Crisis and flexibility: Temporary or not?

Crisis and flexibility: Temporary or not?

Although the continued relaxation of State aid rules has undoubtedly offered a valuable way to deal with emergency situations, what are the implications for the internal market?

(Yet another) temporary framework

On 9 March 2023, the European Commission published the 'Temporary Crisis and Transition Framework' aimed at broadening the possibilities to provide State aid to further support the transition to climate neutrality. These changes to the current temporary framework – introduced last March to cope with the economic consequences caused by Russia's aggression against Ukraine – are part of the 'Green Deal Industrial Plan for the Net-Zero Age Deal' (presented on 1 February). This was designed to increase the EU’s attractiveness for investments in green technologies and net-zero emission products with a view to continuing the European Green Deal and complementing the EU Industrial Strategy. This plan, however, also addresses the need to counter the Inflation Reduction Act, the US initiative that by mobilising 370 billion dollars in investments, marks the most significant action taken by Congress on clean energy and climate change.

What's new?

The amendments concern Sections 2.5 and 2.6 of the current Temporary Framework, which contain the measures aimed at decreasing dependence on Russian fossil fuels and facilitating the green transition based on Art. 107(3)(c) of the Treaty on the Functioning of the EU (TFEU), along with the introduction of entirely new provisions (Section 2.8) for accelerated investments in strategic sectors, thereby outweighing the consequences of the US incentives. It should also be noted that the original deadline has been extended by two years (31 December 2025), except for measures relating to limited amounts of aid, liquidity support, compensation for high energy prices, and support for reducing electricity demand.

Has the exception become the new rule?

The adoption of temporary measures derogating from State aid rules has become the Commission's practice since the financial and economic crisis of 2008 and again with the Covid-19 pandemic. Therefore, it comes as no surprise that the Commission acted promptly to set up a temporary framework after Russia's aggression against Ukraine and has now opted to use the same instrument. The political and economic upheaval caused by this event has undoubtedly revealed a new imbalance in the EU. To cope with the difficult consequences of this, a strengthening of European industry through public funding appears necessary. Besides, it is also true that without coordinated action at EU level, only States with more robust economies would be able to face such a challenge. This would entail the danger of fragmentation of the single market (and the Commission's intention seems precisely to avoid such a scenario).

However, while aiming at a ‘simpler, quicker and more predictable’ State aid framework, the Commission continues to soften the State aid control rules – identified ever since the 1956 Spaak Report as one of the fundamental policies for the creation of the common market – by transforming the temporary frameworks from instruments conceived precisely as ‘transitional’ into ‘almost permanent’ ones. The risk is that these measures, conceived as exceptions to the ordinary framework, will in fact become the new rule (also considering the duration until 2025).

Beware of the fragmentation risk for the internal market

Concerns about the integrity of the internal market are indeed more than justified, since not all Member States have been able to offer subsidies to the same extent so far.

Whilst the promotion of renewable energy and the decarbonisation of industry undoubtedly constitute desirable goals, it is nevertheless worth asking whether or not this repeated extension of exceptional disciplines might lead to serious repercussions. On the one hand (and from a systemic perspective), if the exemption increasingly extends its scope, the prohibition of State aid to undertakings under Article 107(1) TFEU may be called into question with regard to the applicability of the incompatibility principle as a general rule. On the other hand, in a crisis scenario, only States with higher financial resources will be able to invest more significantly in these emerging sectors, while weaker States tend to concentrate their efforts on bailing out individual companies (which are often already in difficulty). Finally, considering that the framework allows the aid measures adopted to be combined with those already approved under the Covid-19 Temporary Framework, a possible overlap of different aid measures for the same liquidity needs of beneficiaries can also be problematic, in addition to the uncertainty that the constant modification of the rules and their requirements may entail for the companies.

Concluding remarks

Overall, it should always be recalled that the system of European competition rules is an important guarantee in the perspective of competitiveness, thus extreme caution is necessary in order not to jeopardise the pillars of the structure. A broader question (certainly not to be underestimated) is whether a reconsideration of the system, of the role of governments and consequently of competition rules, is necessary as a result of the pandemic and ongoing short- and long-term challenges, including energy price inflation, security and climate change.

Against this background, it will be interesting to evaluate how the Commission intends to develop the proposal for a European Sovereignty Fund, as a structural response to investment needs, in the context of the revision of the Multiannual Financial Framework before summer 2023. Such a proposal could perhaps represent a complementary and yet alternative instrument to the continuous issuance of temporary frameworks, aiming at achieving the same result, while more effectively safeguarding cohesion and the internal market from the risks that may be caused by unequal availability of public support measures by Member States.


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