Doing more with less – State aid reform in times of austerity: Supporting growth amid fiscal constraints

Joaquín Almunia — Vice President of the European Commission responsible for Competition Policy 

King’s College – The modernisation of State aid rules

London, 15-1-2013 — /europawire.eu/ —

Mr Secretary of State,

Professor Jacobs,

Professors,

Dear Students,

Ladies and Gentlemen:

I thank King’s College and the College of Europe for joining forces to organise this event. Initiatives of this kind are the perfect opportunity to discuss the policies and explain the decisions that we take together in the European institutions. Indeed, EU policy-making is based on regular consultations and an open dialogue with the organisations and individuals that are affected by our decisions. But I like to participate in such debates out of Brussels to counter the perception of the EU as a bureaucratic Leviathan and open new channels of communication with our stakeholders and with our fellow citizens. I am also happy that this conference takes place in London, given that the UK is one of the most active supporters of our topic today, the strategy for the modernisation of State Aid control.

Our initiative will streamline the rules and procedures and will propose a new compact to Europe’s governments. The reform started to bear its first fruits in December, as I will explain later on, and its different components will be discussed and adopted from now until mid-2014. But our strategic initiative will have its intended effects only if it dovetails with the many measures to support growth taken at national level. I hope this will also happen with the industrial strategy unveiled by Secretary Cable last year, shortly after the Olympics. Both the UK authorities and the European Commission share a few core principles, namely recognising a role for the state in shaping the economy, pulling together private and public efforts, and creating the best conditions in the markets to boost growth and create jobs.

Before I describe our reform, I’d like to say a few words on the place of State aid policy in the process of European integration.Together with the control of the anticompetitive behaviour of private undertakings, State aid control was the first part of the internal market chapter of the Spaak Report of 1956. The early architects of the European Union showed courage and an admirable institutional acumen when they gave to an independent authority – the European Commission – the power to control the economic support that national authorities would grant to private companies.

Since 1957, the implementation of State aid law has underpinned economic integration in Europe and ensured the smooth functioning of the Single Market. The system has no equivalent anywhere else in the world. No other country, jurisdiction or trade bloc has had to make sure that decisions taken by national governments would not undermine the integrity of a super-national internal market. The basic principles of the system have not changed over the years. The main objective remains the search for the right balance between state intervention and the invisible hand. When the market does not deliver the goods that the people need, our governments can step in to fix the market failure. The present Treaty articles establishing the State aid rules – which are now in the Lisbon Treaty numbers 107 and 108 – have remained unchanged since the Treaty of Rome came into force on the 1st of January 1958.

However, the story of State aid policy has been one of adaptation and resilience. To keep pace with change, the legal framework governing State aid control, developing the Treaty provisions, has been updated regularly over the years and the assessment of the effects of aid measures has become more sophisticated. During the last decades, State aid control has had to adapt to the dramatic increase in the size and functions of our public sectors and the number of government interventions through public subsidies.

More recently, the challenges we must tackle have evolved quite dramatically. The business environment has been transformed by technology and the integration of world markets. In addition, with the progressive integration of new countries to the Union, the system has expanded horizontally to integrate new national authorities. It has also grown in complexity since the various levels of government – and hence of State aid granting authorities – are organised in a different way in each Member State. And last but not least, since 2008 companies and governments have had to cope with the impact of this long and very deep crisis.

The reform we are carrying out today takes into account these elements and follows this tradition of adaptation and resilience. Let me explain how the very institutional role of State aid policy needs to change to respond to today’s conditions. This is a difficult time for governments to take spending decisions. The opportunity cost of inefficient spending has rarely been larger. Battered by the recession, more and more Europeans turn to their national and EU authorities for support. They want to see credible plans for growth and jobs. They need better prospects for their future and that of their children.

But these demands come at a time when almost all governments need to reduce debt levels and consolidate their finances. How can public budgets withstand the pressure? The best answer is growth. And public policies have an important role in this regard. Government expenditures and tax policies must be targeted to create the best conditions for a sustained – and sustainable – period of expansion.

Of course, a credible growth strategy will have to include other elements as well. We also need structural reforms and more competition in the Single Market – which in fact is a structural reform that would cost us nothing and produce quick results. But public spending and tax systems remain crucial. Smart investments to increase our physical and human capital are needed to re-start the engines of growth in Europe. In sum, in times of shrinking budgets EU countries have to do more with less. This is why State aid policy needs to change tack and become more strategic.

