The European Response to COVID-19: State Aid and the ECB Under the TFEU
By Giulio Preti
Introduction
As COVID-19 continues to spread in the European Union, many Member States (MS) have called for a European approach to tackle the economic issues likely caused by the disease.[1] The European Commission (EC) and the European Central Bank (ECB) have sought to take immediate action. Salient examples of this have been the creation of a temporary framework which works to clarify both the application of state aid rules within the context of the pandemic (the Framework), and the measures undertaken by the ECB. However, as it will be discussed, both measures may encounter significant hurdles in their application either because they risk being exploited by the MS or because they risk running contrary to the provisions of the Treaty of the Functioning of the European Union (TFEU).
The purpose of this contribution is to analyse the measures brought forward, highlight the difficulties which they pose and consider wider implications related to the measures.
- COVID-19 and State Aid
The economic impact of COVID-19 cannot yet be fully assessed. It has been estimated that the loss of GDP over 2020 and 2021 within the European Monetary Union could exceed 15% compared to 2019.[2] In this context many companies may face significant challenges and MS may decide to intervene to rescue the businesses which have been most affected. It should not come as a surprise, therefore, that shortly after COVID-19’s outbreak in Europe, many countries, including Italy,[3] France,[4] and the UK,[5] have indicated that they will provide support to national companies through different means such as capital injections and state guarantees.
However, these forms of intervention are considered to be state aid which is generally forbidden under Article 107(1) TFEU. This imposes a general restriction on such practices which, through favouring certain undertakings, are incompatible with the internal market.[6] However, some exceptions are provided under Article 107(2) and 107(3). In particular, aid is always considered to be compatible with the internal market if it is given ‘to make good to the damage caused by natural disasters or exceptional occurrences’.[7] Further, state aid may be considered compatible if it is provided to ‘remedy a serious disturbance in the economy of a Member State’.[8]
In order to allow MS to vigorously confront the challenges posed to businesses by COVID-19, the EC has decided to reverse the presumption of incompatibility of the aid with respect to aid granted to compensate businesses for the loss associated to the COVID-19 pandemic. A first Communication to that effect was issued on 13 March 2020[9] which recognised that the situation in Italy could qualify as a serious disturbance to the economy for the purposes of the application of Article 107(3).[10] A second Communication detailing a Temporary Framework to support the economy in the current COVID-19 outbreak was issued on 19 March 2020[11] and amended on 3 April 2020.[12] In this context, the EC recognised ‘the need for appropriate State aid measures’.[13] The intervention of the EC was particularly strong with reference to aid provided to financial institutions. Following the economic crisis of 2008 the banking sector is no longer subject to Article 107 TFEU but to the Bank Recovery and Resolution Directive (BRRD)[14] and to other soft law instruments enacted by the EC.[15] The Framework, in essence, allows MS to disregard the BRRD and to rescue banks if they have been affected by COVID-19.[16]
The Communications must also be interpreted in light of the most recent decisions of the EC. It is important to note that the EC has already agreed to allow State aid to be granted by various countries, including France[17] and Germany,[18]and that such decisions are adopted almost on a daily basis.[19] The most significant decision relates to the aid granted by Denmark to undertakings just prior to the introduction of the Framework.[20] The significance of this decision stems from the fact that it was adopted less than 24 hours following notification of the aid. The speed of the EC in assessing aid granted to businesses affected by COVID-19 indicates an endorsement of such measures. Furthermore, the rapidity of the decisions will likely give an incentive to MS to notify the measures before they are implemented unless they fall under the General Block Exemption Regulation (GBER),[21] in which case they would not require notification to the EC.
The broad exceptions granted by the Commission and the speed of the decisions adopted, however, risk diminishing the level of scrutiny of every decision. Some MS may try to grant aid even for situations which fall outside COVID-19. It is true that the framework allows aid to be granted to undertakings which ‘were not in difficulty (within the meaning of the GBER) on 31 December 2019’.[22] A strict application of this principle may make a significant amount of businesses ineligible for aid, thus causing further financial distress and, perhaps, bankruptcy. This is obviously an undesirable outcome for MS. There is, consequently, a potential for abuse which may lead to unpredictability. Italy, for example, has announced further aid for its national airline Alitalia[23] despite the fact that it has already been granted allegedly illegal public loans in the amount of €900 million in 2018,[24] and €400 million in 2019.[25] Hence, the EC will have to carry out three separate investigations into the measures with likely different outcomes as to their compatibility with the internal market, which may create uncertainty.
