Europe News

Europe has new rules on aid from governments and there are four big differences from 2008

Key Points
  • The EU said Friday that "companies that were already in difficulty on 31 December 2019 are not eligible for aid."
  • The European Commission has so far approved almost 1.9 trillion euros ($2.06 trillion) in state aid measures related with the ongoing crisis. 
  • This includes a 7 billion euro package from the French government to Air France.
BRUSSELS, BELGIUM - MARCH 13: Executive Vice President of the European Commission for a Europe Fit for the Digital Age and European Commissioner for Competition, Margrethe Vestager.
Anadolu Agency

There are now stricter conditions on how European governments can provide financial aid to companies struggling with the ongoing coronavirus crisis.

The European Union adopted new state aid rules in early March as a first step to deal with the economic fallout from the pandemic. These measures were revised for a second time on Friday after long and detailed discussions with the 27 European governments.

The most recent changes to state aid are different from what the EU did back in 2008 and 2009 in response to the banking crisis, Paolo Palmigiano, a partner at the law firm Taylor Wessing, told CNBC Tuesday.

Definition

The EU said Friday that "companies that were already in difficulty on 31 December 2019 are not eligible for aid." This is because their financial weakness is not deemed to be as a direct result of the pandemic.

In comparison, Palmigiano said that there was no such restriction during the global financial crisis.

"At the time, there were different banks that were solid and not solid. Here (with the latest state aid changes) if you were not in a good state on December 31, you wouldn't get it," he said.

The European Commission, the executive arm of the EU, has so far approved almost 1.9 trillion euros ($2.06 trillion) in state aid measures related with the ongoing crisis. 

Conditionality

This includes a 7 billion euro package from the French government to Air France. In return, the airline will have to comply with more stringent environmental rules, such as cutting back the number of night flights.

This dilemma becomes really difficult when some member states like Germany are ready to spend a lot of money for their companies, but other countries cannot or do not want to spend money.
Guntram Wolff
Director of Bruegel

The latter is another difference from the conditions imposed back in 2008 and 2009. Member states are now able to apply specific environmental standards in return for their help — something that was "not even considered in the banking crisis," Palmigiano said.

Quick exit

He added that there is also a new push for companies to end state aid.

The European Commission has said that "any recapitalisation measure shall include a step-up mechanism increasing the remuneration of the State, to incentivise the beneficiary to buy back the State capital injections. This increase in remuneration can take the form of additional shares."

Timing

There is a final difference from 2008, according to Fabian Zuleeg, chief economist at European Policy Centre.

"The EU reacted quite fast (this time)," he told CNBC Tuesday, and updated state aid rules "much, much quicker" than during the banking crisis.

The first communication from the European Commission back in 2008 happened more than a month after the collapse of Lehman Brothers. The decision to relax state aid rules this time around was taken on March 19 — just days after some EU countries introduced lockdown measures.

Rich-Poor Divide

However, state aid is far from being a simple issue among the 27 nations.

There is an ongoing debate between countries that have more fiscal room (and are therefore better placed to provide financial support) and those that cannot help all the companies that are struggling — which could aggravate unemployment levels.

The European Commission "needs to make sure that the integrity of the single market is protected but at the same time allow for financial support to companies. This dilemma becomes really difficult when some member states like Germany are ready to spend a lot of money for their companies, but other countries cannot or do not want to spend money," Guntram Wolff, from the Brussels-based think tank Bruegel, told CNBC Tuesday.

The different fiscal positions could create distortions across the European market. It is one of the European Commission's roles to guarantee a level playing field across the 27 member states.

A spokesperson for the European Commission said Tuesday: "We need a recovery plan that enables us to activate investments across Europe in a fair and balanced manner."

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