• Analysis
  • More Money – Less Solidarity: Competition of the Subsidies

  • Roland Kulke , Susanne Wixforth | 03 Aug 20 | Posted under: Economic Governance , Euro , European Union
  • Covid-19 has led to a dramatic economic crisis. The EU has modified the strict State aid rules to such a degree that States can now help their national economies virtually at their own discretion. What at first sounds sensible comes with a catch, however, since it results in the strong becoming even stronger and leaving poorer economies behind.

    Covid-19 has left its mark on the real economy, putting at risk an as yet incalculable number of jobs. The Member States, above all Germany, are using up much of their funds for subsidies: EUR 13.8 billion for Adidas, TUI, as well as for Lufthansa. But large companies in other Member States too are being supported by the state: KLM Airlines is granted a subsidy of EUR 2-4 billion from the Dutch government; similarly, Air France receives a EUR 7 billion sum from the French government. Spain put together a rescue package to the tune of EUR 1 billion for Vueling and IAG, while a EUR 3 billion subsidy package for Alitalia is under discussion as part of the planned renationalisation. Industrial sectors have also been knocked off balance: the French Finance Minister hinted that Renault would not survive the crisis without state aid. A EUR 5 billion package of state support is under discussion.

    The call for state aid during the crisis is sounding loud and clear again. Millions of jobs in all sectors from the manufacturing industry to services, tourism and culture are at risk. In Germany alone there are 7 million employed in short-time work.

    The situation is one of deja-vu: before and after the 2008 financial crisis, the state was defined as a stumbling block for entrepreneurial activities; suddenly, however, it is supposed to swing into action as the saviour of enterprise and take on the burden of losses.

    Relaxation of the EU ban on State aid

    In March 2020 the outbreak of the Covid-19 crisis led the EU Commission to temporarily suspend the ban on State aid of Art. 107 of the Treaty on the Functioning of the European Union (TFEU), in order to swiftly enable rescue measures in favour of the real economy. In its Communication on a temporary framework to support the economy it provides an accelerated procedure for various support instruments: accordingly, temporary direct grants of up to EUR 800,000, reduced government guarantees for bank loans, public and private loans with reduced interest rates, tax deferral measures, suspension of social security contributions and wage subsidies for employees, as well as state recapitalisation measures for companies are now permitted. Under the section entitled ‘The need for close coordination of national aid measures at European level’, the Commission does in fact stipulate that Member States must report to what extent the aid received supports activities that are in line with the EU’s objectives with regard to environmental and digital change. This is nothing more than a voluntary commitment, however. The section entitled ‘Governance’ makes it clear that shareholders are not permitted to receive any dividends while the government holds a stake. Bonus payments for management are only prohibited though up to a certain level of state involvement.

    Despite this European clemency the Austrian Finance Minister has called for temporary total suspension of the EU State aid regime:

    I fail to understand why we support other countries with Austrian taxpayers’ money and, in return, we are prohibited from supporting our own companies with our own taxpayers’ money.

    It is now becoming increasingly clear that easing the State aid regime will increase economic inequalities in the internal market in the long term: Member States experiencing a state of budgetary emergency cannot keep pace in this manner of aid provision competition. They will emerge from the crisis weakened yet further and their companies will be crowded out of the market or taken over, while we lack an adequate compensation mechanism at a European level that could cushion these economic inequalities.

    As a result, the exemptions from aid exacerbate economic inequalities, which the EU aid ban should avoid in particular. Even the liberal President Macron admitted that this kind of subsidy competition undermines fair competition conditions in the internal market.

    Rather than fratricidal war between Member States...

    Meanwhile, State aid authorised by the EU Commission has now grown to approximately EUR 1.5 trillion. In total, the EU Commission has taken over 200 State aid decisions on national measures in all EU Member States and the United Kingdom since the outbreak of the crisis (correct as of 9 July 2020).

    Source: German Federation of Trade Unions, DGB

    From a legal perspective, all Member States are free to use the new, eased EU regulations in the form of sectoral and enterprise support packages that have been granted fast-track approval by the EU Commission (see graphic). Member States are also able to grant aid through general national measures that can be accessed by all companies. These types of subsidies are not subject to approval. Economic policies within Member States differ considerably.

    If we look solely at sectoral business support, it is evident that large economies have a clear competitive advantage over smaller ones: Italy, Germany and France together account for EUR 1.2 trillion, which is 78% of the total aid approved by the Commission. The United Kingdom and Belgium appear some way behind in fourth and fifth places, accounting for EUR 60 billion and EUR 54 billion respectively.

