Covid-19: Can State aid be part of the cure?

In the last few days, an increasing number of governments around the world have announced support measures to counteract the impact of the Covid-19 outbreak on the economy. The situation is rapidly evolving, especially in Europe. Sectors such as tourism, air transport and events have been hit particularly hard, with consequences set to spread.

These circumstances call for rapid intervention. The President of the European Commission, Ursula von der Leyen, like Mario Draghi in 2012, has said that the Commission “will do whatever is necessary to support the Europeans and the European economy”. But the EU itself lacks the budgetary muscle to intervene on a massive scale ― which means that the brunt of the financial burden must be borne by Member States.

In Europe, government support will need to comply with EU law and may require prior authorisation from the Commission under State aid rules. This will also be the case for any support granted by the UK government for the duration of the transition period under the Withdrawal Agreement.

What does State aid mean for potential government intervention?

Not all State support will qualify as “State aid” under EU law and require authorisation from the Commission and existing rules do accommodate for aid in emergency aid situations. The legal implications of different types of support will depend on their design and scope. In particular, we anticipate that governments will adopt the following type of measures:

• General measures (e.g. corporate income tax deferrals and suspension of social security contributions) applicable without distinction to all sectors of the economy. These would normally not amount to State aid and would therefore not require prior notification. This is because they benefit the economy as a whole and do not grant a “selective advantage” for individual companies or sectors. Similarly, compensation and payments direct to individuals/consumers would generally not involve State aid. Such measures can be put into effect immediately.

• Measures which fall within existing State aid exemptions or authorised aid schemes (e.g. liquidity aid to SMEs in certain Member States and de minimis aid). These would also not require prior authorisation. Additional flexibility is offered by the fact that budgets of existing aid schemes can be increased up to 20% without having to be re-notified.
• Measures which provide liquidity or solve short-term cash flow issues in a specific sector and for a specific company and do not fall within any exemption or existing scheme. These would normally require prior approval by the Commission under the Rescue and Restructuring Guidelines.

Will measures be approved?

The need for notification and pre-approval goes hand in hand with the assessment of whether such measures are “compatible” with the EU internal market. This assessment is done by reference to Commission guidelines and/or the provisions in Article 107 TFEU. In essence, it is about verifying that the aid is well targeted, proportionate and limited to the minimum necessary.

In the package of Covid-19 measures already announced by the Commission, it referred to two TFEU provisions that only apply in an emergency or crisis situation:

• Aid to compensate companies for damage caused by “natural disasters or exceptional occurrences” (Article 107(2)(b) TFEU). This provision can be used to justify aid to sectors that are directly and particularly severely hit by the crisis, such as transport, tourism, hospitality and events organisers. But the Commission has also suggested that certain support to financial institutions may fall under this provision.
• Aid to “remedy a serious disturbance in the economy of a Member State” (Article 107(3)(b) TFEU). This provision can be applied to broader State intervention to deal with the indirect economic fall-out of the Covid-19 crisis. So far, the Commission has accepted that Italy is currently suffering from such a “disturbance” to its economy. But this will no doubt soon apply also in other Member States as lock-downs and similar restrictions are implemented across Europe.

Will the Commission be up to the challenge?

While there are a number of measures which EU Member States will be able to adopt without having to go through a notification process, others will require approval (whether it is for “schemes” or “individual aid” to specific companies). The experiences gained during the financial crisis of 2008 shows that the Commission is willing to be pragmatic and work together with Member States to deal with highly pressured and extreme crisis situations:

• First, it has been quick in the past in providing comfort and certainty around rescue measures ― in the global financial crisis, and more recently with the approval of a Danish Covid-19 aid scheme last week within 24 hours of its notification (the Commission is also reassigning additional staff to its State aid units);
• Second, even where aid measures are put into effect prior to the required approval, the Commission can still approve them after the event, if the conditions for compatibility are met.

However, it remains to be seen whether the Commission is prepared to handle the expected avalanche of cases, given how quickly events are escalating and the need for Member States to take urgent action. Companies that contemplate seeking State support must also make quick and difficult decisions to manage their legal and financial risks. The Commission has made it clear that any aid granted must comply with EU law. Getting it wrong could lead to significant consequences: companies may have to offer far-reaching commitments in order for promised aid to be lawful and may be forced to return any unlawful aid, plus interest.

Will Europe weather the storm? This is not the first time that the State aid legal framework has been put to the test. However, the scope and scale of the Covid-19 crisis mean that the challenges faced by the Commission, national governments and European companies this time are unprecedented.