27 March 2020

Erika Szyszczak is Professor Emerita at Sussex Law School and a Fellow of UKTPO.

Recent weeks have seen the rapid implementation of measures to manage and maintain EU state aid policy during the COVID-19 crisis. Some Member States, including the UK, have adopted urgent measures to ameliorate damage to their economies. During the transitional period of the Withdrawal Agreement the UK must follow EU law and therefore the responses by the UK Government to the COVID-19 fiscal and economic crisis should comply with EU rules.

The EU is no stranger to adapting quickly to unforeseen economic crises. In the financial crisis starting in 2008 the European Commission introduced a Temporary State Aid Framework for the regulation of guarantees for banks and other financial institutions.  Between 1 October 2008 and 1 October 2011, the European Commission approved aid to the financial sector totalling € 4.5 trillion (36.7% of EU GDP). This was complemented by a second Temporary Framework from 2008 – 2011 to support the real economy by facilitating speedy access to credit by businesses in order to maintain long term viability.

Underpinning the EU response was a need to ensure that the principles behind the state aid rules could be maintained through the crisis. Lessons learnt from these measures have placed the EU in a strong position to act quickly and decisively to maintain the discipline of the EU State aid rules.

Thus, once again we witness how quickly and flexibly EU State aid policy can respond to a crisis. As major events were cancelled, borders shut, or businesses forced to close and workers laid off, the European Commission issued a soft law Communication on the Co-ordinated economic response to the Covid-19 epidemic (13 March 2020) and this was followed on 19 March 2020 by a second Communication creating a Temporary Framework to assess State aid responses to the COVID-19 effects on the economy. This second Communication will operate until 31 December 2020 and addresses how state aid procedures will be adapted and simplified to allow the Member States to introduce rapid economic response measures, as well as addressing the wider policy implications between EU and national economic policies. Also, a simple notification template was produced and a rapid response team put in place.

The European Commission reinforces a message that the majority of the different emergency fiscal responses used by the Member States are compatible with EU State aid law. These embrace the measures related to wage subsidies as well as measures granting direct financial support to consumers. Other measures – for example, support offered to SMEs – also fall within existing EU Block Exemptions.

Two basic EU Treaty provisions provide the legal means to adapt state aid to unusual, or crisis, situations.

Article 107 (2) (b) TFEU: State Aid to Rectify Damage Caused by Natural Disasters or Exceptional Circumstances

Under this provision the European Commission should investigate and confirm that there are exceptional circumstances. The first investigation into the notification from Denmark for a scheme to compensate organisers of cancelled events with an audience of over 1000 participants was dealt with rapidly – within 24 hours – with the European Commission finding that the scheme was directly related to the COVID-19 crisis.

The Temporary Framework also addresses the relationship of measures related to the COVID-19 crisis and the Rescue and Restructuring Guidelines. The latter are interpreted strictly under EU law in order to prevent Member States throwing money at unsustainable businesses and sectors. But, in the context of measures designed to ameliorate the effects of COVID-19, the European Commission states that the “one time last time” principle will not apply to any measures deemed compatible with Article 107(2) (b) TFEU.

Article 107 (3) (b) TFEU: State Aid to Remedy a Serious Disturbance in the Economy of a Member State

This Treaty provision had been rarely used before 2008 but was the basis for the approval of some 40 measures taken during the financial crisis. The practice, and lessons learnt, allowed the European Commission to draw up 5 kinds of aid that would automatically be compatible with EU law:

1. Direct grants, selective tax advantages and advance payments.  Member States may establish schemes to grant up to 800,000 euro to a business to address its urgent liquidity needs;
2. State guarantees for loans taken out by companies from banks. Member States may provide State guarantees to ensure access to credit;
3. Loans to businesses. Member States may grant loans with favourable interest rates to businesses;
4. Short-term export credit insurance for risks which are normally taken by private insurance companies, but which are temporarily unavailable because of the COVID-19 crisis;
5. Measures to ensure that banks can continue to guarantee liquidity to the real economy. The Framework states that this aid goes to customers, not to the banks. There are guidelines designed to ensure there is minimal distortion of competition between banks.

Measures which do not fall within the 5 categories of aid may be notified to the European Commission where the aid is designed to meet acute liquidity needs and support undertakings facing financial difficulties due to, or aggravated by, the COVID-19 outbreak.

By 26 March 2020 the European Commission had approved two schemes using the exceptional circumstances criteria of Article 107 (2) (b) TFEU as the legal basis and twelve schemes were deemed to fall within the Temporary Framework.

To ensure transparency, and to allow for an iterative process, the Decisions will be published in the State Aid Register.

Using the Temporary Framework the European Commission approved the two UK schemes to support SME: the Coronavirus Business Interruption Loan Scheme and the Direct Grants to Support SME scheme. The European Commission found the schemes were necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State under Article 107 (3) (b) TFEU.

During the transitional period of the Withdrawal Agreement, EU law produces the same legal effects in the UK as with the Member States of the EU (Article 127(1) and (3) and any reference to Member States in the Union law shall be understood as including the United Kingdom (Article 127(6)).

Recently, the UK has been exploring how a domestic State aid/Subsidy scheme should be developed to meet EU demands of a level playing field in any post-Brexit trade agreement with the EU. The first UK encounter of COVID-19 State aid/Subsidy responses has shown that the EU State aid regime is not as painful as the popular mood makes out.

Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.