This reform will respect the general principles set out in the State Aid Action Plan that are valid in all areas of state aid policy, including regional aid. The SAAP clarifies that cohesion policy is a positive contribution of the Union and can unleash a tremendous growth potential. It also reasserts the importance of targeting the aid to the regions most in need, in order to achieve cohesion, while granting Member States a certain degree of flexibility in defining these regions and ensuring a smooth transition to the new framework, taking into account in particular of the need to ensure some continuity in the present regional development efforts. The Commission will continue its consultation on regional aid more specifically in the coming months.

How does the SAAP fit in with the work on Services of General Economic Interest ?

The State Aid Action Plan underlines the importance of effective and high quality Services of General Economic Interest (SGEI) as a key component of the European social model, and one which is safeguarded in the current Treaty. At the same time, it reiterates that compensation granted to make the performance of public service missions feasible should not lead to overcompensation and undue distortions of competition. Last year, the Commission began a consultation process on services of general economic interest, notably with the European Parliament and the Member States. The state aid action plan confirms that the Commission will adopt several texts to provide legal certainty on these principles.

Will this prevent Member States from taking steps to safeguard employment?

Not at all. Member States can design whichever state aid measures they see as necessary. However competitive markets are the best way to create competitive firms, capable of surviving and creating jobs in the long run. The common interest of the EU is to develop and grow competitive firms, and not to spend the limited available state resources to distort competition by artificially keeping failing firms alive. Giving state aid to such firms is not the best way to safeguard long-term employment.

State aid fostering and supporting R&D and innovation is better to create long term sustainable growth and employment. On that basis, the state aid action plan supports a targeting of state aid towards supporting long term and sustainable growth and jobs, including action for employment, training and education.

What are the next steps?

Over the summer, the Commission should publish texts on the Services of General Economic Interest and a consultation document on State Aid for Innovation. It has started a review of its internal practices and should come up with a set of proposals to increase the efficiency internally, as well as in the collaboration with Member States.

Before the end of the year, the Commission aims to adopt a revision of the Regional Aid Guidelines. Proposals will be made in what regards state aid for R&D, innovation and risk capital, to be adopted before mid-2006. The Commission will also consolidate into a single act, and expand the scope of the current Block Exemption Regulations, its key legal instruments which allow Member States to grant certain aid measures without having to notify them to the Commission, by the end of 2006.

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