Shearman And Sterling

corona virus

Mar 17, 2020

COVID-19: State Aid Support to Business

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COVID-19: STATE AID SUPPORT TO BUSINESS

Member States of the EU and the U.K. are announcing massive support packages for companies affected by the coronavirus crisis. These interventions are on a vast scale. Unlike the 2008 financial crisis, the measures we are seeing this week are predominantly fiscal rather than monetary policy responses.

The British Government announced today it will do “whatever it takes” to get businesses through the crisis, including an initial package of £330bn of government-back loans and guarantees to all businesses, as well as cash grants of £25,000 to hospitality sector businesses which don’t have insurance for pandemics such as coronavirus. Additionally, all businesses in the hospitality sector will pay no business rates for 12 months.

Some of these measures involve State aid, especially the proposals for the hospitality and aviation sector. But—perhaps surprisingly—the great majority of the British and French proposals will likely fall outside State aid control as they appear to be of general application across the entire economy.

Those measures that are aid would ordinarily be prohibited until approved by the European Commission unless they fell within an existing exemption or scheme. As with the financial crisis, the Commission is anxious to ensure this legal prohibition holds while rapid and critically important decisions are made by national Governments. The bargain in the financial crisis, which is very likely to be replicated here, was that, if the Member States and the U.K. are prepared to continue to notify, the Commission will approve almost anything—at least in this initial stage of the outbreak.

Indeed, this seems to be what is happening. Commissioner Vestager announced this afternoon, Tuesday March 17,[1] that she will adopt a Temporary Framework—modelled on the ones used in respect of the financial crisis. She says that the Commission will use the “full flexibility foreseen under State aid rules to tackle this unprecedented situation”—code for saying the Commission will approve almost anything that is not explicitly designed to harm the single market (e.g., requiring recipients to stop trading with other Member States, or fire workers in other Member States first, etc.).

Interestingly—again as with the financial crisis—the Commission is proposing to use Article 107(3)(b) as the legal basis—rather than 107(2)(b). Both provisions allow aid for disasters such as coronavirus but under 3(b) the Commission retains its discretion to approve. Conversely, once a measure falls under 2(b), the aid “shall” be permitted—significantly reducing the Commission’s discretion to shape policy. The distinction is esoteric now as the Commission is likely to approve a wide range of generous measures under either basis, but, as the crisis progresses, using Article 107(3)(b) as the legal basis for approvals means we’re likely to see the Commission start to tighten the conditions on which support is available.

The Temporary Framework will appear in the coming days but the outline is already apparent:

  • Confirmation that use of economy-wide measures (such as compensation, insurance or tax holidays) are outside State aid—this is the route most of the British and French measures seem to have taken;
  • Block exempt any support to an individual company (loans, state guarantees, etc.) below €500,000 per company;
  • Allow selective (rather than general) State guarantees on bank loans;
  • Enable public and private loans with subsidised interest rates.

This doesn’t mean that each of these aid responses will be available across the EU. Member States control the money and have to decide how they would like to spend it.

The hardest part will be aid to Member States or to the U.K. dispensed via the banking system. The banking system is critically important as bank lending is still the primary source of capital for the vast majority of businesses in the EU. The Commission is anxious to ensure aid reaches bank customers and doesn’t sit within banks. The lessons from the financial crisis mean banks are better capitalised and central banks have been quick to provide massive liquidity. Even so, these rules will have to strike a careful balance. Most people want support to reach the real economy, but over-engineering the State aid rules to cut out risk of advantage to banks will make the rules hard to apply and increase risk of non-compliance for banks—making the whole scheme much slower and less effective.

Authors and Contributors

James Webber

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+44 20 7655 5691

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