State aid and Covid-19 – the blueprint for Government support falls into place

The last couple of weeks have seen European Governments continue to announce and adopt public support schemes to tackle the economic fall-out from the pandemic and the measures to contain it. As foreshadowed in our previous blog post on COVID-19 and State Aid, the European Commission has so far acted quickly and decisively. We now have a Covid-19 State aid Temporary Framework that sets out conditions for speedy approval of government support measures by Brussels. The Framework does not deal with all types of aid which may be used to deal with the Covid-19 pandemic - many other types of support are available. But there is no free-for-all and the Commission will look to ensure that any measures do not put the level playing field at risk.

The scope of the Framework

The Framework will operate (at least) until December 2020 and is designed to enable governments to provide urgent liquidity support to companies as a result of the Covid-19 pandemic. Such support will often be granted under an aid scheme applying to all sectors of the economy, but may also target a specific sector or an individual company. All aid must still be notified to and approved by the Commission unless it falls under an existing exemption.

The following types of support will be deemed compatible with EU State aid rules:

(i) Direct grants/tax rebates up to €800,000;

(ii) Subsidised State guarantees for bank loans;

(iii) State loans with subsidised interest rates;

(iv) Export credit insurance

Aid may be granted directly by the State or be channeled through the banking sector. In the latter case, safeguards to ensure that indirect benefits to the banks are passed on to the borrowers must be put in place.

Within a week of the Framework being adopted, the Commission has already approved many schemes, with more expected to come. This ranges from guarantee schemes for loans (UK, Germany, France, Spain) to support for a debt moratorium for SMEs (Italy).

Measures outside of the Framework

The Framework provides a helpful tool to tackle the current situation. But it is unlikely to be sufficient, and there will be a number of support measures, including individual aid to companies or sectors, which may fall outside its quick approval process. Member States (including the UK until January 2021) can notify and get approval for the following:

• Aid to compensate damages caused by the Covid-19 pandemic (Article 107(2)(b) TFEU)

Typically, this provision has been used to approve aid to address damage caused by natural disasters. In the context of Covid-19, so far it has been invoked in two Danish schemes to compensate for losses suffered by event organisers and self-employed persons.

Under this provision, there must be a “direct link” between the Covid-19 outbreak and the loss suffered. The Commission has published a list of information that must be provided when notifying such aid and its first decision suggest that income losses caused by the general economic slow-down in the wake of the pandemic may fall under this provision. This shows a willingness to apply Article 107(2)(b) TFEU flexibly, at least in relation to companies and sectors that are particularly hard hit. Aid to indemnify losses suffered by companies in the transport, tourism, culture, hospitality and retail sectors, in particular, may according to the Commission, fall under this provision and therefore be approved in short order.

• Aid to remedy serious disturbances in the economy (Article 107(3)(b) TFEU)

Given the strict requirement for a “direct link” between the C-19 outbreak and a concrete loss under Article 107(2)(b) TFEU, many State aids are likely to be assessed under Article 107(3)(b) TFEU, which allows for wider categories of aid to “remedy a serious disturbance in the economy”.

This provision was used during the 2008 financial crisis. To date, all Article 107(3)(b) decisions adopted during the Covid-19 crisis concern liquidity support under the Framework, but we will no doubt see this article being used to approve other types of aid. However, approval of aid that goes beyond the safe-harbours of the Framework is likely to take longer and the Commission may impose strict conditions for such approval. The Commission will in each case want to ensure that the aid is well-targeted, proportional and is not liable to unduly distort competition.

• Rescue and Restructuring aid (Article 107(3)(c) TFEU)

Governments may also offer rescue and restructuring aid to companies in difficulty. Such support will be assessed under the existing Rescue and Restructuring Guidelines from 2014. Such bailouts will normally only be approved if the aid beneficiary’s investors share part of the financial burden, the company has not received any aid in the last 10 years, and the company undertakes far-reaching restructuring measures to return to viability. However, the Commission has recognised that a relaxation of these rules would be possible for companies not in difficulty prior to the Covid-19 outbreak, and that the above-mentioned 10-year rule will not apply.

• Aid to banks (Banking Communication)

Special rules apply to aid granted to banks under the Banking Communication. These must be read in conjunction with the provisions of the Bank Recovery and Resolution Directive (BRRD). The Commission is mindful of the role that banks can play in the current crisis and has recognised the interactions between State aid and the BRRD in the Framework. In principle, in the context of the current emergency situation, public support to banks should be permissible and fall outside the provisions around resolution in Article 32 of BRRD.

• Other sectors

There are also other industries operating under a special set of rules. Steel manufacturers fall under sector-specific rescue and restructuring guidelines, and State aid to air transport and maritime transport companies may also be dealt with under the special guidelines applicable to these industries.

Do businesses have a clear path now?

The Commission has reacted promptly to the Covid-19 outbreak. It has been pragmatic and determined to provide full flexibility where it’s needed. There are a number of options available to European governments to provide support to companies harmed by the pandemic in compliance with State aid rules. However, support granted beyond the confines of the Framework will often require a more complex (and potentially lengthier) assessment. The Commission will veto any aid that undermines the level playing field of the single EU market. It is therefore important, for companies approaching governments for financial support, to have full knowledge of the options and ensure that any such support is or can be State aid compliant to avoid surprises down the line.