Expect governments to look beyond EU's Covid-19 state aid framework as crisis deepens

While there have been scores of national support measures approved under the EU's temporary coronavirus state aid framework, strikingly only Denmark has made extensive use of an alternative mechanism that allows governments to directly compensate companies.

The European Commission's temporary framework is underpinned by Article 107(3)(b) of the Treaty on the Functioning of the EU, which provides for aid to “remedy a serious disturbance in the economy of a member state” and thus is suited for broad-brush measures.

The EU regulator has been churning out approvals for short-term loans and grants aimed at plugging financing gaps across member states' economies, with more than 60 national programs so far approved under the framework over the past month or so.

But as the crisis deepens, expect other governments to follow Denmark's lead in making use of provisions in Article 107(2)(b). This allows for larger sums than the temporary framework permits to be funneled into specific sectors hardest hit by the crisis, such as airlines.

Earlier this month, an EU competition department official flagged that national governments may be missing out because they aren’t using this alternative treaty clause.

Denmark is thus far a real outlier. It’s had four schemes approved under Article 107(2)(b). By its very nature, this clause allows for more targeted interventions by providing for “aid to make good the damage caused by natural disasters or exceptional occurrences.” Recipients in Denmark have so far been events companies, the self-employed, Scandinavian flag-carrier airline SAS, and companies with the most precipitous fall in revenues due to the pandemic.

Think of the temporary framework as a hose being used for a very large garden of under-watered plants. The hose is pumping out huge volumes of water, but with a fine spray: Each plant will only get a small share. Grants are capped at 800,000 euros. Guarantees can be given on loans, but it's the companies themselves that ultimately take these loans out, and banks that back them.

Article 107(2)(b) has, in the hose example, a much more directional nozzle. It mobilizes similarly huge amounts of money, but channels it explicitly into priority areas. This raises the question of why it hasn't been making much of an appearance so far during the crisis.

Easiest option

National officials contacted by MLex pointed to the upfront advantages to using the EU’s temporary framework as the reason for states leaning heavily on it during the first stage of the crisis.

There’s no burden on governments to prove the exact damage that a company or sector has suffered, and they don’t need to demonstrate that a specific sector has been harder hit than others. Having to quantify the exact damage suffered by a sector entails much more work for government officials already under intense pressure to provide support as quickly as possible.

Aid granted under 107(3)(b) also covers indirect damages. It offers more robust legal certainty. As long as the sums offered are within the prescribed levels, governments can be sure they won’t fall foul of state aid rules.

With 107(2)(b), by contrast, they would face the potential need to claw back excessive funding further down the line. That was a condition the EU made clear in its approval of Denmark’s compensation measures for SAS last week.

Hence national governments have opted en masse for the path of least resistance offered by 107(3)(b). Aside from Denmark, only France had decided before today to use 107(2)(b), winning approval at the end of March for specific measures to defer airline taxes.

In a hint of what looks like a growing appetite among EU states, Sweden today became the third country to make use of the "exceptional occurrences" clause, securing approval for compensation measures for organizers of cultural events.

More to follow

The first wave of state aid measures to address the pandemic is coming to a close. It has done its job in providing immediate support for companies of all sizes and all sectors.

Now the commission is tweaking the temporary framework to allow governments to take direct shares in companies, in anticipation of full-scale bailouts. The next phase of economic fallout from the coronavirus crisis is looming, and specific sectors will start to feel the pain more acutely, whether airlines, hospitality and tourism businesses or car manufacturers.

The administrative burdens under 107(2)(b) may be higher, but the leeway for financial support is much greater. There is no real ceiling on the damages a sector could suffer — and that will be a powerful driver for some governments needing to show decisive action.

National officials told MLex that the relatively low number of notifications by no means indicates that member states have forgotten they have this option. As the crisis wears on, this obscure treaty clause is likely to become rather more familiar.

— With contributed reporting by Sarah Anne Aarup