Furthermore, the Commission has underlined the temporary nature of the Framework by clearly stating that aid must be granted by 31 December 2020.[26] However, in a separate document issued on 13 March 2020,[27] it has stated that the recovery of the GDP after the pandemic has passed will go beyond 2021. As the situation continues to worsen, it is likely that the crisis will last even longer than initially envisaged. As such, a contradiction appears in the implementation of a temporary framework to address an issue unlikely to be temporary. Consequently, as the crisis drags on, it will be increasingly difficult to distinguish which measures genuinely aid in response to the pandemic, and which measures represent incompatible aid. It is possible, therefore, that COVID-19 will influence the presumption of incompatibility of aid towards less stringent standards. The EC will have to strike a balance between a rapid system which may be prone to abuse and the traditional approach which requires a careful case-by-case analysis but may be long and, in an emergency situation, ineffective against the COVID-19 pandemic.
- COVID-19 and the ECB
In the context of the current crisis it has been recognised that providing liquidity to financial institutions and to undertakings will be crucial.[28] The first response of the ECB to COVID-19 has been to extend the scope and size of the bond purchases on the secondary market[29] and to provide liquidity to banks in order to create a ‘backstop’ in case shortages of liquidity were to arise.[30] These measures, described as weak and clumsy,[31] forced the ECB to walk back on its previous statement[32] and to announce the launch of a Pandemic Emergency Purchase Programme (PEPP). This program will entail the purchase of private and public securities on the secondary market to the amount of €750 billion on top of €120 billion already agreed upon by the Governing Council of the ECB.[33] The plan will thus further provide liquidity to European banks up to a massive €3 trillion.[34]
The structure of the measure goes much further than the previous asset purchase programmes[35] and it may, thus, be challenged in Court. Although the European Court of Justice (ECJ) has always considered such programs to be lawful,[36] the unprecedented structure of the PEPP may lead to different outcomes if a case will be brought forward.
Firstly, the ECJ will likely consider if the PEPP is proportional in light of the criteria set forth in previous cases.[37] In particular, the measures will have to ‘be suitable for attaining the legitimate objectives pursued by the legislation at issue and should not go beyond what is necessary to achieve those objectives’.[38] Given the need for liquidity of banks and businesses alike, the measure appears to be suitable to addressing the issue of short-term liquidity. Furthermore, given the impact of the crisis, which has already caused the GDP of some of the countries affected to plummet by over 10% in the first months of 2020,[39] it is unlikely that the amount of money made available to financial institutions by the ECB will be considered disproportionate.
Secondly, the compatibility with Article 123 TFEU will likely be assessed. This provision generally prohibits the ECB from intervening directly in support of MS. The ECJ has held that the notion of direct intervention under Article 123 must include also measures which have an equivalent effect to that of a direct purchase of bonds.[40] The ECB has made clear that the purchase of public bonds will be limited, although more flexible than the previous programmes. However, it has not yet made public which share of the total bonds on the secondary market may be purchased. The share of the bonds purchased will likely be the question which will decide if the measure will be deemed compatible with the TFEU. If the share of the bonds acquired will be close to 100% of the bonds circulating on the secondary market it will likely be argued that this level of intervention amounts to direct aid in violation of Article 123 TFEU. As such, it is unclear where the ECJ will draw the line between strong intervention and violation of the TFEU.
It is, therefore, likely that this crisis will constitute an incentive to modify Article 123 TFEU, allowing the ECB to support MS directly in similar circumstances in future. In lieu of this, another option could be to allow the ECB to purchase bonds on the primary market, thus creating a central bank equivalent to the Federal Reserve acting as a lender of last resort. However, it is unlikely that a compromise could be reached on this solution in the short to medium term.
