Addressing the Economic Impact of the COVID-19 Outbreak: State aid Measures

Addressing the Economic Impact of the COVID-19 Outbreak: State aid Measures

Not only is the outbreak of COVID-19 in Europe an unprecedented health emergency, but it is also being greeted with widespread consternation by the global and European economy. Weathering the storm at global, European and national level requires a coordinated policy response that should support citizens, companies and economies.

On March 13, 2020, the European Commission (“Commission”) set out a European coordinated response to counter the economic impact of the COVID-19 outbreak.  The response includes a set of measures pertaining to State aid framework, fiscal policy, health policy etc.

In order to alleviate the negative effects of the pandemic, the Commission said it will work closely and quickly with the Member States.  In that context, Margaret Vestager, EU Commission Executive Vice-President in charge of Competition policy, stressed: “We stand ready to work with all member states to ensure that possible national support measures to tackle the outbreak of the virus can be put in place as quickly and effectively as possible, in line with EU rules.”

What support measures are covered by existing State aid rules?

Within the scope of EU State aid rules, Member States may turn to Article 107 to the Treaty on the functioning of the European Union (“TFEU”).  This provides the legal basis for Member States to take swift and effective action and grant aid to citizens and companies facing economic difficulties due to the COVID-19 outbreak.

 

a. Natural disasters or exceptional occurrences

Article 107(2)(b) TFEU provides the legal basis for the Commission to approve State aid to compensate damage directly caused by natural disasters or exceptional occurrences.

This Article will be applicable only in case of a direct causal link between the aid granted and the damage resulting from the exceptional occurrence. Furthermore, an event that caused the damage must be deemed “an exceptional occurrence”, i.e. it must be (i) unforeseeable or difficult to foresee, (ii) of significant economic impact; and (iii) extraordinary.  As stated in the Commission Communication[1], the COVID-19 outbreak qualifies as such an exceptional occurrence.

The first COVID-19-related approval of State aid under Article 107(2)(b) TFEU, as an exceptional occurrence, is a Compensation scheme for event cancellations in Denmark.  Under the scheme, event organizers will be able to recoup losses caused by the cancellation or postponement of large events due to the COVID-19 outbreak.  Acting in line with the exceptional circumstances, the Commission gave express approval for the compensation scheme i.e. within 24 hours.

More precisely, Article 107(2)(b) TFEU allows Member States to:

  1. compensate individual companies or
  2. put in place compensation schemes for industry sectors that have been particularly hard hit. So far, the sectors bearing the brunt of the outbreak are tourism, transport (in particular aviation) and hospitality.

 

b. Potential bankruptcy

State aid rules under Article 107(3)(c) TFEU enable Member States, subject to Commission approval, to meet the acute liquidity needs of small and medium enterprises (“SMEs”) and to support companies facing bankruptcy due to the COVID-19 outbreak. Such aid encompasses:

  1. support to companies in difficulty in the form of loan guarantees or loans;
  2. support to companies facing acute liquidity needs so as to address crises caused by the COVID-19 outbreak;
  3. putting in place support schemes for SMEs and smaller state-owned companies, in order to cover their acute liquidity needs for a period of up to 18 months.

In relation to the aid that will be granted to companies, in particular SMEs, under a more flexible regime, Margrethe Vestager, EU Commission Executive Vice-President in charge of competition policy highlighted:

Our goal here is to make sure that businesses have the liquidity they need to keep operating, and to make sure the support reaches the companies that need it. [W]e will give advice and share templates of schemes that work well”.

In line with the words of Vice President Vestager that “we [Commission] will need to do more”, the Commission announced departures from some well-established legal principles.  Namely, in order to help businesses to endure the economic downturn, the Commission may depart from the one time – last time principle, and accept exceptions to that rule.  Under the usual regime, companies that have already benefited from aid to cover acute liquidity needs in the past 10 years would not be eligible for further aid.  However, exceptional and unforeseeable circumstances such as the COVID-19 outbreak may justify an additional grant of aid, if followed by an individual notification.

