Neelie Kroes
Member of the European Commission in charge of Competition Policy

Reforming Europe's State Aid Regime: An Action Plan for Change

Wilmer Cutler Pickering Hale and Dorr/ University of Leiden Joint conference on European State Aid Reform
Brussels, 14th June 2005

Thank you, Dr Ehlermann, and good morning ladies and gentlemen.

I would like to thank the law firm Wilmer Cutler Pickering Hale and Dorr, and the University of Leiden, for putting together such an interesting programme for our conference today. I am delighted to be here to start the debate about state subsidies, and why we want to reform the European framework which governs them.

Introductory comments

Last Tuesday, the Commission unanimously approved a State Aid Action Plan , setting out the philosophy, principles and key proposals which will guide our action over the next five years. The document launches a comprehensive, coherent and far-reaching reform of state aid policy , as a direct contribution to the renewed Lisbon Strategy for economic growth and more and better jobs.

Over the last five years, anti-trust and merger rules have been comprehensively and successfully reformed. It is now time for a long, good look at the rules for state aid. A reform of this scale can only be successful if it builds a consensus among all stakeholders - national, regional and local authorities, European institutions, citizens, companies, consumers - about the need for reform, and how to go about it. That is why the Commission has launched a public consultation on the ideas presented last week. Today is one of the first of many opportunities to discuss our ideas, and I hope that as many of you as possible will send comments to the Commission before the end of the consultation period in September.

Why do we have state aid rules?

But let's put first things first, and remind ourselves why we have a European state aid policy in the first place.

Our starting point is that free and open markets force companies to compete on their merits and to become more efficient, more productive and more innovative. Fair competition means that our companies are not only better placed to compete globally , but also, and most importantly, they provide consumers with better quality goods and services at cheaper prices. All of which contributes to creating a virtuous circle of economic growth, better standards of living, and more and better jobs .

State aid control is essential to maintaining a level playing field for free and fair competition in the Single Market. State aids discipline exists to ensure that national governments do not engage in old fashioned "beggar thy neighbour" policies , using aid to protect companies from competition while doing nothing to prepare them for competitiveness. National, regional and local governments should be made to think twice before embarking in bidding wars to attract investments, or protecting and supporting perceived national champions. Such outdated policies can only lead to lower overall competition in the European market place, companies which are ill-prepared for global competition, and higher prices for citizens who are taxpayers as well as consumers.

The rationale of state aid control remains just as valid today as it was when the rules were first written into the Rome Treaty. But however freely and fairly our European internal market operates, it is still true that, left to its own devices, the market alone would not always deliver what we would describe as the basics of our European model : social justice, environmental protection, and investing in sustainable economic prosperity for generations to come.

To think otherwise would - even for the most liberal of minds - be simply irresponsible .

This is why Europe does need to have recourse to appropriate, well-targeted state aid tools :

- Aid which targets innovation, research and development ;

- Aid directed at disadvantaged regions to guarantee cohesion and equal opportunity;

- Aid to help European companies arm themselves with the knowledge, skills and experience they need to compete effectively in an increasingly global market;

- Aid which leads to secure, viable, long term employment for our citizens;

- Aid, in fact, that will promote the very things we need to strengthen the European economy and to provide cohesion within our European social model.

Our state aid rules should safeguard and facilitate the use of such aid by providing a framework for competent governments to focus their resources on aid measures that will strengthen the European economy by investing in the future .

Why reform the state aid rules?

This is why are we proposing a wide-ranging reform of our rules. Used wisely, state aid has a major role to play in strengthening the European economy, and in safeguarding the European social model. Getting the state aid rules right is therefore the top priority of my tenure as Competition Commissioner , and one of the key ways European competition policy can contribute to economic growth and more and better jobs.

I have identified a series of specific points on which the existing rules are less than satisfactory. The objectives of state aid discipline are neither well understood, nor well served by the current framework. State aid control has evolved over the years into an unnecessarily complicated set of rules, exemptions, and guidelines. It has had to intervene in rather insignificant cases, for example on individual swimming pools. The procedures have grown lengthy and cumbersome . And Commission approval of state aids is still too often seen as just one additional bureaucratic formality to be jumped at the end, once the decision to grant aid has already been taken.

