Economic Effects and EU State Aid Control: Recalibrating the Impact Standards for the Identification of Aid in Article 107(1) TFEU

Abstract

Despite the frequent refrain that the identification of State aid depends on the effects of a measure and not is objectives, causes, or aims, the conditions for the application of the prohibition on aid that directly relate to the effects of an intervention play a relatively minor role in the analysis. These impact standards, which require that a measure causes a distortion of competition and affects trade between Member States, are easily satisfied. This article proposes changes to the application of these impact standards in Article 107(1) TFEU. It argues that the criteria relating to the distortion of competition and the effect on trade between Member States should be interpreted as distinct, higher thresholds imposing more substantial evidential burden on the Commission. This proposal draws on the existing logic of the case law and the State aid control regime to contain the notion of aid within principled and coherent limits.

I. INTRODUCTION

The Court of Justice of the European Union (CJEU) has consistently held that, in determining whether a measure falls within the prohibition on State aid in Article 107(1) TFEU,¹ the law should have regard to the effects of that measure, rather than its objectives, aims, causes, or regulatory technique.² The most obvious place where effects might feature in the analysis for the identification of aid is in the conditions relating to the distortion of competition and the effect on trade between Member States. These have been described as ‘impact standards’ for the identification of aid.³ While these are necessary conditions for the application of the State aid rules, the requirements that aid distort competition on the internal market and affect trade between Member States have been interpreted such that they are almost always satisfied. This is the case even where the measure does not have consequential impacts on competition or trade in the internal market. The thresholds for these impact standards are low and the burden on the Commission to reason its conclusions in respect of them is light. There have been relatively few cases where these criteria have proved decisive in determining that a measure does not come within the prohibition in Article 107(1) TFEU. While this picture is beginning to change in the case of the effect on trade between Member States, the irrelevance of these criteria in much of the case law of the CJEU and the decisional practice of the Commission is particularly striking given the relatively clear textual foundation for these provisions. Simply put, the reality of the assessment conducted by the CJEU and the Commission on these criteria falls considerably short of what might be expected given their prominence in the Treaties and the emphasis in the jurisprudence on an effects-based approach.

A reappraisal of these criteria is timely in circumstances where the application of the State aid rules has increasingly been criticized for its excessive breadth, particularly with respect to fiscal measures.⁴ It has been argued that the selectivity criterion has been interpreted in a very broad manner in its application to fiscal measures, having been reoriented around the discrimination standard.⁵ The impact of these changes cannot easily be confined to the assessment of fiscal measures in circumstances where the CJEU insists that the regulatory form of an intervention cannot affect its classification as aid. Instead, these changes are likely to facilitate the Commission in enforcing the State aid rules not only against tax measures, but will also allow a wider category of grant schemes, loans, guarantees, and even general market regulation to come within the definition of aid. The concern is that such an interpretation will mean that an excessively broad range of Member State policies will have to be notified in advance to the Commission. Member States will have to wait for the Commission’s approval before implementing these policies. This may unduly limit the autonomy and flexibility of national governments and it may also place excessive burdens on the administrative resources of the Commission. It is in that context that this article will propose a more rigorous interpretation of these standards, arguing for higher thresholds and more extensive obligations on the Commission to present tangible economic evidence in support of its conclusions. It will be argued that not only does this represent a means of limiting the scope of the prohibition on aid in a principled manner that serves the objectives of State aid control and achieves an appropriate balance between the distribution of power between the EU and the Member States, but also that it may assist in relieving the pressure on the fraught and complicated application of the selectivity criterion.⁶ In that regard, this article adopts a pluralist understanding of the objectives of State aid law that emphasizes the role it plays in managing regulatory competition as well as facilitating market integration and maintaining competition between undertakings.⁷

The remainder of this article will proceed as follows. Sections 2 and 3 will address the criteria of the distortion of competition and the effect on trade between Member States respectively. It will be observed that while there have been important developments which appear to have made the latter criterion more capable of excluding measures from the definition of aid in Article 107(1) TFEU, it will be argued that there remains a large body of case law which treats both of these criteria together as a single, relatively low threshold for the identification of aid which can be satisfied with little evidence. Section 4 will identify deficiencies in the approach of the Commission and the CJEU to these impact standards through the manner in which they unduly extend the notion of aid, with negative consequences for Member State autonomy, the allocation of the Commission’s administrative resources and the prioritisation of enforcement against measures which are most likely to cause the harms which the State aid control regime is designed to prevent. Section 5 will build on this critique to propose a revised framework for assessing these impact standards. While this proposal acknowledges overlaps between the distortion of competition and the effect on trade between Member States, it seeks to clarify their status as distinct standards that merit separate analysis. It will also be argued that the thresholds for satisfying these standards should be higher than the tests applied by the existing body of jurisprudence. Section 6 considers a significant objection to the approach advanced in this article on the basis that it narrows the notion of aid and limits enforcement. Section 7 will consider a range of other objections relating to the utility of the analysis proposed and its relationship to other elements in the State aid control regime, including the GBER⁸ and the De Minimis Regulation.⁹ These relate to the possibility that a more detailed analysis of these criteria could increase the administrative burden on the Commission, the extent to which the analysis proposed in this article replicates that which is already undertaken in the compatibility assessment under Article 107(2)–(3) TFEU and the extent to which the objectives of this proposal are already served by existing legislation.

These proposed reforms require changes in the interpretation of Article 107(1) TFEU. Given the enduring lines of case law that have supported the existing interpretation of these criteria, it might be argued this can only be achieved through the amendment of the Treaties. It is important to observe here that while the proposals advanced in this article could potentially be achieved through the amendment of the Treaties, this article does not actively advocate for Treaty change. Article 107(1) TFEU has not been substantively amended since 1958 and in that context, it is accepted that an amendment to this provision is not likely. However, this article contends that the proposals it advances can be achieved by changes in the interpretation and application of the existing provisions by the Union courts. It adopts a doctrinal methodology whereby the proposals for reform are framed by and draw on arguments developed from the existing jurisprudence and the logic and objectives of the State aid control regime, even if it is accepted that the existing lines of doctrine do not endorse these proposals. While the arguments made in support of these proposals therefore draw on and interrogate arguments that can be discerned from the case law, it will inevitably have to do so selectively in circumstances when the proposals advanced here represent a change to the existing interpretation of the law. While it is no small thing for the CJEU to change its existing line of jurisprudence, it is noteworthy that there is some evidence to support the proposition that it has changed its approach at least somewhat in respect of the criterion relating to the effect on trade between Member States. This article therefore aims to propose important but modest changes that can allow the State aid rules to adapt to the challenges presented by their application to fiscal measures and indeed a wide range of other government interventions.

