Why do the EU State aid rules apply here?
The formal definition of a State aid is that it is an advantage granted by a public authority, that selectively benefits certain undertakings, and affects competition and trade between Member States.
Many of the things governments will need to do in response to Covid 19 will be State aid. Tax holidays, guarantees for loans, and direct grants are all advantages, whether benefiting companies or the self-employed. And the scale of the measures will affect competition and trade between Member States.
But not all of them will be State aid. A tax holiday or deferment for everyone, a wage subsidy for all workers, or a reduction in VAT rates or business rates for everyone, will not be “selective”, as they benefit all businesses alike.
That said, a package designed to help small businesses, or particular sectors (transport or hospitality), or to rescue particular businesses, will be State aid.
Why do the EU State aid rules still affect the UK? I thought we had Brexit on 31 January?
The UK has agreed a transition period during which it remains treated for almost all purposes as part of the EU. During that period EU still applies in the UK as it did while the UK was a Member State. The present Parliament voted for that in the Withdrawal Agreement Act 2020, which makes it clear that EU law remains binding in the UK during the transition period. The transition period is due to end on 31 December 2020, and the Government is currently still committed to that, though many people believe that the present crisis will require an extension as Government and business are too focused on the current crisis to be able at the same time to prepare for the changes that will be needed when transition ends and (we hope) a new agreement between the EU and UK comes into force.
What happens if the Government decides on a measure that amounts to State aid?
The basic rule is that unless a State aid fits within various “block exemptions” laid down in EU legislation, it has to be notified to and cleared by the Commission before it is put into effect. Normally, most aid that is granted fits within the block exemptions. But measures on this scale won’t.
The Commission has power to clear aid that is necessary to “remedy a serious disturbance in the economy of a Member State”. The Commission has made it clear in guidelines that it agrees that Covid 19 has caused a “serious disturbance”.
Those guidelines set out a list of criteria that, if met, will lead to an automatic “tick box” clearance decision. Those criteria are: aid of less than €800,000 per business; that there be a formal scheme with a budget; and that grants stop being given by 31 December 2020. (There are slightly different rules for aid to the agricultural sector, and more complicated criteria for loan guarantees and loans at subsidised rates.). Applying this guidance, the Commission has already (within 4 days of notification) approved the sweeping French government scheme for loan guarantees.
But it is very important to note that aid going well beyond those criteria can and will be approved swiftly. Paragraph 14 of the Commission’s guidelines records, for example, that “Member States can notify to the Commission aid schemes to meet acute liquidity needs and support undertakings facing financial difficulties, also due to or aggravated by the COVID-19 outbreak”, and paragraph 15 points out that “Member States can also compensate undertakings in sectors that have been particularly hit by the outbreak (e.g. transport, tourism, culture, hospitality and retail) and/or organisers of cancelled events for damages suffered due to and directly caused by the outbreak. Member States can notify such damage compensation measures and the Commission will assess them”.
Won’t all this just lead to delay?
Not really. Any measure involving spending huge sums of public money has to be worked out in at least some detail: criteria have to be fixed and so on. That takes some days to do, with the best will in the world. And in many cases Parliament will have to approve the measure in legislation (either by a statutory instrument or in some cases passing primary legislation). That takes a bit of time. And in the meantime the Government can approach the Commission to let it know what it is proposing. It is clear that the Commission is very conscious of the huge problems that are being caused and the need for urgent measures and will clear these proposals very quickly – within days. Indeed, during the banking crisis, it approved one rescue package overnight.
Isn’t this all just pointless Euro-regulation, stopping democratically-elected governments doing what they think best for their people?
Not really. The need for these measures national governments is obvious. But in a single market, huge grants given by one Member State to its businesses can easily overspill and hurt the economies of other Member States. And if there were no controls at all, Member States might use the Covid 19 emergency as cover to grant subsidies that are not really about dealing with this crisis at all. The Commission can check that that is not happening.
Can’t the UK just ignore these rules?
If the UK granted State aid that should have been cleared first by the Commission and wasn’t, then the aid would be unlawful. In principle, either the Commission or a UK court (at the request, for example, of a business that did not qualify for a grant or was otherwise unhappy with the scheme) would have to require the scheme to stop and any aid granted under it to be repaid.
In any event, the UK government has a good record of compliance with the State aid rules and generally takes seriously its obligations to comply with the law (including international law). That record is an asset when trying to negotiate trade agreements with other countries, as the UK wants to do after Brexit. Anyway, I am glad that the government respects the law, even in a crisis, as I may need the government to respect the law when it deals with me, even in a crisis. Aren’t you?
GEORGE PERETZ QC