The reform we are proposing will give state aid policy a clearer meaning and a clearer direction , so that European citizens can see that their concerns are being listened to , and are being addressed in an appropriate and un-bureaucratic way by the European Union.

Two guiding principles for the future state aid regime

We think that the objectives I have just outlined can best be reached by redesigning the future state aid regime around two twin principles: efficiency and equity .

Efficiency because we should never forget that state subsidies are paid for by European taxpayers. State resources are limited, and they are needed for many core tasks, like education, health or social protection. Our Member States therefore need to be able to make their spending choices transparently and to spend money efficiently.

Our reform should help Member States get the best value for money for their taxpayers , so that we can work together to build a stronger European economy. That means designing a framework to target aid better . When state subsidies are used intelligently to fill clearly identified gaps , they can deliver sizeable spin-offs - for citizens, for consumers, for companies, for Europe's overall competitiveness and economic growth.

And of course, the efficiency principle must also mean making sure that State aid procedures are as simple, user-friendly, clear and predictable as possible .

Finally, efficiency means acting proportionately . We want to make sure that the EU rules can be effectively applied to aid that can have a genuine effect on European competition , and that we don't intervene unnecessarily in matters that should be solely for national governments to decide.

The other guiding principle behind our reform ideas is equity . This policy aim is just as important as the efficiency objective . Equity applies at many levels in our reform proposals.

At the most basic level, the state aid framework has to ensure that companies can compete as equals on the basis of merit within our Single Market. But the equity agenda is much wider than just parity between companies.

In order to be true to the Lisbon agenda, we need to help Member States deliver on a wide range of primarily non-economic issues which are of fundamental importance to our European model . This includes social and regional cohesion, human capital and cultural diversity.

The four essentials of the State Aid Action Plan

On the basis of these twin principles of efficiency and equity, let me now stress four features of the State Aid Action Plan.

1. A coherent approach and philosophy

Firstly, the Action Plan presents the general philosophy with which the Commission approaches State aid reform. Our leitmotif is the European Council's call for "less and better targeted state aid" .

When the European Council set this goal, it was in recognition of the fact that public intervention into the market has to be done with great delicacy and care . State aid is a powerful means to change the incentives of market participants, which is what makes state aid both beneficial and highly risky.

The State Aid Action Plan puts forward general criteria to assess the validity of an aid measure. It argues that state aid should only be used :

- when it is an appropriate instrument for meeting a well defined objective of common interest (like cohesion, public services, economic growth, or employment);

- when it creates the right incentives and is proportionate to the problem;

- and when it distorts competition to the least possible extent so that on balance it can be authorised by the Commission.

Assessing the compatibility of state aid is fundamentally about balancing the negative effects of aid on competition with its positive effects in terms of common interest . Local, regional and national governments should think carefully about the right policy instruments to achieve their goals: state aid may be the right instrument, or something else entirely may be needed .

2. Emphasis on refined economic analysis as a means to ensure a proper and transparent evaluation of state aid

Secondly, the Action Plan puts more emphasis to the priorities of the re-launched Lisbon Strategy for growth and jobs , through recourse to a refined economic analysis. This economics-based approach is about better finding out why certain desirable economic objectives (such as growth and sustainable jobs) are not met naturally by markets - and what can be best done against this (which does not necessarily always mean State aid ).

Later today Lars-Hendrik Roeller, our Chief Competition Economist, will present some of the work he and his team have been doing on this issue. Economic analysis can help us understand how state aid can be used in a pro-active way, as a means to improve the functioning of markets. It can help us design a framework which focuses aid on market failures in areas that make a difference for the overall competitiveness of Europe, while reducing market distortions as much as possible .

By market failures I mean situations where the market by itself does not deliver an efficient outcome. For example, in the field of risk capital , normal market conditions typically mean that small, innovative and thus risky businesses face tremendous problems in getting funding. In these circumstances, the state is sometimes the only actor able to change the incentives for investors , to make them consider innovative ventures worth a try.