II. VERY LOW THRESHOLD—DISTORTION OF COMPETITION

This section will examine the current state of the law in relation to the distortion of competition under Article 107(1) TFEU. While much of the law on this point is well established, it is necessary to briefly review the state of the law before articulating a critique of the law in later sections. In particular, it will be observed that the more recent decisions of the CJEU on this criterion largely appears to confirm the position whereby this criterion is very easily satisfied.

The law on the requirement for the distortion of competition is well settled. Wherever a measure is liable to improve the competitive position of its beneficiary relative to other undertakings with which it competes, there will be a distortion of competition.¹⁰ The Commission does not have to prove the existence of any actual distortion of competition, but only that the measure is liable to distort competition.¹¹ The substantive threshold for a distortion of competition is very low, with even a very minor distortion of competition being capable of satisfying this condition.¹² The case law has repeatedly contrasted the ‘extremely broad definition’¹³ of distortion of competition under Article 107(1) TFEU with the interpretation of similar wording in Article 101 TFEU and other areas of competition law which normally requires that the distortion of competition be appreciable in character.¹⁴ In particular, it is clear that the small size of any grant of aid cannot exclude the possibility of a distortion of competition.¹⁵ Similarly, the relatively small size of the recipient undertaking and its market share cannot guarantee that this condition will not be fulfilled.¹⁶ Despite this very low threshold, the Commission has found that a distortion of competition can be excluded where aid is granted to a provider of a service in a sector that is not liberalized.¹⁷ This is subject to the conditions that the aid is granted to an undertaking providing a service subject to a legal monopoly that is compliant with EU law, that there is no possibility of competition on the market or to become the exclusive provider of the services and that there is no competition with the provision of other services.¹⁸ If the recipient operates on another market that is open to competition, the possibility of cross-subsidisation arising from the aid must also be excluded.¹⁹ However, it remains the case that the threshold is sufficiently low that it will be established in respect of virtually every measure under investigation.²⁰

As a result of this very low threshold, much of the litigation that has challenged the Commission’s application of this condition focuses on the sufficiency of the Commission’s reasoning.²¹ The Commission considers that this criterion will generally be satisfied when a Member State grants a financial advantage to an undertaking in a sector that could be exposed to competition.²² This financial advantage will generally be present where the aid contributes the ordinary costs of the business.²³ In determining whether there is a distortion of competition, the Commission is not required to conduct any market definition analysis or detailed economic assessment.²⁴ This approach has been described as relying heavily on presumptions rather than detailed economic analysis.²⁵ While the burden on the Commission to motivate its finding on this point is not particularly onerous, the Commission must still explain the circumstances that give rise to the distortion even if it claims that it is apparent from the circumstances themselves that there is a competitive distortion.²⁶ However, many of the cases where the Union courts have made a finding that there was insufficient reasoning on this point involve decisions that provide no material that is relevant to the distortion of competition.²⁷

There are also some cases in which the CJEU expresses skepticism towards the Commission’s reasoning where it relies too heavily on presumptions to justify its conclusions on the distortion of competition. In Wam, the CJEU found that in circumstances where the aid was granted to an undertaking to fund increased capacity to export to third countries, the distortion of competition was less obvious and required more detailed reasoning.²⁸ AG Sharpston emphasized the distinction between economic advantage and competitive advantage and considered that the Commission had to do more to explain how the aid would affect the recipient’s competitive position.²⁹ She suggested that the finding that a distortion of competition cannot be excluded is not sufficient to explain why such a distortion exists.³⁰ A similar approach can be seen in AG Fennelly’s conclusions in Italy and Sardegna Lines, in which he considered that the Commission could not use the selective nature of the measure as evidence of a distortion of competition.³¹ Rubini praises the more stringent approach taken by AG Sharpston in Wam but acknowledges that this is not typical of the jurisprudence, which relies more heavily on a presumption of competitive distortion if other conditions are satisfied.³²Indeed, AG Tanchev’s remarks in Arriva Italia Srl appear to equate an inability to exclude the possibility of competitive distortion with the presence of such a distortion.³³ Elements of this are also evident in the language of the CJEU in Azienda Napoletana Mobilità.³⁴There is a relatively modest volume of recent jurisprudence that tests this proposition. However, it is worth recording that these more recent remarks continue to adopt a position whereby this criterion will almost always be satisfied by any State intervention in the market.

III. CHANGING STANDARD—EFFECT ON TRADE BETWEEN MEMBER STATES

A measure will only be considered to be State aid if it affects trade between Member States within the meaning of Article 107(1) TFEU. While the language of Article 107(1) TFEU suggests that these are distinct and cumulative criteria,³⁵ the effect on trade between Member States has often been conflated with the distortion of competition. Since the decision in Philip Morris,³⁶ the criteria have often been dealt with together.³⁷ However, there are some exceptions which analyse them separately.³⁸ The interpretation of the effect on inter-state trade criterion therefore shares important characteristics with the distortion of competition in that no detailed economic assessment or market definition analysis is required in order to justify the Commission’s conclusions.³⁹ Further, there is no requirement to prove a real effect on trade, only that the measure is liable to affect trade between Member States.⁴⁰ As with the distortion of competition, an effect on inter-state trade may arise even where the subsidy is very small.⁴¹ Similarly, the fact that the recipients of the aid trade primarily or exclusively with third countries is not necessarily inconsistent with the finding that there is an effect on trade between Member States.⁴² As with the distortion of competition, the condition relating to the effect on inter-state trade is likely to be fulfilled in most cases where the other conditions for identifying aid are satisfied. The approach of the CJEU has been criticized for failing to articulate positive guidance on what circumstances will give rise to an effect on inter-state trade, focusing instead on situations in which the effect cannot be excluded.⁴³ It has also been suggested that this approach creates the risk of conflating the inability to preclude the possibility that the criterion is satisfied with a positive finding that there is such an effect.⁴⁴ This can also be contrasted with the CJEU’s approach to similar wording in Article 101 TFEU which treats these conditions separately and gives them a narrower reading than that which prevails in the interpretation of Article 107(1) TFEU.⁴⁵