    While this may be acceptable as a temporary situation, especially to avoid the loss of millions of jobs (as has happened in the United States), the loss of equal competitive conditions is harmful and unacceptable. A functioning internal market demands a ‘level playing field’ for companies and the employees who are dependent on them.

    ... collective rebuilding of the EU

    Instead of simply turning on the subsidy tap, the EU therefore needs a comprehensive industrial strategy that also re-evaluates issues around State aid: Covid-19 has shown that strategic property is not sufficiently secured against ‘hostile takeovers’; that strategically important production lines, such as the production of goods vital for health, should be brought back to the EU or prevented from leaving; and that recapitalisation measures can be an important instrument for strengthening the EU’s competitiveness. The White Paper on foreign subsidies can be a first step in this direction. Furthermore, EU State aid law must in future steer national aid in a direction that supports shared European strategies, such as achieving climate neutrality or pursuing a common aviation strategy.

    There must also be a major change in the conditionalities of the aid measures: they must support Member States’ EU goals and obligations with regard to social-ecological and digital change, and contain an employment and location guarantee. In addition, shareholders ought not to receive any dividends from companies where there remains a level of government involvement to any extent; equally, bonus payments for management must be suspended entirely. These conditions must be laid down in advance in the guidelines and not only determined subsequently on a case by case basis.

    A democratisation of State aid law should also be considered by defining important principles – not in the form of non-binding guidelines issued by the EU Commission but via guidelines within the framework of the ordinary legislative procedure.

    The EU’s Member States find themselves in a kind of fratricidal war, as the EU Commission itself implies it in its Industrial Strategy 2020. It rightly emphasises that the temporary suspension of the ban on State aid can only be a complementary measure. Companies will require supplementary, large-scale private and public investment as part of the rebuilding phase following the crisis. This requires a reconstruction plan that supports horizontal goals such as the ‘Green Deal’ through socially inclusive transformation. The reform of the aid regulations, especially the State aid guidelines affecting energy and protection of the environment, can only be a small component of this.

    This is the only effective way to move from crisis mode to a joint process of rebuilding the EU.

    ... with shared democratic economic planning

    The Covid-19 crisis has demonstrated a typical reaction pattern by the EU and its Member States: in a profound crisis the national state is always strengthened to the detriment of common EU policy. This was the case in the financial markets crisis of 2008 – and also in the refugee crisis of 2015, when individual Member States erected walls in the most literal sense of the word. This was also the case in spring 2020, however, e.g. when France, Germany and the Czech Republic began imposing export bans on essential goods at the beginning of March. It is only once the crisis is partly analysed that the debates begin at a European level around whether it is possible to collaborate better in future.

    The discussion about State aid fits this pattern. A topical example may clarify this: the Japanese automotive company Nissan cooperates globally with French company Renault. Nissan announced that it was shutting its factory in Barcelona and making 3,000 employees redundant. If we include the local and regional value networks, up to 30,000 jobs in Spain’s most important industry sector, the automotive sector, are at risk. It is probably no coincidence that this announcement was made shortly after the French President had declared that Renault would only receive EUR 5 billion in French State aid if it brought back (‘re-shored’) industrial production sites to France. We are therefore seeing a policy of ‘every man for himself’ and the winners are those whose ‘national purses’ allow greater direct support for their own national industry. It is clear that such a development will lead to further destruction of industrial structures in the European periphery and thereby to a further division of EU societies.

    Retrodisplacement of economic competencies to national states is not easy, however – at least if we are aiming for the goal of European solidarity.

    This is because the integration of property, made possible by the freedoms of the internal market, is considerably advanced.  This causes corporations to have an economic influence on the development of national strategy in States in Central and Eastern Europe. For example, the management of Škoda in the Czech Republic tends to represent the interests of the German (VW) industry rather than advocating national Czech development. This shows that it was a mistake to automatically perceive decentralised political decisions as ‘closer to the issues’, since the value chains and the associated relationships of dependency work across borders. If European political management is reduced, transnational capital dependencies will increase.

    The EU’s neo-liberal regulations, such as the Stability and Growth Pact, should be rejected. At the same time, however, the current crisis shows that the strengthening of nation states, e.g. by suspending the State aid rules, increases unfair competition between the Member States.

    From a democratic perspective, a regulation that enables joint planning of short-term aid and, in the medium-term, upcoming socio-ecological transformation of European economies would therefore be welcomed. The European Parliament is the right actor here. This would prevent national subsidy advocates from putting even further pressure on Member States experiencing budgetary difficulties. What we need is a politicisation of the discussion about sustainable European economies, not a decision based on coffers.


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