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Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

Developments in State aid policy

State Aid Round Table - BDI

Berlin, 11 November, 2011

Ladies and Gentlemen:

I am grateful for your kind invitation to this roundtable.

I commend the BDI for taking the initiative to organise today’s debate on the role of State aid in this difficult juncture for Europe’s economy.

Today I want to explain how I see the present and the future of the EU policy regarding State Aid control, one of the competences that the Treaty entrusts to the Commission, and that are included in my area of responsibility.

But, I cannot give you a thorough explanation of this issue without mentioning immediately how the crisis affects our priorities and our decisions.

The crisis is changing the role of government in the economy, and I have seen these changes reflected in our control of State aid.

Since 2008, the amounts of private and public debt have been accumulating and in several member states have reached unsustainable levels. In particular, the sovereign debt crisis has reduced the room for manoeuvre of public budgets in Europe.

As a result, national and regional governments and the European institutions need to find more efficient ways to support economic activity; they also need to choose their spending priorities more carefully if they want to maximise the impact of their action on growth and job creation.

The challenges are daunting. First, new tensions in the financial markets are stoking a crisis that continues to pose systemic risks and Member States are taking fresh steps to respond to the situation.

In addition, EU countries must ensure that fiscal consolidation proceeds as planned and that its social costs are mitigated and fairly distributed among the different sectors of the population.

Finally, let us not forget that there is a growing temptation in these difficult times to set up protectionist lines of defence. This is why Europe’s governments must also reinforce their oversight and control to protect the integrity of the internal market.

This last point is crucial. A Single Market of 500 million people with different cultural backgrounds remains –together with the single currency- our most important asset; it gives the EU an edge over our global competitors; and it will be the main engine of our recovery.

Against this background, today I would like to share with you my views on the role of State aid policy and control during the crisis.

I will also illustrate the main policy initiatives we have in the pipeline and briefly outline the spirit of the broader reforms we are considering for the future.

The public rescue and restructuring of ailing banks has determined a dramatic evolution in State aid policy and control.

According to a study we published last month, between October 2008 and December 2010, EU governments granted aid for €1,2 trillion to the financial sector.

The largest share – €757 bn – was in the form of guarantees; followed by capital injections, asset relief and liquidity measures.

The public money used to support the financial sector at the beginning of the crisis managed to stabilise the markets and maintained a sufficient flow of credit to the real economy even at the height of the recession.

But once governments began to bail out their banks, another danger immediately appeared. If the aid had not been coordinated, we would have seen large transfers of capital from one Member State to another – and that would have dealt a fatal blow to the internal market.

The risk was not hypothetical; in the early days of the crisis we did see large movements of capital between Member States in search of highest level of protection. Also, the support was concentrated in few Member States and on few banks.

Our study found that 60 % of the total amount of aid was concentrated in the top three banking markets – the United Kingdom, Germany and France – and more than half went to the ten largest beneficiaries.

This means that the bailout had the potential to alter the competitive structure of the banking market. But Europe played as a team and the risk was averted.

Thanks to the emergency regime that was swiftly introduced, State aid control managed to mitigate the distortions of competition and to keep a level playing field in the internal market.

I would like to stress that our control has always had two sets of goals; on the one hand, we had to put out the fire; on the other, we prepared the ground for the post-crisis scenario.

Since the beginning, we have imposed restructuring conditions that were designed to bring more stability to the financial markets and to help banks return to financing the real economy.

These conditions include that banks remunerate and eventually repay the public support and that shareholders and hybrid-capital holders bear a fair share of the burden to address the moral-hazard issue.

Unfortunately, our work is not over.

Before the summer, we were getting ready to move from the emergency regime to more permanent, post-crisis rules at the end of the year.

But the renewed tensions in the markets forced us to change our plans; in the next few weeks, I will submit to the College the extension of the crisis regime into 2012.

The Member States and the Commission recently agreed a package of measures to strengthen the capital of banks and provide guarantees on their liabilities that may bring us more State aid cases next year.

The crisis rules, which have proved their worth in earlier phases of the crisis, give us the tools we need to deal with those cases.

There is no need for fundamental change. But we are working to see how we can clarify and update the rules on pricing and other conditions to facilitate the implementation of the banking package.

As to Germany, a large rescue programme was set up in 2008 which would have allowed for a recapitalisation of €80 bn; around €30 bn of which were allocated. In addition, the Länder have recapitalised their banks with another €23 bn.

The crisis has revealed the existence of financial stability risks, in particular of a number of Landesbanks. But not only them. Commerzbank and Hypo Real Estate, among others, also required our attention.

Using the emergency State aid regime, the Commission has tried to steer these banks towards a sustainable business model and to discourage unwise investment decisions and excessive risk taking.

We have closed almost all of the German banking cases. Recently we adopted decisions on Hypo Real Estate and HSH.

The discussions on the restructuring of WestLB are progressing well and I hope to adopt a final decision by the end of the year.

BayernLB remains the last open case; we are not at the end of the discussions yet, but there is progress also in this case.

Of course, the effects that the crisis is having on government spending and on State aid control are not limited to the financial sector. It affected non financial companies as well.

This is why our emergency regime also included the so-called Temporary Framework of aid to the real economy.

Under the terms of the framework, the Commission approved commitments for €81 bn and Member States used about a quarter of it.

On top of this, Germany has been during these years the largest spender in ordinary State aid; that is, aid not related to the crisis.

The total volume of this aid amounted to about €16 bn – that is, about 0.6% of GDP – both in 2009 and in 2010. This figure is also significant and shows the continued centrality of our control to guarantee that the internal market remains fair, open and level.

I will now turn to our current policy initiatives in State aid, starting with the upcoming reform of the rules that we use to control how governments subsidise the public services that are delivered through market mechanisms – the so-called Services of General Economic Interest or SGEI.