However, the Commission has taken some steps to apply the effect on trade criterion in a way that makes it more difficult to satisfy. A range of decisions determining that impugned measures did not affect trade between Member States indicate an intention to give this condition a much more decisive role in identifying aid and clearing measures with minimal effects.⁴⁶ These decisions relate to government support for local healthcare facilities, sports and leisure facilities, ports and local languages and media. The Commission’s guidance on the notion of aid appears to draw a number of criteria from these cases, finding that there will be no effect on inter-state trade if the recipient supplies goods or services only to a limited area within a Member State, if the recipient is unlikely to attract customers from other Member States, and if the measure would not have any foreseeable, more than marginal effect on conditions of cross-border investment or establishment.⁴⁷ It has been suggested that these criteria are moving towards a de minimis threshold in a manner that is absent in the analysis on the distortion of competition and indeed the case law of the CJEU on this point.⁴⁸ It is suggested that these criteria are intended to exclude from the definition of aid measures that have a ‘minor, marginal, or insignificant’ effect on inter-state trade.⁴⁹ The decision in Marinvest appears to develop the second of these criteria, finding that the aid must have a significant incentive effect that would attract customers from other Member States.⁵⁰ The application of these criteria for the effect on inter-state trade also appears to differentiate this analysis from the assessment of competitive distortion where the threshold is much more easily satisfied. For example, in Marinvest, the General Court applied these criteria and considered that even if a distortion of competition at a local level could not be excluded, an effect on inter-state trade may still be absent.⁵¹

There remains some uncertainty about how these criteria will be applied. Some commentators have given these new criteria a cautious welcome.⁵² Indeed, it has been suggested that many of the decisions finding that there is no effect on trade between Member States have had a ‘social character’ including local provision of cultural events, leisure facilities, and healthcare.⁵³ However, the Commission continues to be criticized for the inchoate and piecemeal development of the law in this area.⁵⁴ Apart from the cluster of decisions from which these new criteria have been derived, the Commission often refrains from deciding on the effect on inter-state trade when it reaches a decision not to raise objections to alleged aid.⁵⁵ This can be understood as squandering opportunities to expand and develop the rules on this point.⁵⁶ Indeed, it has been suggested that the Commission has sometimes undermined its own decisions with contradictory reasoning by concluding that there are no serious doubts as to the compatibility of the aid with the internal market while claiming it cannot take a position on whether there is an advantage and whether it affects trade between Member States.⁵⁷ In order for the application of this condition to be useful in guiding the behaviour of Member States, the Commission must do more to elaborate on its guidance and apply it in a detailed, systematic manner. Cnossen and Dictus suggest that the more detailed and conclusive reasoning on the matter in the Commission’s decision in Ingolstadt provides an instructive and positive example for future practice.⁵⁸ Further elaboration on these criteria and detailed examples of their practical application are required.

A more important concern about this shift in the Commission’s decisional practice is that it involves a change in the interpretation of Article 107(1) TFEU that is not supported by the jurisprudence of the CJEU and is therefore beyond the competence of the Commission to introduce.⁵⁹ However, some commentators argue that while previous case law on this issue does outline circumstances in which an effect on inter-state trade cannot be excluded, these do not go on to find that such an effect is always present in such circumstances.⁶⁰ The decision of the General Court in Marinvest which upheld the Commission’s analysis of these criteria to conclude that there was no effect on inter-state trade where the recipient undertaking provided spaces in a port for mooring recreational boats mostly for local residents rather than to tourists from other Member States.⁶¹ Schotanus argues that this does not resolve the matter and that a decision of the CJEU is required to resolve the inconsistency he sees between Marinvest and the preponderance of the previous jurisprudence.⁶² In particular, he points to cases decided by the CJEU after Marinvest, including Achema¸⁶³  Azienda Napoletana Mobilità⁶⁴ and Arriva Italia Srl⁶⁵ which do not refer to the new criteria articulated by the Commission or indeed to Marinvest when addressing the effect on trade between Member States.⁶⁶ While these were decided in the context of preliminary references in the absence of a Commission decision directly referring to these criteria, they do not provide any support for the Commission’s new approach. The subsequent decision of the General Court in Ighoga Region 10 v Commission to uphold a finding that there was no aid makes more direct reference to these criteria forming part of the Commission’s ‘decisional practice’ and offers further support for the legal validity of the Commission’s approach, even if a decision of the CJEU is required to finally settle this issue.⁶⁷ It nevertheless represents a welcome improvement to the law in this area. This approach is an important first step towards higher thresholds and distinct application of the impact standards in Article 107(1) TFEU. As will be argued below, this is a necessary improvement to the interpretation of these conditions.

IV. DEFICIENCIES IN THE PREVAILING APPROACH

The interpretation of the two impact standards in Article 107(1) TFEU that define aid in relation to its effects has begun to diverge. While the law is very quick to find that a State intervention has distorted competition even if its impact is very small, the interpretation of the inter-state trade criterion is taking important, albeit uncertain steps towards providing a meaningful limit on the notion of aid. It is important to consider the deficiencies in the prevailing interpretation and outline the changes necessary for these conditions to perform their important, but distinct roles in defining the notion of aid.

First, these conditions reflect concepts that are important to the objectives of the State aid control regime and therefore have great potential to identify aid that is likely to cause the type of harm to competition and the internal market that the regime seeks to prevent. Indeed, this is likely to be the reason why they are referred to expressly in Article 107(1) TFEU. However, the reality is that a broad interpretation of these conditions such that they are very easy to satisfy leads them to contribute very little to the analysis under the remaining conditions for identifying aid. This means that any positive contribution that they are capable of making to defining aid is relatively limited. While there have been some tentative steps in the Commission’s practice on the effect on trade between Member States, the distortion of competition has a particularly marginal role in distinguishing between aid and other permissible interventions on the market.⁶⁸ It fails to distinguish between the conferral of an economic advantage and the conferral of a competitive advantage, which should in theory remain distinct concepts.⁶⁹ Indeed, it has been suggested that the market economy operator principle effectively acts a proxy for the condition on the distortion of competition, with the latter making no real contribution to the analysis.⁷⁰ This is particularly problematic in circumstances where this principle cannot be invoked in respect of all forms State intervention to argue that they are not aid.⁷¹ The existing law operates in many cases as a presumption that a distortion of competition and an effect on trade between Member States will follow where the other conditions for the identification of aid are satisfied notwithstanding that it is far from clear that there is a strong empirical justification for the widespread use of that presumption. Moreover, given the strong textual justification for the conditions relating to the distortion of competition and the effect on inter-state trade, their relatively peripheral role in the identification of aid is arguably inconsistent with Article 107(1) TFEU and its objectives.

