EU members clash over state aid rules to tackle coronavirus

Brussels plans for a further relaxation of its rules on state aid have been caught up in an increasingly hard-fought pan-European debate over whether government bailouts are skewing the single market. 

The European Commission has been holding discussions with member states over the details of its temporary coronavirus-related state aid regime, which allows capitals to rush through help to companies crippled by the lockdowns. 

An update from the commission tackling injections of equity and hybrid debt by governments is expected to be released as soon as next week. The decision has been preceded by tense consultations with capitals amid warnings that deeper-pocketed member states are gaining an unfair advantage because of their ability to subsidise key industries. 

“The Germans, Danes, Dutch and Austrians have a lot of money to throw at this,” said one EU official. “It’s part of this risk that the recovery will be asymmetric.” 

Since coronavirus broke out in the continent, the EU has rushed through measures to cushion the impact of the pandemic on businesses. A key moment came at the start of March, when Ursula von der Leyen, the commission president, promised to inject flexibility into state aid rules restricting governments’ ability to subsidise companies given the “exceptional circumstances” created by the outbreak. 

The EU’s bid to avoid mass bankruptcies and even higher unemployment has seen a torrent of government notifications for accelerated approval of government support: as of the middle of this week, the commission had approved €1.9tn of state aid measures, via 95 decisions, covering 26 member states plus the UK. 

Germany has accounted for a disproportionate share of the aid approved, prompting complaints in southern capitals that they will suffer from unfair competition and weaker economic recoveries because they have less capacity to support them. Germany has accounted for 52 per cent of the aid approved — roughly twice its share of the EU economy, according to commission data. 

“If a country, thanks to the [added flexibility] of the state aid rules that we have all agreed, can inject liquidity of this size to its companies, there is part of the internal market that is not going to function, because it does not have access to this liquidity,” said one senior Spanish official. “The risk is the rupture of the single market”. 

EU officials have been discussing a further relaxation of the rules by allowing countries to inject equity and debt into businesses suffering as a result of the pandemic. Ahead of the decision, member states have been haggling with the commission over the terms and conditions attached to the financing to bailed-out companies. Constraints include a ban on paying out dividends, buy back shares or provide bonuses or similar remuneration, according to proposals seen by the Financial Times.

Officials said the discussions have proven “politically charged” given the issue of fairness in relation to taxpayers recouping the aid but also with regards to the differing means that countries have to help their industries. “It’s a complex discussion with sensitive political considerations,” said an EU official.

A number of member states, including the Netherlands, have been pushing for permission to keep aid in place for a longer period than first proposed by the commission. Diplomats said that others want more generous thresholds for the amount of money that can be handed out.

Austria has gone the furthest in pushing for a relaxation, last week asking commission executive vice-president Margrethe Vestager to suspend the state aid regime during the crisis. Diplomats said Spain has by contrast been urging the commission to retain limits on the scope and timescale to avoid undermining the single market — even as it supports the broader decision to relax the state aid regime.

Spain has also been arguing countries including Germany should show greater solidarity with the south by backing common issuance of perpetual bonds to fund the recovery. The commission should be “very strict when it comes to evaluating how exceptional these circumstances are, and the timeframe when it comes to relaxing the state aid rules”, said one diplomat. 

The commission’s new guidelines are expected to be released in the coming days. Responding to Austria’s demands, Ms Vestager said in a letter seen by the FT that the commission continued to adjust the state aid rules while at the same time “keeping in mind the need to preserve the level playing field”.

Ms Vestager added: “European co-ordination and support to the economy are indeed needed, especially where national measures are insufficient, to avoid an asymmetric and long-lasting shock to our economy.”

A spokesperson for the commission said: “All state aid approved has been necessary and proportionate to support businesses and remedy the serious disturbance to the European economy due to the coronavirus outbreak. At the same time, there are huge differences in the amount of state aid granted by member states, which appears linked to the fiscal space they have as well as the respective size of their economies.”

Additional reporting by Daniel Dombey in Madrid

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