Commission reasserts its state aids authority

LEGAL ANALYSIS:One aspect of the European Commission’s handling of the current financial crisis that has received relatively little mainstream coverage is the way in which it has applied the state aid rules to the measures taken by the member states to shore up their financial systems and to rescue their banks and in the process greatly expanded its oversight role in financial services markets.

This lack of attention is surprising because (within the relatively staid world of financial regulation and competition law policy) it is an intriguing tale of power struggles and tactical compromises, with long-lasting consequences for some leading players, including the main Irish banks.

In addition, there are no signs that the commission will be abandoning the use of the state aid rules as a monitoring tool for financial markets and transactions in the post-crisis period. It has already explained in very clear terms the role it expects to play, under the state aid rules, in the privatisation processes that are under way in a number of member-states (including Ireland).

It was clear from the outset of the crisis in 2008 that the measures adopted by the most seriously affected member-states fell within the definition of state aid in Article 107 of Treaty on the Functioning of the European Union (TFEU), and that, as a result they should have been notified to the commission, which has exclusive jurisdiction under the treaty to clear state aid measures.

Rules questioned

It was less clear that the member states would submit their plans to the commission and wait for its approval. Many politicians – notably former French president Nicolas Sarkozy, openly questioned the utility of the state aid rules in times of crisis and argued that they should be relaxed to allow member states develop their own national responses free of restraint.

Some governments simply ignored the rules. In Ireland, for example, the guarantee scheme for banks introduced by the late Brian Lenihan in September 2008 was notified only after the commission contacted the Irish government “seeking further information”. The scheme was eventually cleared.

On the commission side, there was recognition that, while it was essential to maintain the commission’s exclusive state aid jurisdiction, a “business-as-usual” approach would not work.

The commission’s response in the early days of the crisis, when the stakes were highest, was threefold. First, it dusted down a previously unused state aid provision, Article 107 (3) (b) TFEU, that allows it to clear aid “to remedy a serious disturbance in the economy of a member-state” – this is the legal basis it subsequently used for more than 400 financial services decisions.

Secondly, it undertook to deal very quickly with urgent cases (some decisions being taken in less than 24 hours). And thirdly, it published a series of communications outlining its approach on key issues, starting with an October 2008 communication on state guarantees and following with communications on bank recapitalisations, bank restructuring and the establishment of impaired assets agencies.

This astute political manoeuvre, largely led by the redoubtable Dutch commissioner, Neelie Kroes, saw off the clamour for the disapplication of the state aid rules; the commission settled into its new role, micro-managing the distressed parts of the European financial system. Each bank that received rescue or recapitalisation aid was required to submit a restructuring plan to the commission, drafted to comply with the commission’s Bank Restructuring Communication, explaining the bank’s proposals to restore itself to viability, the measures it would take to prevent undue distortion of competition as a result of the aid and the contribution that the bank and its shareholders would make to the restoration of viability by means of “burden sharing”.