Secondly, there is an extent to which this interpretation unduly extends the limits of the notion of aid. Even though the scope of the prohibition on aid in Article 107(1) TFEU does not determine whether the aid is compatible with the internal market and therefore permissible, an unduly broad prohibition has significant consequences. This may lead to Member States having to notify an excessively broad range of measures to the Commission and refrain from implementing them until they have been approved.⁷² Further, it may also place further strain on the administrative resources of the Commission as it struggles to review an unduly large number of notifications. A stricter interpretation of these impact standards might allow the Commission to more effectively streamline its enforcement and prioritize the notification and review of measures that are most likely to be harmful due to their impact on competition and inter-state trade.⁷³ This would be consistent with previous initiatives of the Commission to modernize and reorient State aid enforcement against measures that are most likely to cause harm.⁷⁴ This would also conform to consistent policy prescriptions in the literature on competition economics seeking safe harbours for measures unlikely to be harmful and prioritising resources for more ambiguous cases.⁷⁵ While measures such as the GBER and the De Minimis Regulation have gone some way towards assisting the Commission in targeting its enforcement towards measures which are more likely to have these effects, these are not perfect substitutes to limitations on the definition of aid in Article 107(1) TFEU.⁷⁶

Third, the decisional practice of the Commission and the case law of the CJEU too often conflates the distortion of competition and the effect on inter-state trade. It has long been established that these are distinct, cumulative conditions.⁷⁷ Indeed, this understanding of the relationship between the two conditions is the most plausible reading of the text of Article 107(1) TFEU. However, there remains a significant body of case law and Commission decisions that treat both of these conditions together with relatively terse reasoning.⁷⁸ This approach ignores the distinct contributions that each condition has to make as part of this analysis. It is also inconsistent with the finding that these are distinct, cumulative conditions to fail to assess both separately. While there is a consensus in the literature that the close links between these conditions cannot be severed completely, it is not impossible to address them as separate criteria that will not always be satisfied together. The treatment of criteria derived from similar wording in Article 101 TFEU provides a useful example of how it is possible to address these related criteria separately.⁷⁹ As observed above, there have been positive developments in this regard with the Commission’s new approach to effects on inter-state trade that draws distinctions between this condition and the distortion of competition. The General Court’s reasoning in Marinvest also appears to separate these criteria.⁸⁰ Therefore, this attempt to restate the tests for the distortion of competition and the effect on trade between Member States starts from the premise that these conditions are not coextensive and that they require separate analysis to determine whether they are fulfilled.

V. THE NEED FOR TWO DISTINCT, HIGHER THRESHOLDS

These deficiencies with the prevailing practice inform the restatement of the tests for these criteria advanced in this article. This proposed restatement has three main features. The first is that the distortion of competition and the effect on inter-state trade should be addressed separately as distinct, albeit related issues. The second is that the substantive thresholds for these conditions must be raised above the very sensitive thresholds that are currently applied. The third is that the CJEU should be more exigent in requiring the Commission to provide evidence to substantiate the assertion that a measure distorts competition and affects trade between Member States. In particular, the distortion of competition should involve the use of more detailed economic evidence than is currently required for the Commission to satisfy this condition. This will require a decreased reliance on presumptions that these conditions merely because the remaining criteria for identifying aid are fulfilled. It is necessary to outline specific prescriptions for the distortion of competition and the effect on inter-state trade in turn.

The test for the distortion of competition must be interpreted more rigorously than the prevailing standard. In order to play a meaningful role in the identification of aid, three important changes are required. The first is that the law must cease its reliance on crude presumptions of competitive distortion wherever there is an economic advantage or wherever another criterion for the identification of aid is satisfied.⁸¹ Related to this point is that the CJEU must be clear that the mere fact that competitive distortion cannot be excluded should not be equated to a finding that such a distortion exists.⁸² Some strands in the case law offer limited support for this more exigent approach.⁸³

The second is that the substantive threshold must be higher. It may well be the case that anytime the State confers an economic advantage on a selective category of undertakings using State resources, there is also likely to be at least some minimal distortion of competition. If this condition is to make any meaningful, independent contribution to the analysis, it cannot be fulfilled by this minimal distortion alone and should instead require that the distortion be appreciable. While this would follow the interpretation of Article 101 TFEU, this is not to say that the precise level of the threshold should be identical for both Article 101 and Article 107(1) TFEU. Indeed, there may well be good reasons why this threshold should be lower for the latter. The law may be more concerned about distortions of competition caused by State aid than those caused by undertakings and about the risk of error in clearing measures that should be subject to further scrutiny in this context.⁸⁴ Further, the availability of broader derogations for aid under Article 107(2)–(3) TFEU may also allow for a lower threshold under Article 107(1) TFEU than would be applied to an agreement between undertakings.⁸⁵ While these reasons might justify differences in the precise level of the threshold, it is much more difficult to argue that they require the absence of any appreciability threshold in circumstances where this deprives the condition of any meaningful effect in any liberalized market.

The third is that the CJEU must be more demanding in requiring the Commission to reason its conclusions that an intervention has sufficiently distorted competition. Indeed, this prescription follows closely from the previous two. In order to establish something more than some minimal level of distortion without relying on very simple presumptions relating to other criteria for identifying aid, more detailed economic analysis should be required. There is a consensus in the literature about the types of competitive distortion that aid may cause. Aid can inhibit the ordinary functioning of the market such that it can allow less efficient undertakings to survive when they otherwise would not, which in turn may dull incentives to compete.⁸⁶ Aid can also distort the dynamic incentives which may result in potential competitors refraining from entering the market.⁸⁷ This may also encourage competitors in the market to reduce sales and limit plans for investment.⁸⁸ The aid may also consolidate any market power held by the beneficiaries.⁸⁹ The aid may also have effects on markets other than those on which the beneficiaries compete, including markets for their inputs and other markets that use similar inputs.⁹⁰ It is also clear that the intensity of these effects will vary according to a wide range of factors including market concentration, barriers to entry, and product differentiation.⁹¹ The scale of any competitive distortion therefore depends not only on the form of the intervention but also its context.⁹² Identifying these effects and making some meaningful assessment of their gravity is difficult without engaging with economic evidence and analysis that is considerably more detailed than that which is currently accepted as justification for a finding that a measure distorts competition within the meaning of Article 107(1) TFEU. Such an analysis will generally require the Commission to consider the relevant market and its product and geographic dimensions.⁹³

