One of the fundamental objectives of the recent reforms of the EU competition policy was to attack more effectively the state aid given by national governments to local or national strategically important businesses. Such assistance contravenes the requirements of the SEM. Over the past two decades, the French government has found itself in almost perpetual conflict with the European Commission over the level of support it offers to its ‘strategically important’ industries. In many ways, this reflects a strong tradition of intervention based on a culture of ‘Colbertism’ where the state is perceived as having a legitimate role in the ‘direction’ of industry. This desire to intervene has not been dimmed by the progressive liberalization of the economy or by the gradual transfer of state assets out of public control. This desire to secure key domestic businesses from the excesses of corporate markets was evident again in the early years of the new millennium as the French government sought to support France Telecom (FT) in the face of a deteriorating and unstable commercial environment.
Up to the end of 2002, the French government granted FT an exemption from business tax. This exemption was given to financially support a business that had run up debts of over €70 billion following an aggressive acquisition spree. Such debts were not unique to FT as other of Europe’s leading incumbent operators had also undertaken similarly aggressive expansionist strategies. Initially, the French government sought to inject, via a state-controlled investment fund, €9 billion into FT in order to support immediate financial difficulties in 2002. As the French state was still a major shareholder, attempts were made to disguise this support as normal shareholder assistance. Thus, under the market economy investor principle, the support would be compatible with EU law. The money was to be repaid once turnaround was complete.
In response to complaints from other European states, the European Commission investigated the agreement. The European Commission felt that as the support offered was not matched by private-sector money, there were questions over its legality. This was compounded by allegations—after raids upon FT by the Commission—over illicit practices that inhibited the development of rivals within its domestic market. There were particular concerns that the regulatory body granted too many favors to FT. However, the case against the €9 billion injection was dropped, and some argued that it never actually existed. The Commission suspected that although the aid was never used, the potential support had a psychological impact upon perceptions of the future of the company, resulting in higher share prices and credit ratings via the effect on investor confidence. Thus, the Commission could not ask for the money to be repaid.
In 2004, the Commission launched another investigation over benefits received by FT in 2002. The Commission believes that between 1994 and 2003, FT was offered favorable rates and thresholds for a business tax (known as the taxe professionelle). The benefits were estimated to be around €1.1 billion. In July 2004, FT was ordered to repay this aid—the largest repayment ever ordered by the Commission. FT countered that since it had overpaid taxes between 1991 and 2001, it should not be liable for the sums and, in fact, the support was actually a repayment.
The new rules that clamp down on aid allows for less discretion in policy and ensure that the ‘one-time, last-time’ principle applies for ten years and that aid has to be paid back once the firm has recovered. However, taking action against the French desire to support ailing firms has been a constant challenge to the Commission. The French Government repeatedly supported its firms such as Crédit Lyonnais and Air France in the 1990s. Throughout the 1990s, the Commission has taken an increasingly aggressive stance with regard to state aid although it has had to compromise on many cases (such as Alstom). The new policy should, in theory, limit future challenges to the competition law by the French. However, improvements to policy cannot occur without the support of member states.
(a) Under what circumstances is state aid to firms justified?
(b) Outline how state aid can distort the competitive process within the EU market place.
(c) Explain in which European socio-economic models state aid happens a lot.