Another important aspect to consider is the influence of ECB announcements themselves on the market. There are empirical examples of announcements exerting power over more than inflation rates and moving markets themselves in a direction which is more positive for MS. For example, in 2012 the then President of the ECB launched the so-called ‘Outright Monetary Transactions’ (OMT)-Programme,[41] with the view of decreasing the yields of government bonds in case of crisis. In doing so, Mr Draghi stated that: ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’.[42] Although the programme has actually never been deployed, the announcement itself was able to drastically reduce the yields on government bonds and to significantly improve the financial situations of multiple MS.[43]
Conclusion
The unprecedented crisis which Europe is facing has pushed the EU to adopt bold actions to preserve the very existence of the Union. This has caused the EC to walk away from the dogma of the prohibition of State aid and has forced the ECB to stretch its role to the very limits of its mandate under the Treaties, and perhaps even beyond. Although these measures are undoubtedly bold and necessary to face the crisis, they may be exploited and challenged. Namely, MS may use the Framework enacted on state aid as an excuse to bail out failing businesses, and the ECJ may find that the ECB has strayed beyond its mandate. In order to fix the contradictions of these programmes it may be necessary to change the broader approach to the matter of state aid and of the role of the ECB. This would allow for a greater ability to combat similar economic effects in future.
[1] D Boffey, ‘Italy critises the EU for being slow to help over coronavirus pandemic’ in The Guardian, (London, March 11, 2020) <www.theguardian.com/world/2020/mar/11/italy-criticises-eu-being-slow-help-coronavirus-epidemic> accessed 28 March 2020.
[2] M Khan, ‘The costs of Europe’s economic hibernation’ in Financial Times, (London, March 31, 2020) <www.ft.com/content/de7c7007-1601-4efa-b19c-6b04f4411560> accessed 4 April 2020.
[3] C Verdelli, ‘Coronavirus, Di Maio “Aiuti alle imprese, con pandemia cambi tutto in Europa”’ in Repubblica (Milan, 18 March 2020) <www.repubblica.it/politica/2020/03/12/news/coronavirus_di_maio_cambia_ue-251043398/> accessed 20 March 2020.
[4] W Garcin-Berson, ‘Coronavirus, le gouvernement détaille son plan d’aide aux entreprises’ in Le Figaro, (Paris, 18 March 2020) <www.lefigaro.fr/conjoncture/coronavirus-le-gouvernement-presente-son-plan-d-aide-aux-entreprises-de-45-milliards-d-euros-20200318> accessed 20 March 2020.
[5] R Partington, P Walker, ‘Rishi Sunak promises to guarantee £330bn to businesses in The Guardian, (London, 17 March 2020) <www.theguardian.com/world/2020/mar/17/coronavirus-rishi-sunak-promises-to-guarantee-330bn-loans-to-business> accessed 20 March 2020; It is important to note that the UK is still subject to the EU State Aid rules until the end of the transition period on 31 December 2020 as per Article 10 of the Withdrawal Agreement.
[6] TFEU Article 107(1).
[7] ibid Art 107(2).
[8] ibid Art 107(3).
[9] Commission ‘Communication to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup on Coordinated economic response to the COVID-19 Outbreak’ COM (2020) 112 final of 13 March 2020 <https://ec.europa.eu/info/sites/info/files/communication-coordinated-economic-response-covid19-march-2020_en.pdf> accessed 20 March 2020.
[10] ibid 9.
[11] Commission, ‘Communication: Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak C (2020) 1863 final (Temporary Framework) <https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework.pdf> accessed 20 March 2020.
[12] Commission, ‘Amendment to the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak’ C (2020) 2215 final <https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_1st_amendment_temporary_framework_en.pdf> accessed 15 April 2020.
[13] Temporary Framework para 3.
[14] Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0059> accessed 20 March 2020.
[15] S Maes and S Mavroghenis, ‘Aid in the Banking Sector’ in P Werner and V Verouden (eds), EU State Aid Control, (Wolters Kluwer, 2017) 776, 777.
[16] Temporary Framework paras 6, 7.
[17] Commission, ‘Decision SA. 56709, France – COVID-19: Plan de sécurisation du financement des entreprises (Decision) <https://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_56709> accessed 20 March 2020.
[18] The decision has not yet been published, the only document available is the press release issued by the European Commission on 22 March 2020 and accessed on the same day on the website of the European Commission at <https://ec.europa.eu/commission/presscorner/detail/en/ip_20_504> accessed 20 March 2020.
[19] The complete list of the decisions adopted by the EC on the matter of State aid in relation to COVID-19 is available on the webpage of the institution at this link: <https://ec.europa.eu/competition/state_aid/what_is_new/covid_19.html> accessed 28 March 2020.