One potential difficulty with this arises with respect to distortions of competition arising from locational competition, whereby Member States use incentives to encourage mobile undertakings to make investments and establish themselves in one Member State over another. Many commentators have suggested that State aid control is not only designed to address competition between undertakings, but also competition between Member States.⁹⁴ Indeed, the State aid rules have often been applied against measures that seem to directly encourage establishment or investment in a specific Member State and the CJEU has frequently rejected attempts to justify State intervention as a means to attract investment.⁹⁵ Managing this type of regulatory competition between Member States is an important and distinctive part of the State aid control regime.⁹⁶ Regulatory competition is the process by which Member States amend national regulation in the broad sense in response to the actual or potential impact of internationally mobile goods or factors of production without seeking to restrict or block such mobility.⁹⁷ However, it has been suggested that this type of inter-state competition involves analysis that is quite different to the microeconomic analysis that would be undertaken following the prescriptions set out above.⁹⁸ This creates a difficulty because if it is covered by the distortion of competition criterion, it may complicate the analysis as it may not be possible to assess the effects on these different types of competition in a commensurable manner to determine whether the relevant threshold has been met. It may also make it difficult to separate targeted incentives from broader macroeconomic policy.⁹⁹ If it is excluded, some measures may evade scrutiny notwithstanding their impact on matters relevant to the rationale for State aid control.

The resolution proposed by this article is that this type of regulatory competition between Member States and the impact on locational competition should be included in the assessment of a distortion of competition. However, excluding this element from the analysis would not pose a significant obstacle to State aid control. A tax break or direct grant for a company seeking to procure the establishment of an office in a specific Member State would have to be set at a level that would provide a positive incentive to move, which would likely affect the competitive relationship between the company and its competitors in any event.¹⁰⁰ Such measures are likely to be captured in the analysis outlined above even without specifically accounting for the impact on regulatory competition between Member States. While it may be that some subsidies could be designed in a manner such that they would only compensate for the costs of moving and therefore have a minimal impact on competition between undertakings, this is unlikely in practice.¹⁰¹ Further, the location of an investment can effectively be understood as an input. Aid can distort competition on the market for this input just as it can for any other, specifically by exerting a negative impact on regions from which investment is withdrawn.¹⁰² This may also occur by encouraging an inefficient allocation of resources by leading undertakings to establish facilities in places that are not best suited to those facilities.¹⁰³

However, it is more appropriate that this type of competition is included in the assessment of the distortion. For example, it should be relevant to this assessment that a tax break or subsidy targets undertakings in an industry that is relatively mobile and for which the costs of moving to a different Member State are low. This may be true of certain types of financial services, for example.¹⁰⁴ These are likely to be areas in which locational competition between Member States is likely to be particularly acute. By contrast, aid for local media in a minority language within a region of a Member State may be less likely to provoke locational competition.¹⁰⁵ This flows from an important rationale for State aid control. The rules are designed to restrain regulatory competition and so the distortion of competition criterion should assess distortions to this type of competition. Indeed, the breadth of the notion of competitive distortion as it is currently interpreted may well include this type of competition already.¹⁰⁶ The difficulties of integrating assessment of this type of distortion into the analysis are not insurmountable. As indicated above, the Commission already considers the impact on locational competition as a potential distortion to an input market. However, it is also clear that the Commission also considers the competition between Member States to include competition to attract investment directly as well.¹⁰⁷ The compatibility assessment therefore considers both types of competition and integrates them into a final assessment of the appropriateness of the aid. It therefore seems possible that this could also be done under Article 107(1) TFEU. Further, the difficulty in distinguishing between legitimate macroeconomic policy and aid is often more pressing in cases involving locational competition. However, this distinction is one that should be policed by the selectivity criterion.

Similar amendments should be made to the interpretation of effects on trade between Member States. In order to clarify the meaning of this condition, it is important to understand its relationship to the distortion of competition. There appears to be consensus that these conditions are inextricably linked.¹⁰⁸ However, this does not mean that both conditions will always be satisfied wherever one of them is satisfied. While the distortion of competition should be interpreted broadly to encompass the different types of harm that aid can inflict on the internal market, the effect on trade between Member States is more specific. The latter condition should be focused on identifying an appreciable international impact of the harms caused by the impugned measure. This understanding of the relationship between the two criteria suggests that while some distortion of competition will be necessary for there to be an effect on trade between Member States, an effect on inter-state trade is not necessary for there to be a distortion of competition. It is possible for government interventions to distort competition within the boundaries of a single Member State to an appreciable extent without necessarily causing any significant effects on international trade within the internal market.¹⁰⁹ This may be the case where the distortion of competition occurs over a very narrow geographical area within a single Member State in the circumstances highlighted in the Commission’s guidance.¹¹⁰

The assessment of the effects on inter-state trade therefore encompasses the elements of the competitive distortion that involve a cross-border effect within the internal market. Some guidance may be drawn from the analysis of the inter-state effects of competitive distortions as part of the assessment of the compatibility of the aid with the internal market.¹¹¹ This condition may be satisfied where there are distortions in markets that span multiple Member States. Effects on inter-state trade may also exist where the beneficiaries trade across multiple jurisdictions. Locational competition and the extent to which the aid causes the displacement of economic activity and incentivizes the redirection of investment should play a particularly prominent role under the analysis for this criterion.¹¹² The criteria in the Commission’s guidance are also useful starting points for analysis, suggesting that there will not be a sufficient effect on inter-state trade where the recipient trades in a small geographical area, the recipient is unlikely to draw customers from other Member States and there is no more than a marginal effect on conditions of cross-border investment and establishment.¹¹³ However, the Commission should be cautious about concluding that there is an effect on inter-state trade simply because tourists from other Member States are potential customers as this risks setting a very low threshold.¹¹⁴ The CJEU should hold the Commission to similar higher evidential standards on this point as should be applied to the distortion of competition. This approach does not require strict separation of the matters considered under each condition, but simply that the Commission and the CJEU offer a more transparent analysis, in which the factors relevant to each condition are highlighted and explained in turn.

