European Commission confirms "ambitious reform package" for state aid rules

The proposals, outlined in a Commission communication paper (9-page / 39KB PDF), are intended to streamline existing rules and allow the Commission to focus its enforcement action on those cases with the biggest impact on the internal market. If approved, the new system could be in place by the end of 2013.

"Economic forecasts currently indicate that growth in the EU will remain low for some time," said Competition Commissioner Joaquín Almunia. "In this environment Europe must tap the full potential of a competitive internal market and, in a context of fiscal consolidation, governments must focus their spending on growth-enhancing priorities."

"I expect our state aid reform to help public authorities make more efficient use of scarce public resources and design public support to firms so that it helps achieve the EU's growth objectives while limiting competition distortions," he said.

EU state aid law specialist Alan Davis of Pinsent Masons, the law firm behind Out-Law.com, welcomed the proposals.

"For too long, the EU State aid regime has constrained the ability of Member States to tackle economic development needs at a local level. The rules haven't focused sufficiently on whether aid has a real anti-competitive effect in the market or a material effect on trade between member states," he said. "In the current economic environment in Europe, a more efficient and focused state aid regime could play a valuable role in stimulating economic recovery and growth."

State aid is an advantage or incentive granted by a national government to a particular company, and can take a variety of forms including grants, tax reliefs, guarantees, government holdings of all or part of a company or the provision of goods and services on preferential terms. To ensure fair competition inside the EU, state aid is prohibited unless it can be justified for general economic development reasons.

Member states must apply to the Commission for clearance on a case by case basis before they can offer funding or incentives which amount to state aid, and member states can be required to recover illegal aid from companies which have received public support in breach of the state aid rules. However, some types of aid are automatically exempted under the General Block Exemption Regulation.

At a press conference in Brussels, Almunia said that "good" state aid which was efficient, well-designed and addressed real market failures was "fully justified and needed", particularly in relation to green technologies and innovation.

"This kind of aid can support R&D and innovation, can make access to finance easier for SMEs, can give the right incentives to broadband investment, can contribute to funding the strategy against climate change or in favour of environmental protection and can drive investment towards weaker regions," he said. "By contrast, we should discourage the 'bad aid' that generates significant distortions of competition without bringing any real value added... [such as] public support to non-viable businesses."

The Commission's role in controlling state aid needed to shift from the existing case-by-case approach to a more structured state aid 'policy', he said, allowing for the stronger scrutiny of large and potentially distortive aid as well as enquiries by sector. A review of the existing exemptions, including those outlined in the general Block Exemption Regulation and Enabling Regulation, would simplify the investigation of those cases which have only a limited impact on trade.

The paper also proposes an impact assessment on the 'de minimis' Regulation, adopted in 2008, which will consider whether the current threshold exempting payments below €200,000 from being declared, should be reviewed to reflect current market conditions.

Other proposed reforms include an updated Procedural Regulation, which would allow the Commission to set priorities for complaints handling rather than being obliged to examine all allegations, and a clearer and more rational set of rules which Almunia said would lead to "less red tape and faster decisions".

Approximately €52 billion, or 0.42% of EU GDP, was granted by member states in the form of state aid in 2010, according to Commission figures. The funds were used to support objectives including regional development, environmental protection and research and development.