I would also mention in the same context the need to do more to fill the innovation gap . In the early autumn the Commission will present a communication in which we suggest ways to address the specific market failures which are currently hampering the innovative process. We know that companies take a certain risk when they bring forward new ideas beyond the research phase, through prototyping, and on to production and finally marketing. We want to help support this process and in particular to look at the role small and medium sized enterprises , intermediaries (such as clusters and technology centres) and researchers play. State aid can be justified when it is necessary to increase the incentive to innovate and when it does not lead to a crowding out of private initiatives or to unfair competition. But formulating state aid measures for innovation is complex, because innovation is itself a complex process, and that is why our communication will launch a public consultation on this issue.

But alongside the importance of addressing market failures, the Commission fully recognises the need to meet other state aid objectives . The aim is a coherent and holistic framework for national support to research, innovation, entrepreneurship, human capital, high quality services of general economic interest, environmental protection, and of course, regional cohesion.

Regional aid is the instrument to redress imbalances in regional development and contribute to cohesion - irrespective of the correction of market failures. This is why the Action Plan proposes that investment aid to large companies remains possible in assisted regions. Horizontal instruments, such as state aid to R&D, or in the future, for certain innovative activities, or for risk capital or for SMEs - can and should be available everywhere across the EU, including in non-assisted regions. Together, this gives assisted areas the advantage they need to catch up, whilst ensuring that horizontal objectives can continue to be pursued throughout the Union.

3. Efficient procedures

The third aspect which I want to highlight is how the Action Plan seeks to improve the efficiency and transparency of state aid procedures and to speed up decision-making . Better state aid also means better regulated state aid, with simplified rules and a reduced administrative burden.

We are therefore thinking of consolidating and extending as much as possible the use of block exemptions, which authorise the granting of aid without it being notified to the Commission. This will allow us to concentrate our resources on cases that significantly distort competition and trade. Fewer aid measures should need to be notified, which means less bureaucratic burden on companies and authorities. As a result, state aid measures will be subject to Commission control in proportion to their potential effect on competition and trade.

We also intend to simplify and consolidate the many existing regulations , so that the overall architecture of state aid policy is easier to grasp. Best practice guidelines will help make the framework as user-friendly as possible. At a later stage, we may consider revising the procedural regulation to speed up decision-making, strengthen deterrence measures and enhance the Commission's investigative powers.

Finally, I am committed to doing more to make state aid policy more transparent . I would like people to understand state aid policy better, and to see how it serves the public interest. And I fully agree with you, Dr Ehlermann, that, in this context, private complainants may be our best friends.

4. A partnership with Member States

If by now you are thinking that all this is rather ambitious, you are probably right. Our Action Plan sets its sights very high. But this is because we believe that a thorough state aid reform, towards more efficiency and more equity, is essential to the jobs and growth agenda .

But there is one further factor - and this is my fourth point - which is critical for the success of this reform, and indeed for the renewed Lisbon process: the willingness of Member States to work in partnership with us to reach our common goals.

Procedurally, we need Member States to cooperate by providing complete notifications or timely and accurate replies to our questions. In terms of policy goals, Member States alone are responsible for setting their own spending priorities and designing schemes that generate growth and sustainable jobs. The most recent State Aid Scoreboard shows that progress still has to be made in this respect. I sincerely hope that our Member States will prove to be as committed to the Lisbon agenda as we are!

We should not forget, in this context, that only a small percentage of all aids banned by the Commission are ever recovered. If aid is condemned as illegal and incompatible, you would normally expect it to be recovered, but unfortunately, this doesn't often happen. Member States have a duty to act here, to recover the illegal subsidies and to put the money to other uses in the interests of their tax-payers. Here again, I would hope that competitors could become our best allies.

With the State Aid Action Plan, the Commission has shown our commitment to do all it takes to get our part of the job done. But we will not deliver effective state aid administration without a true partnership with Member States.

Conclusions

Ladies and gentlemen,

The State Aid Action Plan provides a roadmap, a global picture of the reform we intend to deliver over the coming years. Even a simplified state aid regime will be made up of several components. The Action Plan therefore shows how, taken together, our future measures should achieve the overall goal: meeting the basic twin objectives of state aid policy - efficiency, and equity - and putting Europe firmly back on the path to sustainable growth and jobs.

In this process, the Commission of course does not have all the answers. Before finalising the concrete regulatory proposals, I want to hear and discuss the views of people from all backgrounds and from all over Europe. I am very pleased that today's conference provides an early opportunity for this debate. I look forward to a fruitful and instructive discussion.

Thank you for listening so attentively.

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