Just as the distortion of competition should be appreciable in order to classify a measure as aid, so too must the threshold for an effect on inter-state be raised. The effect must be appreciable to justify the application of the prohibition of Article 107(1) TFEU. There is some suggestion that the case law is moving towards a higher substantive threshold for this criterion in the Commission’s decisional practice,¹¹⁵ even if the support for this position before the Union courts is less clear.¹¹⁶ However, it seems likely the current law will require relatively unusual circumstances for the effect to fall below this threshold. The test delimits the circumstances in which there will be no effect, rather than situations where there will be an effect. Subject to more direct approval from the Union courts, this could represent an important improvement but it is unclear that it would create an appreciability threshold that would be necessary to appropriately circumscribe the notion of aid. This would also be consistent with the approach taken to the interpretation of similar language in Articles 101–102 TFEU,¹¹⁷ even if the jurisdictional role played by this criterion under the competition rules is not relevant in circumstances where many Member States do not have a domestic system of State aid control.¹¹⁸ Nevertheless, limiting the application of Article 107(1) TFEU to circumstances where the effect on trade is appreciable would narrow the notion of aid in a principled and proportionate manner that is connected to its central objectives of managing competition between Member States and preventing the imposition of trade barriers between them.

The tests proposed above would represent a significant change to the type of assessment undertaken under Article 107(1) TFEU. Higher thresholds and more rigorous explanation would enhance the marginal importance of these impact standards and would make them important criteria for the identification of aid. This would serve to narrow certain contours of the notion of aid and would likely serve as a more useful valve for doing so than the selectivity criterion which has been reoriented around the discrimination standard and whose application has proved complex and heavily contested.¹¹⁹ This would reduce the administrative burden on the Commission and, more importantly, expand the freedom of Member State governments to act decisively in pursuit of their own interests, and those of the EU more generally. Further, it would do so in a way that does minimal violence to the text of Article 107(1) TFEU and the objectives of the State aid control regime. It would give more meaningful effect to two conditions with a strong textual justification in the Treaties. It would apply standards that are directed towards precisely the type of harms that State aid control seeks to avoid including obstacles to trade, distortions of competition between undertakings and excessive regulatory competition between Member States.

The CJEU has often insisted that in identifying aid, it is the effect of the measure that takes priority, rather than its objectives, aims, or causes.¹²⁰ While it has been argued that it is difficult to entirely exclude objectives from the analysis, particularly with respect to the selectivity criterion,¹²¹ the approach to the impact standards in Article 107(1) TFEU canvassed here would ensure that the notion of aid is defined to a greater extent in relation to its effects. This may allow for differential treatment of interventions according to their form, but only to the extent that the difference in regulatory form has a meaningful impact upon the effects of the measure. This could provide a more principled way of acknowledging any differences that may exist between different types of measure but only to the extent that it is justified by the economic evidence.¹²²

VI. OBJECTION: NARROWING THE NOTION OF AID AND LIMITING ENFORCEMENT

It is necessary to defend this more rigorous interpretation of the distortion of competition and the effect on inter-state trade from potential objections. Perhaps the most fundamental objection to the proposals advanced in this article relates to the potential impact that these proposals might have on enforcement outcomes. This is addressed in this section as the response posited here will inform how other objections are addressed in the Section 7. It might be thought that it is likely to allow measures that would otherwise be classified as aid within the meaning of Article 107(1) TFEU to be excluded, on the basis that they do not distort competition or affect trade between Member States. It might be argued that the State aid rules have generally leaned in a more permissive direction in recent years, with lenient temporary frameworks for the assessment of aid in the context of different crises,¹²³ which have provided the basis for decisions to approve aid that have generally withstood scrutiny before the CJEU.¹²⁴ This has, in part, led to larger overall aid volumes being approved as compatible with the internal market.¹²⁵ Other developments may well exacerbate this trend, such as the adoption of amendments to the GBER which seek to facilitate the implementation of certain aid measures.¹²⁶ It could be argued that the State aid regime has leaned too far in this direction, and that proposals such as those advanced in this article, which might allow a wider range of measures to escape scrutiny, would be at best unnecessary and at worst actively exacerbating an undesirable trend.

The task of calibrating exactly how much aid and what type of aid should be permitted is beyond the analytical tools of the doctrinal legal methodology which is adopted in this article. However, even for a given set of State interventions permitted under the State aid rules, there are important reasons to consider that the existing law is unsatisfactory. This is because the mechanism through which the outcomes of the State aid regime have become more permissive is through the compatibility assessment. Measures such as the GBER have also been used for this purpose, which provide detailed criteria ex ante which can be used to determine that a measure is presumed compatible with the internal market. The proposal advanced here does not speak to the compatibility of an aid measure with the internal market, but rather seeks to classify an intervention as being outside the definition of aid. This article contends that it matters not only whether a measure is likely to be regarded as compatible with the internal market, but also whether it is classified as aid in the first place.

This is because, even if a given intervention is regarded as aid that is compatible with the internal market, its classification as aid still has important consequences. A Member State must notify the Commission, justify the intervention, and wait for the Commission’s approval.¹²⁷ This is a significant limitation on national government’s autonomy and flexibility even if the Commission finds the intervention to be compatible. Extending the notion of aid excessively has the potential to unduly restrict policymaking by national governments and to place unmanageable burdens on the Commission’s resources, subject to the extent of the exemptions from the notification obligations in the GBER¹²⁸ and the De Minimis Regulation.¹²⁹ While it is difficult to measure precisely the effect of a broader interpretation of the notion of aid in isolation, the doctrinal methodology adopted here means that this article must limit itself to drawing inferences about the incentives and effects generated by the procedure envisaged by the Treaties and relevant secondary legislation for the assessment of aid. As part of that assessment, it is not difficult to understand that a national government may refrain from committing public resources to the development of certain policies if it considers that there is a risk that it will be considered aid. This is because, absent a suitable exemption in the GBER or the De Minimis Regulation, the implementation of the measure will be dependent on a favourable decision from the Commission that does not impose conditions for compatibility that will make the policy politically undesirable for that government.

Further, the limits of the notion of aid in Article 107(1) TFEU are likely to represent the limits of the EU’s competence to examine a particular measure.¹³⁰ Even if the Commission does not restrain a Member State from implementing an economic intervention, the classification of a measure as aid means that it is subject to the review of the Commission. This has implications for the distribution of power between the Commission and national governments, even if the Commission is, at a given point in time, liable to exercise restraint in enforcing the prohibition on aid against the measures that are subject to its review. Lenient policies adopted by the Commission do not radically alter this distribution of power if the range of measures which come within the notion of aid in Article 107(1) TFEU and are subject to its review is unduly broad. This is particularly the case in circumstances where the precise scope of the derogations is subject to change. It is clearly established that the Commission has discretion in defining the precise scope of the derogations in Article 107(3) TFEU.¹³¹ The Commission does this by issuing detailed guidelines on the types of measures that will be permitted. These can evolve and change according to the political priorities of the Commission and can become more or less permissive as a result, a reality that has been particularly evident in the Commission’s responsive policy-making through the temporary frameworks. When the CJEU defines the notion of aid in Article 107(1) TFEU and determines how the impact standards should be applied, it should therefore be hesitant to rely on the breadth of derogations that are subject to the Commission’s discretion to justify its approach.

