The COVID-19 outbreak is placing a tremendous strain on economies, institutions, companies, individuals, and society in general. As a matter of fact, it has exposed the European Union’s weaknesses, contradictions, and limitations. However, despite the havoc it has wreaked, COVID-19 is not without silver linings. That said, in these unprecedented times, we have witnessed inspiring examples of empathy and solidarity between nations, between people, but also between generations. Unsurprisingly, the European Commission has spearheaded EU solidarity, as evidenced by their motto “United in Adversity.”
In mid-March, the Commission announced a loosening of State aid restrictions, aimed at ensuring fair competition within the EU’s single market and allowing countries to inject capital into companies heavily hit by the COVID-19 outbreak. When it comes to numbers, as of the beginning of October, the total amount of approved aid mainly comprised of subsidized loans, direct grants, and recapitalization measures has exceeded EUR 2.89 trillion. The measures are approved under the Temporary Framework (article available here), based on Article 107(3)(b) of the Treaty on the Functioning of the European Union that envisages assistance to undertakings facing a sudden lack of liquidity. Nevertheless, potential problems are looming…
Warning about dark clouds on the horizon
While the COVID-19 pandemic has dramatically reshaped every aspect of businesses, the loosening of State aid restrictions achieved its ultimate goal and shielded the EU economy from imploding. However, the COVID-19 economic crisis is unlikely to end soon meaning that these measures are set to remain for quite some time. This suggests that the crisis will not only distort both the level playing field and the single market in the short term but also have long-term consequences. Bearing this in mind, the real challenge is still to come, with Competition Chief Margrethe Vestager expressing concern about the “huge differences” in coronavirus State aid among the Member States. Namely, Vestager pointed out that a discrepancy in State aid would distort competition and slow the economic recovery from the coronavirus pandemic. Yet, in retrospect, the Competition Chief insisted, amid criticism from less wealthy EU countries that it is “important for all of us” that Germany ensures liquidity for national companies because “that will work as a locomotive” for Europe. Wasn’t she jumping the gun since her comments came EU’s competition watchdog?
The swift and massive shock of the coronavirus pandemic and shutdown measures have plunged the global economy into a severe contraction. According to the World Bank flagship report, COVID-19 has triggered the deepest global recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870. Thus, given that the economic situation deteriorated from day to day, there was the indisputable necessity to fast track COVID-19-related measures. That was the biggest challenge. Consequently, while shielding the economy from crashing, the EU sacrificed the supposedly scared principle of the level playing field. This principle is very simple – all economic actors should be bound by the same set of rules and conditions to ensure that there is fair competition between them. However, this principle was already under strain before the pandemic hit, only to be aggravated by the fast tracking of COVID-19-related measures. By way of illustration, the level playing field is like a board carefully balanced on a fulcrum, yet once it starts to lean, it gains momentum with a positive feedback loop that accelerates promptly until it completely falls over. That could be a political time bomb, and therefore its ramifications should not be lost on us. On top of that, we should not lose sight of the fact that approving the support measures in the manner ‘all Member States are equal, but some of them are more equal than others‘ could reignite unresolved tensions between Member States.
In this instance, widely differing fiscal space between states has led to asymmetries in the use of State aid measures. Let’s take a step back, what is a fiscal space? Namely, it can be defined as a room in a government’s budget that allows it to provide resources for the desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy.[1] Illustratively, having fiscal space is like having money in the bank. It follows that governments can increase spending or cut taxes without undermining the longer-term health of public finances. For example, Germany alone has been allocated more than half of the coronavirus State aid approved. That said, there are mounting concerns that deeper-pocketed Member States might be getting an unfair advantage in the EU’s single market. Considering all of the above, does it mean that the rich get richer, the poor stay poor?
To sum up, the Commission has a crucial role in preventing further asymmetries deriving from State aid. In the long run, fostering European solidarity includes the defense of a single market against severe distortions by employing defense instruments in compliance with EU law. Thus, enforcement of State aid rules should be targeted on structural measures ensuring a level playing field for all Member States. That is the safe path to neutralizing the structural deficiencies of the European monetary union. Namely, ensuring a competitive level playing field within its cherished single market is a fundamental EU postulate ensuring that European companies face the same conditions no matter which Member State’s market they enter, with EU institutions executing supranational implementation, arbitration, and enforcement. Moreover, it is a key condition for opening up to foreign players from China, and more recently, Brexit Britain.
[1] Peter Heller, Finance and Development, Back to Basics – Fiscal Space: What It Is and How to Get It
