As noose tightens on Ukraine, EU should loosen state aid rules for its members

Almost two years ago, the European Commission made a dramatic change to its industrial policy to respond to a rapidly developing crisis. It was shortly after the onset of the pandemic in Europe in March 2020 that the commission derogated from its usually strict stance on the EU’s state aid rules which limit the ability of member states to use public money to support businesses.

The commission adopted a temporary framework with relatively permissive guidance that allowed governments to grant vast sums of money in aid to give short-term liquidity, guarantees and other supports to businesses affected by closures, lockdowns and public health restrictions, as well as encouraging investment in Covid-related research and the production of personal protective equipment. The commission committed to approving grants of aid as quickly as possible and continued to adapt its guidelines to the demands of the evolving crisis.

After six amendments and extensions, the final version of these more permissive guidelines on state aid is due to expire at the end of June 2022. However, just as the pandemic appears to be subsiding in Europe, another crisis has emerged that requires a similar response from industrial and state aid policy.

The EU and its member states have rightly condemned the Russian invasion of Ukraine and have offered support to the Ukrainian government in the form of equipment, weapons, financial aid and sanctions on its aggressor.

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The EU has not yet gone so far as the US to ban imports of fossil fuels from Russia, although this may change in the near future. Indeed, Russia may move to limit supply to retaliate against the extensive sanctions imposed by the EU. It may well be foolish for the EU to expect that it can continue to rely on Russian supplies as the conflict develops. Continuing to purchase Russian energy in large quantities with money that may well contribute towards the destruction of Ukrainian cities also undermines EU support for its ally.

Food prices

The conflict is also likely to have an impact on food prices. For very good reasons, Ukraine has announced that it will stop exporting grains and other foodstuffs. Ukraine and Russia together account for about 30 per cent of the world’s traded wheat. Ireland is particularly vulnerable to supply restrictions in this regard as it imports 60 per cent of its grain, with relatively little agricultural land used for crop farming.

It has been in the long-term interests of the EU to pursue strategic autonomy in the production of vital goods for some time. With its origins as a simple trading bloc, the EU understands as well as anyone the benefits of comparative advantage and free trade rather than relying exclusively on domestic sources. However, as important trading partners are ravaged by war or indeed become hostile, the EU cannot leave itself exposed to the risk of energy and food shortages or skyrocketing prices strategically induced by its neighbours.

An active industrial policy allowing for significant but appropriately targeted subsidies to develop domestic energy supplies and food production capacity is necessary. Much of this must support the development of better technologies and infrastructure to produce renewable energy. This also supports a longer-term interest in fulfilling the bloc’s commitments on achieving net-zero greenhouse gas emissions by 2050.

The Russian invasion of Ukraine has turned a long-term strategic interest into an immediate threat. Markets and consumers are likely to struggle to adapt to this reality in the short term. An interventionist industrial policy creating targeted but powerful incentives to invest in this technology and infrastructure is likely to accelerate this vital transition and soften the blow for consumers. Just as it did with the pandemic, the commission must actively facilitate member states in making swift and effective investments in the EU’s energy autonomy with a permissive approach to its state aid rules.

Worst impacts

There is already some acknowledgement in the EU institutions that this is necessary, with discussions under way on how best to relax the state aid rules and apply the NextGenerationEU funds underwritten by the entire bloc to deal with the worst impacts of the crisis. Leniency on the part of EU institutions will be particularly necessary to deal with the issue of food shortages given the much more integrated subsidy policies in place across the internal market as part of the Common Agricultural Policy.

The EU is already leaning towards relaxing strict state aid rules to bolster its strategic autonomy in important areas. The commission recently made a proposal for a European Chips Act that includes plans to double the EU’s market share in the production of microchips, which are indispensable to much of the essential infrastructure and daily conveniences enjoyed by Europeans. This plan seeks to mobilise €43 billion of public and private investment with contributions from the EU’s own resources as well as grants of aid by member states, echoing similar plans for subsidies currently being considered by the US Congress. The prudence of this type of investment and active industrial policy is becoming increasingly clear.

One of the EU’s most important energy suppliers is using devastating military force against an EU ally and close neighbour. The invasion of Ukraine and the EU’s consequent need for domestic energy and food production requires great urgency and decisiveness on industrial policy.

Christopher McMahon is an adjunct assistant professor at the School of Law, Trinity College Dublin