The vast majority of Europeans want strong, affordable, and efficient public services and they are concerned that the budget cuts that practically every country in the EU is making will put them at risk.

Public authorities need to adapt their policies to meet the needs and expectations of the people in these times of austerity.

As you know, we have the responsibility to control the compensation granted for the provision of the Services of General Economic Interest and we are in the process of reforming the rules that we will use to carry out this control.

The new rules we are proposing are designed to help national and regional governments provide smarter and more efficient services and to defend Europe’s public services in times of fiscal consolidation.

I would like to highlight two aspects of our new SGEI package; the diversification of our control and a stronger protection for disadvantaged social groups.

As to the first aspect, we have decided to ease our control on the services that do not have a significant impact on the internal market and to focus on the commercial operations that have a real potential to distort competition.

For instance, a new de minimis rule will exclude from our control compensations made by small local authorities under certain thresholds.

On the other hand, new guidelines are devoted to large-scale commercial services – such as the post, environmental services and energy supply. If the package is approved, you can expect a stricter scrutiny of these operations with a clear impact on the internal market.

To simplify the procedures in the case of services linked with the protection of the most disadvantaged people– we have proposed to extend the sectors that are exempted from our prior authorisation.

These will include the services that cater for essential social needs and vulnerable groups. At present, only hospitals and social housing can benefit from this exemption.

As we speak, the SGEI reform package is in its final drafting stage to take account of the many comments received in the last public consultation. If everything goes well, the Commission will adopt my proposal before the end of the year.

Another policy initiative that I will soon propose regards the protection of the environment.

Early next year, I intend to submit to the College our new State aid guidelines ahead of the entry into force in 2013 of the amended Emissions Trading Scheme.

I regard this as a crucial measure of the EU. Although environmental sustainability is among the most serious and urgent challenges of our time, environmental costs are still poorly reflected in the prices of our goods and services. The new ETS is an important step in the right direction.

The new scheme will have implications for our control of State aid because CO2 costs in electricity prices will likely increase and European companies will be tempted to move energy intensive operations towards those parts of the world where environmental protection is laxer.

The best way to tackle this risk of carbon leakage would be a global agreement through the UN that engaged all major economies to sharply reduce their emissions.

Until this happens and to seal the borders of the EU against carbon leakages, Europe’s governments will be under pressure to help companies shoulder the higher CO2 cost.

We need to strike a reasonable balance. A poorly targeted support to the biggest users of CO2 intensive electricity would relieve them of the costs of the new ETS system at the expense of other sectors and would undermine the overall aim of the scheme introduced to cut emissions in cost-effective ways.

On the other hand, we need to avoid the risks of “carbon leakage”.

Although we will alleviate the burden, I believe that the extra costs should remain in part with the firms, which would give them an incentive to innovate, save energy, and demand green electricity.

This is why the list of sectors eligible for State aid to compensate them for the ETS extra costs should be well targeted and the public support should be used with parsimony.

Above all, our new guidelines will have to prevent subsidy races within the EU, which is crucial at a time of economic uncertainty and budgetary discipline.

Other upcoming policy initiatives in the State aid domain include a revision of the Regional aid guidelines – which are slated for adoption at the beginning of 2013 – and new guidelines for maritime transport, on which a public consultation will be launched at the end of the year.

We are also reviewing our rules on air transport, an industry that has radically changed over the past decade. In particular, low cost carriers have introduced a new model and have gained a sizeable share of the market.

In addition, a large number of European airports benefit from significant public support which constitutes State aid.

In this context, I have decided to review the existing guidelines and adapt them to the new market reality. I intend to adopt the new guidelines by the summer of 2012.

Finally, next year I will propose new rules for the rescue and restructuring of industrial firms. And when the financial markets will have stabilised, I will propose new rescue and restructuring guidelines for financial entities.

To sum up this part of my presentation:

This crisis is making life harder for many firms and households, but it can also provide an opportunity to restructure and innovate – and State aid can indeed promote sound restructuring.

However, uncontrolled subsidies to ailing firms can put the integrity of the internal market at risk.

Our present rules have served us well, but today the stakes are higher. We need to avoid that a disordered deleveraging brings worthy businesses into bankruptcy.

We also want to encourage smart restructuring and more market-based solutions that can promote growth on a sustainable basis.

These are the main policy innovations we are working on at present, but I have also asked my services to look farther ahead in time.

Our reflection on the State aid policy of the future points at the growing need to set our priorities and to shift our resources towards the control of subsidies with a real potential to distort competition.

We are also thinking of how we can clarify and simplify our action, which would make our rules easier to comply with.

Finally, I believe that State aid control could be more proactive. At present, almost all the cases that we look into are notified by national authorities; perhaps we could explore ways to start more ex-officio investigations.

But these are just preliminary thoughts; the reflection is going on and I will present more detailed ideas next year.

Today I have talked about a policy area that could adapt fast to the financial storm;

I have illustrated the main policy initiatives that will change our control in a number of domains;

And I have briefly pointed towards the direction that State aid control may take in the future.

The picture that emerges is that of a flexible instrument in constant evolution, and I am committed to keeping State aid policy well oiled and abreast of change together with the other instruments of competition control.

Keeping the competitive environment clean and level across the internal market has never been more necessary because on it depend our chances to recover from this crisis.

State aid can sustain growth and create jobs provided we can distinguish between throwing good taxpayers’ money after bad and – at the opposite end of the spectrum – spending in promising sectors such as education, the digital economy, and renewable sources of energy.

All the changes that I have illustrated to you today are designed to make progress towards the recovery and to prepare the ground for State aid control in the economic and social environment that will emerge from this crisis.

Thank you.

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