 

c. Serious disturbance

Aid approved under Article 107(3)(b) TFEU serves to remedy a serious disturbance in the economy of a Member State.  Currently, the situation in Italy falls under the provision of this Article due to the impact of the COVID-19 outbreak.  However, there may be more situations that call for measures to be assessed under Article 107(3)(b) TFEU. Having that in mind, the Commission is preparing a special temporary legal framework.  That legal framework would pave the way for the Commission to approve additional national support measures to remedy a serious disturbance to the economy of a Member State.  Indicators considered relevant for assessing whether an economy is in the grip of a serious disturbance include, inter alia, the expected contraction of GDP, the stringent public measures imposed, such as school closures, circulation restrictions, cancellation of events, constraints on the public health system, as well as flight cancellations.

This is not the first time the Commission has had to respond to an exceptional emergency situation by adopting a special legal framework.  The same was done during the 2008/09 financial crisis, when the Commission adopted a 2009 Temporary Framework on State aid measures to support access to finance in the then financial and economic crisis.

 

Aid which is not subject to approval

Aside from the measures subject to approval under the State aid regime, Member States have at their disposal a number of measures that fall outside the scope of State aid approval, such as:

  • granting financial support directly to consumers (for instance, reimburse consumers for cancelled services or tickets that are not reimbursed by the operators concerned),
  • providing employee wage subsidies,
  • suspending payments of corporation and value added taxes or social contributions.

Member States are invited to introduce such measures throughout their domestic economies in order to give “breathing space” to all businesses, without discrimination.

Finally, the Commission established a dedicated contact line to provide Member States with comprehensive information and guidance regarding the State aid possibilities in relation to the COVID-19 outbreak.

 

Takeaways for Serbia

The relationship between the EU and Serbia is bound by the Stabilisation and Association Agreement (“SAA”) that came into force on September 1, 2013.  Pursuant to Article 73 of the SAA, Serbia is bound by the criteria and interpretative instruments of the EU acquis in the field of competition law and State aid control.

In line with the above, State aid measures approved in the EU to combat the COVID-19 outbreak may serve as guidelines for Serbian Commission for State Aid Control (“SCSAC”).

 

What support measures are available under the State Aid Control Act?

In Serbia, State aid is regulated by the new State Aid Control Act[2] that entered into force on January 1, 2020.

a. Social character & natural disasters or exceptional occurrences

Article 5(1) of the Serbian State aid Control Act prescribes that (i) aid having social character, granted to individual consumers, as well as (ii) aid granted to remedy the damage caused by natural disasters or exceptional occurrences, will always be compatible.

As mentioned, the Commission considers the COVID-19 outbreak as an exceptional occurrence, given that it is an extraordinary, unforeseeable event having a significant economic impact.  Such an exceptional occurrence not only justifies but, what is more, calls for rapid reaction by governments. Having that in mind, the SCSAC may take the EU approach as an example to start granting State aid to companies and/or establish support schemes for entire industry sectors that are hard hit by the COVID-19 outbreak.

Additionally, following the EU example, Serbia could identify industry sectors that are most affected by the current virus outbreak and establish compensation schemes to remedy the damages caused by the COVID-19 outbreak.

 

b. Aid which is not subject to approval

Serbia may use the Commission’s flexible approach to State aid regime to adopt general economic measures that would apply to all individuals and/or companies, without discrimination.  Such measures would be deemed lawful without SCSAC approval and may encompass (i) employee wage subsidies, (ii) suspension or postponement of payments of corporate and value added taxes and social contributions, (iii) and reimbursements for cancelled services or tickets.

 

c. Special legal framework

In required, Serbia may consider adopting a set of temporary measures to address the economic downturn caused by COVID-19 as was the case with the Commission and the temporary legal framework adopted during the 2008 financial crisis.

[1] Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup: Coordinated economic response to the COVID-19 Outbreak, Brussels, 13/03/2020. https://ec.europa.eu/info/sites/info/files/communication-coordinated-economic-response-covid19-march-2020_en.pdf

 

[2] Official Gazette of the Republic of Serbia, No 73/2019.

 

For more information, please contact us via covid19@geciclaw.com