Ukraine war and green transition keep EU state aid near record level

News

The European Commission has approved €733bn in state support since March 2022 for businesses affected by the war in Ukraine and the green transition, an amount superseded in recent years only by subsidies approved during the Covid-19 pandemic.

Germany accounts for almost half of total EU state aid funding approved under a temporary crisis scheme introduced in 2022 to shield economies from the war in Ukraine and to support green investments, according to commission figures seen by the Financial Times. A total of €90bn of the approved funding was granted in 2022.

The subsidies are lower than the record state support granted of almost €900bn, out of more than €3tn in approved Covid spending, in 2021. But EU diplomats in smaller countries have criticised the trend of continually relaxing state aid rules in emergencies, which they say favours bigger economies that can afford to offer such support to their businesses.

“We are unhappy about it because we see that the conditions for doing business are widening again between member states,” said one senior diplomat. “It is due to exceptional circumstances, but that excuse is beginning to be a bit too easy to bring to the table.”

Another diplomat said the commission was resorting to emergency measures too easily. “They make up all these excuses to keep relaxing rules,” they said.

The increase comes ahead of a review of the EU single market by former Italian prime minister Enrico Letta, which is due to be completed in March next year.

While he would not “prejudge” the findings of his report, Letta told the FT he was “worried by the increase of state aid that we are going through currently because state aid is a fragmentation of the single market”.

EU state aid expenditure has crept up in recent years, growing from €98.2bn in 2015 to €334.54bn in 2021.

The commission has the power to recover aid spent unlawfully if it considers it incompatible with the single market. There was one such case in 2022, compared with 19 in 2015.

Margrethe Vestager, the commissioner in charge of EU competition policy, first relaxed state aid rules in 2020 to help sectors such as airlines and hospitality hit by lockdowns during the pandemic. A further so-called temporary crisis framework was adopted in March 2022 to allow member states to help companies affected by the war in Ukraine and compensate those hit by higher energy costs.

Vestager has since expanded and extended the policy to the end of 2025 to support investments towards the green transition, approving 270 national measures so far under the scheme. France is the second-largest user of the scheme, accounting for 23 per cent of approved projects, followed by Italy with 8 per cent.

Other EU legislation to support the production of semiconductors, ammunition and critical raw materials will also facilitate more direct investment from member states in their industries. 

“Each instrument in itself has reasons to be more flexible, but if you add it up, the cumulative effect, it’s probably going a bit too far,” a diplomat added.

Other diplomats say the single market has long failed to deliver the same returns on investment for smaller member states compared with larger ones. “[The market] was designed by the Dutch, the Germans, the French and others and it doesn’t benefit those on the fringes,” said one diplomat from an eastern member state.

Eastern countries have also increased their state-aid spending under the crisis measures, with the commission last week approving a €2.36bn Hungarian investment as part of the green transition.

A spokesperson for the commission said that state aid controls set rules applicable to all member states, protecting cohesion within the EU and ensuring that taxpayer money was spent wisely and that public money did not crowd out private spending.

“EU state aid rules, which have been recently subject to a modernisation process, make sure that aid granted by a member state or through state resources does not distort competition and trade within the EU by favouring certain companies or the production of certain goods, ensuring a level playing field in the single market,” the spokesperson added.

The mounting spending also comes as the EU seeks to wean itself off dependence on rivals including China. Letta, who is president of the Jacques Delors Institute, a Paris-based think-tank focused on European affairs, warned that the EU could not achieve “strategic autonomy” by bypassing the single market.

Instead, he called for a stronger single market, saying his report would discuss “finally completing” a capital markets union to give businesses better access to finance across the bloc.

“It’s obvious that we are not going to define a European strategy with the politics of state aid,” he added. “State aid is about necessity and urgency, it’s not a strategy. A strategy needs to be found at a European level.”

Additional reporting by Alice Hancock in Brussels

Articles You May Like

Iran warns it could review nuclear stance if Israel threatens atomic sites
Financial services firms looking for a Basel III rewrite
Markets are a frog in boiling water on Iran-Israel
Russia threatens to step up attacks on western weapons in Ukraine
Rockefeller taps three Invesco PMs to expand HY, IG porfolio