This must be seen in the context of the allocation of competences between the EU and the Member States on economic policy. Article 3 TFEU grants the EU exclusive competence in “the establishing of the competition rules necessary for the functioning of the internal market”, which likely includes the State aid rules which appear in the Chapter 1 of Title VII of the TFEU which deals with competition law. However, matters of general economic policy remain in the hands of national governments. Article 5(1) TFEU provides only that the “Member States shall coordinate their economic policies within the Union”.¹³² Even for Member States who participate in the common currency, the power to tax and spend is not centralized within the EU. Moreover, it is evident that the State aid rules ultimately leave, at the very least, the right of initiative to Member States in granting aid, subject to the oversight of the Commission. This is therefore a certain tension between the EU’s authority in respect of State aid and national governments’ power over general economic policy. The definition of aid in Article 107(1) TFEU in particular therefore plays an important role in determining in what areas Member States can act unilaterally and what kinds of measure are subject to the scrutiny of the Commission, whether they are confirmed to be compatible with the internal market or otherwise. This is consistent with the pluralist understanding of the objectives of State aid law adopted by this article, according to which State aid law plays a role not only in facilitating market integration and maintaining competition between undertakings, but also in managing regulatory competition between Member States.¹³³ It therefore matters where this boundary is drawn, irrespective of how permissive the assessment of the compatibility of aid becomes. Lenient policies adopted by the Commission to approve measures which have already been classified as aid do not fundamentally alter this important feature of the distribution of powers between the EU and the Member States. The argument advanced in this article that the existing law, which operates in many cases as a set of presumptions that competitive distortion and effects on inter-state trade follow where the other conditions for the identification of aid are present, is a relatively crude tool for the demarcation of this important boundary.

This division of power between the EU institutions and the Member States is also largely unaltered by the exemptions from the notification and standstill obligations in the GBER and the De Minimis Regulation, which define areas where the Commission will not enforce the prohibition on aid. Even where a measure is classified as aid but is cleared as being compatible with the internal market either by a Commission decision or is otherwise exempt from the notification and standstill obligations in Article 108(3) TFEU, those measures remain ultimately subject to the review of the Commission and the EU institutions more generally. Measures must comply with conditions set out by the Commission to benefit from an exemption, subject to the very broad parameters set out in the enabling legislation by the Council.¹³⁴ These exemptions are not unconditional and carry with them reporting obligations for Member States who seek to rely on them.¹³⁵ They are also contingent on the choices of the Union legislator and, under the current scheme, the Commission itself, which are liable to change.

The De Minimis Regulation is also insufficient to address the distribution of power between the Commission and the Member States. It will be recalled that the De Minimis Regulation sets out minimum thresholds for most types of aid below which the measure does not have to be notified on the basis that it does not distort competition or affect trade between Member States within the meaning of Article 107(1) TFEU.¹³⁶ This threshold is currently fixed at €300,000 per undertaking per three year period for most types of aid.¹³⁷ It will be recalled that the GBER sets out categories and amounts of aid that are deemed to be compatible with the internal market and are also exempt from the general obligation contained in Article 108(3) TFEU to notify aid and refrain from implementing it until it is approved.¹³⁸ Unlike the GBER, measures that come within the De Minimis Regulation are deemed not to be aid.¹³⁹ However, such measures are not in the same position as those which are otherwise regarded as not coming within the notion of aid as they only benefit from that status subject to a decision of the Commission, within the broad parameters set by the Council, to legislate in those terms. The measures covered by it remain in effect subject to regulation by the EU State aid regime, even if in theory the Commission purports to exclude them from the notion of aid. Further, it will be recalled that there remains some doubt over the legitimacy of the De Minimis Regulation in circumstances where they see the Commission purport to define the notion of aid under Article 107(1) TFEU, which is thought to be a function reserved to the CJEU.¹⁴⁰

In those circumstances, the suggestion that the EU State aid regime is currently applied in a manner that is sufficiently, or even excessively permissive in terms of its enforcement outcomes can only be an incomplete answer to the argument canvassed here in favour of adopting a more rigorous approach to the application of the impact standards. Irrespective of whether a measure is ultimately cleared by the Commission, it matters whether the measure is classified as aid or not. Irrespective of the leniency with which the derogations from the general prohibition on aid are being applied, defining the scope of the underlying prohibition in Article 107(1) TFEU in a principled manner remains an important doctrinal question addressed by this article that this potential objection does not answer.

VII. OBJECTIONS: UTILITY OF THE ANALYSIS AND RELATIONSHIP WITH OTHER PROVISIONS

Another category of objections does not directly address enforcement outcomes, and instead relate to the utility of the analysis proposed for these criteria and its relationship to other elements of the State aid regime. Three principal arguments against this approach will be considered under this heading.¹⁴¹ The first is that the more detailed analysis required of the Commission to classify a measure of aid will only exacerbate the administrative burden on the Commission’s resources rather than easing it. Second, it is arguable that the approach canvassed above, which bears resemblances to the interpretation of these impact standards as they are applied in Articles 101–102 TFEU, ignores important differences between State aid control and competition rules that require a different approach. Third, it may be argued that this change is superfluous as it can do little more than replicate the analysis under the compatibility assessment and the exemptions in the GBER¹⁴² and the De Minimis Regulation.¹⁴³

The first objection relates to the administrative burden on the Commission. One of the justifications for narrowing the notion of aid in the manner described above is that it will ease the administrative burden faced by the Commission. The broader the notion of aid is, the wider the category of measures that must be notified to and cleared by the Commission before they are implemented. The Commission has limited administrative resources and high volumes of notifications may prevent it from performing its role effectively.¹⁴⁴ This may increase delays which may in turn frustrate the policy objectives of national governments. Further, this may increase the risk of error in decisions which may require further delays as the appeals process is exhausted. While there are time limits set out in secondary legislation for the Commission to reach a decision,¹⁴⁵ these can be circumvented relatively easily by issuing a request for further information from the Member State which extends the period within which a decision must be made.¹⁴⁶ Narrowing the notion of aid will reduce the volume of notifications and may therefore alleviate these difficulties. However, it may be argued that decreased reliance on presumptions and requirements for detailed economic evidence to substantiate the effects of the measure on competition and inter-state trade will place further strain on the Commission’s resources.¹⁴⁷ This may outweigh any alleviation of the administrative burden caused by narrowing the notion of aid.