[20] Commission, ‘Decision SA. 56685, Denmark – Compensation scheme for cancellation of events related to COVID-19’ <https://ec.europa.eu/competition/state_aid/cases1/202011/285054_2139535_70_2.pdf> accessed 20 March 2020.
[21] Commission, ‘Regulation (EU) N°651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty’ <https://ec.europa.eu/competition/state_aid/legislation/block.html> accessed 20 March 2020.
[22] Temporary Framework, para 22.
[23] G Dragoni, ‘Alitalia, si profila un salvataggio di Stato’ in Sole 24 Ore, (Milan, 15 March 2020) <www.ilsole24ore.com/art/alitalia-si-profila-salvataggio-stato-ADNmdWD> accessed 29 March 2020.
[24] Commission Press release, ‘State Aid: Commission opens in-depth investigation into Italian state aid loan to Alitalia’ <https://ec.europa.eu/commission/presscorner/detail/en/IP_18_3501> accessed 20 March 2020.
[25] Commission Press release, ‘State Aid: Commission opens in-depth investigation into €400 million Italian government loan to Alitalia’ <https://ec.europa.eu/commission/presscorner/detail/en/IP_20_349> accessed 29 March 2020.
[26] Temporary Framework, para 22.
[27] Commission, ‘Annex 1 to the Communication to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup on Coordinated economic response to the COVID-19 Outbreak’ COM (2020) 112 final of 13 March 2020, page 1 <https://ec.europa.eu/info/sites/info/files/communication-annex-coordinated-economic-response-covid19-march-2020_en.pdf> accessed 29 March 2020.
[28] Temporary Framework, paras 3 and 6.
[29] Press conference of Christine Lagarde and Louis De Guindos, Frankfurt am Main, 12 March 2020 <www.ecb.europa.eu/press/pressconf/2020/html/ecb.is200312~f857a21b6c.en.html> accessed 20 March 2020.
[30] ECB Press Release, ‘ECB announces measures to support bank liquidity conditions and money market activity’ <https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200312_2~06c32dabd1.en.html> accessed 4 April 2020.
[31] L Elliot, ‘ECB U-turn shows it fears coronavirus could destroy eurozone project’ <www.theguardian.com/world/2020/mar/19/ecb-u-turn-shows-it-fears-coronavirus-could-destroy-eurozone-project> accessed 4 April 2020.
[32] M Lynch, ‘ECB’s Lagarde walks back comments which caused Italian bond yields to spike’ in CNBC (New Jersey, US, 12 March 2020) <www.cnbc.com/2020/03/12/ecbs-lagarde-walks-back-comments-which-caused-italian-bond-yields-to-spike.html> accessed 20 March 2020.
[33] ECB Press release, ‘ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP)’ <www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html> accessed 20 March 2020.
[34] ECB, ‘Decision 2020/440 on a temporary pandemic emergency purchase programme’ (ECB/2020/17) <https://www.ecb.europa.eu/ecb/legal/pdf/celex_32020d0440_en_txt.pdf> accessed 15 April 2020.
[35] ECB Press release, ‘ECB announces expanded asset purchase program’ <www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html> accessed 28 March 2020.
[36] Case C-493/17 Weiss v ECB ECLI:EU:C:2018:1000.
[37] Case C-62/14 Gauweilerand v ECB ECLI:EU:C:2015:400 [66].
[38] Weiss (n 36) [72].
[39] T Hale, ‘Singapore GDP plunges by most in a decade’ in Financial Times, (London, 16 March 2020) <www.ft.com/content/0e7484f5-737f-3eb9-8ec6-8b32df97d89e> accessed 29 March 2020.
[40] Weiss (n 36), [107]-[108].
[41] ECB Press release, ‘Technical Features of Outright Monetary Transactions’ <www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html>accessed 20 March 2020.
[42] M Draghi, ‘Keynote Address’ (Global Investment Conference, London, 23 July 2012) <www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html> accessed 20 March 2020.
[43] C Alcaraz and others, (2019) Working Paper Series: Whatever it Takes: what’s the impact of a nonconventional monetary policy intervention? 3, 2019. <www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2249~543dd2fbd3.en.pdf> accessed 20 March 2020.