Coronavirus: a time for extraordinary EU state aid measures

Out-Law News | 24 Mar 2020 | 10:01 am | 3 min. read

The European Commission has announced a relaxation of state aid rules for businesses affected by the Covid-19 crisis and, within 72 hours, approved the first seven schemes under the new rules.

Speaking at the announcement of the temporary framework on 19 March, the EU's competition commissioner Margrethe Vestager said: "The economic impact of the Covid-19 outbreak is severe. We need to act fast to manage the impact as much as we can. And we need to act in a coordinated manner. This new temporary framework enables member states to use the full flexibility foreseen under state aid rules to support the economy at this difficult time.”

The temporary framework introduces five categories of measures designed to help member states to support businesses facing a sudden shortage or unavailability of liquidity as a result of the Covid-19 pandemic:

  • Direct grants, selective tax advantages and advance payments – this includes grants of up to €800,000 per business to address its urgent liquidity needs, though lower limits apply for businesses in the agricultural, fisheries and aquacultural sectors;
  • State guarantees for bank loans – these can be for the purposes of immediate working capital as well as investment needs;
  • Subsidised public loans –these can cover immediate working capital and investment needs;
  • Safeguards for banks that channel state aid to the real economy – the framework clarifies the conditions under which aid channelled through banks will be considered as direct aid to the banks' customers and not to the banks themselves; and
  • Short-term export credit insurance – the framework introduces additional flexibility on how to demonstrate that certain countries are non-marketable risks, thereby enabling short-term export credit insurance to be provided where needed.

The temporary framework will remain in place for schemes introduced before the end of 2020, a deadline which the Commission said it will keep under review. It will also apply retrospectively to non-notified measures introduced since 1 February 2020.

By Sunday afternoon, just three days following the introduction of the temporary framework, the Commission had already announced the approval of seven schemes under the new rules.

Kotsonis Totis

Dr. Totis Kotsonis

Partner, Head of Subsidies, Procurement, Trade Agreements and Trade Remedies

The rapid approval of the first seven schemes shows that aid which meets the new framework's requirements can and will be approved very rapidly by the Commission

The first three of the schemes, notified by France, include state guarantees on commercial loans and credit lines for enterprises with up to 5,000 employees as well as state guarantees to banks on portfolios of new loans to all types of companies. In total, the schemes are expected to facilitate more than €300 billion of liquidity support to French businesses. This was quickly followed by the approval of loan and guarantee schemes in Denmark and Germany, and a €50 million scheme to support the production of ventilators and personal protection equipment in Italy.

Totis Kotsonis, a specialist in state aid at Pinsent Masons, the law firm behind Out-Law, said: "Unlike aid which is de minimis aid or comes within the scope of the general block exemption, aid under the framework still requires prior notification to the Commission for approval before implementation. However, the rapid approval of the first seven schemes shows that aid which meets the new framework's requirements can and will be approved very rapidly by the Commission."

The latest developments follow the approval on 12 March of a €12m scheme to compensate event organisers in Denmark.  Brendan Ryan, a senior associate at Pinsent Masons, said: "The Danish scheme was approved because it was considered to be a direct response to an 'exceptional occurrence'. The temporary framework, by contrast, covers schemes to 'remedy a serious disturbance' in the economy."

"The distinction is an important one: it may be some time before the extent of the damage to real economy becomes apparent and this will make it more difficult to establish a causal link between the 'exceptional occurrence' – the pandemic – and the economic effects a particular scheme is designed to remedy. The framework provides greater certainty and indeed time for member states to develop targeted schemes for sectors suffering from the economic aftershocks of the crisis."

In addition to aid measures for 'exceptional occurrences' and to remedy serious economic disturbances, member states are also free to introduce supports such as wage subsidies or compensating consumers directly for cancelled services which are not reimbursed – as these measures apply generally across the economy, they are considered to fall outside the state aid regime. 

However, further intervention might still be needed, according to Totis Kotsonis: "The Commission's efforts over the past fortnight are certainly welcome, but further action may be needed in due course, in particular to assist the ailing airline industry. The temporary framework will allow for liquidity to be quickly injected into the economy, but this might not be enough to address the concerns of a number of airlines over solvency issues."

"In this regard, the temporary framework does clarify that the principle of 'one time, last time' aid to rescue and restructure failing businesses does not prevent those businesses from receiving further aid which is notified to the Commission in response to 'exceptional occurrences'. This clarification will be welcomed by undertakings in the aviation sector which may already have received rescue and restructuring aid but now find themselves struggling again because of this crisis," Kotsonis said. 

“At the same time, it is clear that within this framework, neither the Commission nor competitors of aid recipients will accept member states providing support to businesses, including struggling national airlines, which goes beyond what is necessary to compensate for damage caused directly as a result of the pandemic," he said.

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