This is the main goal of our reform of State aid rules: we want to help national governments make more efficient use of scarce resources. Public spending and the tax structure can be better targeted to boost growth. The new framework can help Member States reconcile the twin needs to consolidate their budgets and achieve the objectives laid out in the EU strategy for growth and jobs. To help Europe’s governments improve the quality of their public finances, I want State aid control and – more generally – competition concerns to be a regular feature of the EU fiscal surveillance and economic policy recommendations.

The reform will promote what I call ‘good aid’; that is, well-designed and targeted aid that limits competition distortions in the internal market; fixes market failures; and pursues common European objectives. Examples of this kind of aid include support that promotes innovation, green technologies, and the development of human capital. To be specific, in the new Risk Capital Guidelines aid levels will be adjusted to the stage of development of the beneficiaries, because a very young start-up and a more established firm do not need the same amount of aid.

The reform will also promote the incentive effect of public aid. Good aid should complement private spending, not replace it. We all know schemes where the aid has not had a practical impact on companies’ decisions. Aid that pays for activities that the beneficiary would have undertaken anyway is a waste of public resources that we can no longer afford. The regime that will emerge from the reform will discourage another form of wasteful aid. This is the aid that keeps unviable companies on indefinite life support. The new rescue and restructuring guidelines that we are preparing will help EU governments steer their resources away from this form of inefficient aid.

And let me recall that to take the road of sustainable growth, Europe’s countries need to leverage the potential of the internal market to the full. As a consequence, State aid control is more essential than ever to ensure even conditions in the Single Market. To do this, our control will also respond to the growing disparities in the fiscal capacities of different EU countries – we can call them the ‘deep-pockets distortions’. We know from experience that these disparities can be a challenge to the level playing field and that State aid control is a good instrument to tackle it.

Finally, I am convinced that transparency must be an ingredient in all responsible policy-making. Let us not forget that State aid policy is about the use of taxpayers’ money. This means that the people are entitled to know who is receiving aid, how much and why. We have an opportunity with this reform to help information technology keep its promise for more democratic control and participation. We can help our fellow citizens hold companies and public authorities accountable.

Ladies and Gentlemen:

So far I have described the overarching goals of our current State aid policy reform. Now let me briefly give you the state of play of the reform process since it was launched. State aid rules have substantially expanded over the years and now include some 30 different legal instruments. One goal of the reform is to streamline them and make them more consistent. This will not mean a consolidation of all existing Guidelines, but a definition of common principles that apply to our assessment across the board. To be more effective, our instruments need to be simpler and easy to comply with. Hence, notions such as market failure and incentive effect will be treated in the same manner across the different guidelines and frameworks.

Last December, the Commission adopted the first Guidelines of this new generation, those for the broadband sector. At the same time, we also adopted the review of the Enabling and Procedural Regulations, which the Council will start to discuss later this month. Given the increased complexity in State aid control, the number and quality of cases we are to assess every year has increased exponentially in the last few years, when the crisis has triggered an exceptional degree of public interventions. To tackle this challenge, the proposed changes to the Procedural Regulation aim to improve the handling of complaints and to ensure that the Commission obtains relevant market information in good time. In particular, we need to receive all possible information that can be useful to take our decisions. To do so, the Commission should be able – when necessary – to get information directly from the industry, as it does in antitrust, and to conduct inquiries on aid granted in the same sectors by several Member States.

As to the future, over the next 12 to 18 months we will update a number of other guidelines, including those on Regional Aid, that should be ready for adoption in May this year; the Guidelines on on Industrial Rescue and Restructuring and those on Aviation, which are foreseen around the Summer; the Framework for Research and Development and Innovation and the Guidelines on Risk Capital, both scheduled at the end of 2013; and the Guidelines on Environmental Aid, which will most likely be ready at the beginning of 2014. To complete the list, we are also working on a revision of the General Block Exemption Regulation and we are considering whether a modification of the De Minimis regulation is warranted.

Ladies and Gentlemen:

Please allow a final consideration before I close. I opened my presentation recalling the courage and the vision of our founding fathers when they gave to the Commission the sole power to inspect certain government economic interventions. Their vision is still valid today, but we need to update the way we pursue it. This is what we want to achieve with the State aid modernisation strategy. If I were to summarise the main reasons behind it, I would say that the reform intends to send three strong messages:

First, that State aid policy – far from being a bureaucratic obsession of Brussels Eurocrats – is a very important tool to better focus the use of public resources and avoid the waste of taxpayers’ money;

Second, that this is the right time to renew our trust in the power of the Single Market to increase the resilience and dynamism of our economies; and

Third, that Europe’s growth potential will be increased if the European Commission and its Member States stand together to focus public spending and tax policies on common European objectives.

Thank you.