Moving towards less and better targeted aid

Since the early years of the European project, the notion of competition and its implications on the free market has been at the forefront of the European Commission's efforts in creating a single European market. Competition in various sectors of the European economy has produced various positive results, in the process boosting the efficiency of entire industries, raising the standard of living and offering better work for the EU's citizens.

It is for this reason that the Commission is very active in ensuring that member states' government interventions do not distort competition and intra-community trade. State aid is one of the few remaining ways in which member states can hold up liberalisation and protect local companies from competition. As sectors have become open to competition, state aid rules have become more important - including areas which have been the subject to state monopoly. Whereas in past years, some sectors were national in nature, today they have become cross-border.

High amounts of aid can be distortive to the single common market. In this respect, state aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities (Article 87 of the EC Treaty). The EC Treaty sets out four main criteria, all of which must be met for a state aid to be present. The criteria are that the particular aid favours certain undertakings or the production of certain goods (hence, subsidies granted to individuals or general measures open to all enterprises are not covered so do not constitute state aid), that the aid is provided through state resources, it distorts or threatens to distort competition, and that the aid affects trade between member states. Should one or more than one of these conditions not be met, then the particular aid does not involve state aid. Of course, this does not preclude that the offence (should there be one) is not dealt with, under other EU competition rules.

Looking at the most recent available figures from Eurostat, the EU's statistical arm, total state aid granted by the member states was estimated at €64 billion in 2005, with Germany granting the most aid (€20.3 billion) in absolute terms, followed by France (€9.7 billion), Italy (€6.4 billion) and the United Kingdom (€4.5 billion). In 2005, Malta granted €142 million. In relative terms, Malta granted the highest percentage of GDP as state aid (3.16 per cent; EU average 0.59 per cent). The high proportion in Malta is also found in some of the new member states. This is due to pre-accession measures that are either being phased out under transitional arrangements or are limited in time.

Overall, state aid granted in the EU is getting less and better targeted. Of interest is the reorientation of state aid towards horizontal objectives of common interest such as regional development, research and development, SMEs and environment protection. When taking state aid by sector, in 2005, around 63 per cent of state aid in the member states was earmarked for the manufacturing sector (58 per cent) and services sectors (5 per cent). A further 26 per cent was directed towards agriculture and fisheries, with the rest going to coal, transport and other non-manufacturing sectors.

Throughout the years, state aid policy has been, and still is, in continuous evolution. State aid that might have been authorised in the past does not guarantee it can be permitted now or in the future. In general, national rules governing the award of state aid are not harmonised throughout the EU, however the Commission supervises the award to ensure that competition in the common market is not distorted either by the aid itself or procedures that may discriminate against certain firms. As integration deepens within the EU the Commission is becoming less tolerant of state aid. All this is the natural consequence of the economic integration in Europe and the improved ability by the Commission to single out anti-competitive practices.

• Mr Cuschieri is an executive at Impetus Europe Consulting Group Ltd. For more information visit or contact