Lessons learned from the 2008 financial crisis have informed the European Commission's new state aid framework on recapitalisation measures, published on 8 May. Twelve years ago, the Commission had to act quickly to ensure the stability of the financial sector. In 2020, with most economies in shutdown, companies across all sectors will need state support, and urgently. This article will focus mostly on the second amendment to the state aid Temporary Framework.
Recapitalisation measures
After several weeks of discussions with the EU Member States, on 8 May 2020 the Commission issued a second amendment to the Temporary Framework for Stare aid measures to support the economy in the context of the current COVID-19 outbreak. These rules took some time to be published as Member States wanted flexibility while the Commission wanted to ensure that there were strict conditions for the granting of the aid and that restrictions of competition were kept to a minimum. This amendment is a compromise but it seems that both the Member States and the Commission got most of what they wanted.
Principles and elements similar to those used during the 2008 financial crisis are still present. For example, the provision of public support in the form of equity must be necessary and must be kept to the minimum needed, as well as the need for having a restructuring plan in certain circumstances. In addition, the company that gets the support will not be allowed to distribute dividends or give bonuses to management. In both crises, the Commission has included a prohibition on aggressive commercial expansion and therefore on acquisitions. But in 2020 the Commission has introduced some flexibility: a company can still acquire competitors or operators in the same line of business (but only up to a 10% stake, as long as at least 75% of the COVID-19 recapitalisation measures have not been redeemed). This was perhaps one of the concessions made by the Commission in negotiating with Member States.
There are, however, some key differences concerning the scope, the eligibility, the incentives for the state exit, and the possibility created for states to impose (or not) their environmental agenda.
Scope
The first significant, and perhaps obvious, difference is the range of sectors open to bailouts. In 2008, the aim was to ensure the stability of the financial systems so only financial institutions received aid. In 2020, every sector could be a beneficiary as long it is in the common interest to intervene (for example to save employment or avoid the exit of an innovative or systemically important company). Only financial institutions are exempted from the new rules as they are covered by the specific regime created in 2008.
Eligibility
The collapse of a bank would have had serious consequences for the financial sector. For that reason, in 2008 recapitalisation was allowed not only for fundamentally sound financial institutions that were affected by the restrictions on access to liquidity but also for institutions suffering from more structural solvency problems, linked for example to their particular business model (although more far reaching restructuring and compensatory measures were required for the latter). In the current Temporary Framework, the Commission states that companies that were already in difficulty on 31 December 2019 are not eligible for recapitalisation measures (or other forms of state aid). This principle has been a constant during this crisis and will have consequences for certain companies that, even if in difficulty, might have been able to survive, had this pandemic not happened. The difference in treatments has a rationale: while during the financial crisis the safeguarding of financial stability was paramount (and the failure of any systemically important bank would have had consequences), the collapse of companies in difficulties today will not have the same systemic impact.
Incentives
In a first draft of this second amendment to the Framework the Commission wanted to impose strict deadlines for divesting governments’ shareholdings (either by 2023 or 2024). Some Member States considered such measures too restrictive and they worried that it would have caused a large number of assets to be sold at the same time across Europe or at a time that would not be appropriate for the sector. In a concession to these valid concerns, the Commission has not included a strict timeframe for the divestiture but has created on companies very strong incentives to buy back as quickly as possible the state capital injection. Apart from the restrictions about acquisitions and dividends, the longer the state holds a stake into a company, the more the company has to compensate the state. If four years after the equity injection the state has not sold at least 40% of its equity participation in a listed company, the company has to give the state additional shares corresponding to a minimum 10% increase to the equity injection that has still not been repaid. The same happens six years after if the state has not sold in full its equity participation. For non-listed companies the mechanism can be applied one year later for each increase. Such mechanism was not present during the financial crisis. Companies might want to think hard before taking advantage of capital injections by governments, as the conditions are quite onerous. But they have might have no other choice.
The Green agenda
The environment had no place during the 2008 financial crisis. In this new document, the Commission acknowledges that Member States (when designing recapitalisation measures) can take into account the green agenda and digital transformation. This was no doubt inspired by France's bailout of Air France on 4 May, which included environmental conditions. The French government has set “ecological commitments”, including a 50% reduction in carbon emissions on domestic flights by 2024, as well as investing in more fuel-efficient planes as a condition for the aid.
Potential consequences for European Markets
While there is growing uncertainty on how serious the economic downturn will be, the only certainty is that we will come out of this crisis in a completely different world. In competition law we have seen across Europe the unprecedented relaxation of the rules for companies providing essential services such as groceries and medicines as they have been allowed to cooperate in ways that might have been illegal before. In state aid, the amount of aid given by European Member States is unprecedented and it covers almost every sector. Every day we read about the Commission approving new state aid measures. And while the Commission is trying its best to ensure a level playing field, we observe some Members States with sound finances being able to give more aid than those who are or have been in financial difficulties. That in itself will create distortions of competition. The distortion is even greater because some states will provide aid certain industries while other member states will not. The most obvious example is the airlines sector with the UK government having resisted so far supporting the industry while other Members States have granted aid to their national airlines. Even with this amount of state support, some companies will fail and competition will be heavily affected by the exit of certain players. For instance, many commentators expect that the surviving airlines will introduce initially low prices as travel bans are lifted, to encourage people to fly but substantially higher prices later. But the biggest consequence of this crisis is that ultimately, with governments owning stakes in companies in numerous sectors of the economy, we will see an increased role of the state that we have not seen since World War II.