While there is a need for caution in making additional demands on the Commission’s resources, this concern is overstated. This is because the Commission will generally have to carry out a very similar analysis irrespective of whether it must do so as part of the identification of aid under Article 107(1) TFEU. Indeed, the Commission’s assessment for the compatibility of aid with the internal market will generally include more detailed assessment of the distortion of competition on the internal market and its effect on inter-state trade.¹⁴⁸ This analysis goes beyond the relatively superficial assessment currently undertaken under Article 107(1) TFEU in respect of these criteria and resembles the type of analysis proposed in this article. Even when the Commission relies on the prevailing simplistic approach towards these impact standards to find that a measure is aid, it will still have to conduct a more detailed assessment of the measure’s impact on competition and inter-state trade as part of the compatibility assessment. Where a measure would have been classified as aid under the current approach, the more rigorous interpretation of the impact standards proposed here should not add to the Commission’s workload. It will give additional grounds to an interested party, and indeed the Commission, to argue that a measure does not constitute aid but this does not substantially change the type of analysis that must be conducted. It may be argued that in cases where the Commission finds that there is no aid and decides not to conduct an assessment of the measure’s compatibility as a ground for clearing the aid, there may be an additional workload for the Commission in carrying out a more detailed economic analysis under Article 107(1) TFEU than would be required under the current position. However, this impact is likely to be marginal for two reasons. The first is that any increased workload here will likely be compensated for by the much greater potential to find that the measures are not aid and therefore do not have to be notified at all under the approach canvassed here. The second is that under the current law, the Commission will often consider compatibility as an alternative ground for clearing a measure even if it considers that the measure does not constitute aid.¹⁴⁹ This also speaks to a concern that the reforms canvassed here will increase the dominance of expert economic assessments in State aid law. These types of assessment already play a prominent part in the compatibility assessment. The reform proposed here simply allows this type of analysis to play a more important role as part of the identification of aid, in circumstances here it is relevant to that analysis from the perspective of the objectives of State aid control and in circumstances where there is a clear textual mandate for its relevance.

The second criticism is that State aid control is sufficiently different from the competition rules that similar interpretations of the criteria relating to competitive distortion and inter-state trade should not be applied in both contexts. In particular, it is suggested that unlike Article 101 TFEU, which contains only very narrow exemptions,¹⁵⁰ Article 107 TFEU contains very broad derogations from the general prohibition on aid.¹⁵¹ It can be argued that the broad character of these derogations for aid that is compatible with the internal market requires the notion of aid to be interpreted broadly.¹⁵² Indeed, the presence of very broad derogations moderates some of the negative effects arising from a wide interpretation of the notion of aid. Therefore, the State aid rules should adopt considerably lower thresholds for competitive distortion and effects on inter-state trade and should not require detailed economic analysis on this point in the same way as the competition rules. Commentators who regard the State aid rules as largely serving market integration objectives might also object to how these proposals seek to bring the interpretation of Article 107(1) TFEU in line with the competition rules.¹⁵³

There are two responses that can be made to this criticism. The first is that while the proposals outlined in this article undoubtedly bring the interpretation of these impact standards closer to that which is employed for Articles 101–102 TFEU, they do not require the analysis to be precisely the same.¹⁵⁴ These proposals are not inconsistent with a somewhat lower threshold being used in Article 107(1) TFEU than in Articles 101–102 TFEU. Parts of the analysis will inevitably differ to account for differences between public and private intervention in the internal market. While similar interpretations of similar wording in these provisions of the Treaties might be desirable, this is not the primary goal of this reform. Similarly, these proposals do not seek to assert the primacy of competition rationales in the State aid control regime. This article adopts a pluralist understanding of the objectives of State aid law that emphasizes the role it plays in managing regulatory competition as well as facilitating market integration and maintaining competition between undertakings. More rigorous interpretation of the impact standards, particularly the effects on inter-state trade, can allow State aid law to more effectively identify measures that will cause the most harm to market integration objectives as well.

Second, there is a need for caution in arguing for a broad interpretation of the notion of aid simply because the derogations in Article 107(2)–(3) TFEU are also quite broad. Such an argument cannot proceed on the basis that the wide availability of a derogation is functionally equivalent to and largely compensates for a prohibition on aid that is also cast widely, perhaps excessively so. As argued above, the finding that a measure constitutes aid has significant consequences even if the measure is ultimately cleared or is exempt from notification under secondary legislation. The breadth of Article 107(2)–(3) TFEU alone cannot absolve the Union courts from the obligation to define the limits of the prohibition on aid in a principled manner.

The third criticism that may be made against the proposals outlined in this article is that they are superfluous and that they will have little practical impact. One strand of such an objection might hold that the exemptions from the notification obligation in the GBER and the De Minimis Regulation more effectively serve the objectives pursued by these proposals. They may simply be unnecessary. As argued in Section 5, while there are considerable benefits to the GBER and the De Minimis Regulation, their effects and method of analysis can be clearly distinguished from the application of the impact standards in Article 107(1) TFEU as canvassed above.

Similarly, it might be argued that the proposals canvassed here are superfluous because they would conflate the analysis under Article 107(1) TFEU with the compatibility assessment under Article 107(2)–(3) TFEU. As has been argued above, the more rigorous approach to the impact standards in Article 107(1) TFEU canvassed here would require more detailed economic analysis similar to that which is conducted as part of the compatibility assessment. However, that is not to say that this leads to unnecessary duplication or conflation. While the analysis may be similar, the thresholds involved should be distinct. The threshold for competitive distortion that should lead to a measure being classified as aid will inevitably be lower than that which is used to find the measure to be incompatible with the internal market. Further, it is clear from the Commission’s guidance on the compatibility assessment that the analysis is considerably broader than that which would be undertaken under Article 107(1) TFEU, considering the importance of the objective of the measure, its proportionality, its necessity and other matters that go beyond the competitive distortion itself.

VIII. CONCLUSION

The proposal advanced in this article adapts the State aid rules to the exigencies of their enforcement against a diverse range of government interventions on the internal market. It does this by adopting a more rigorous application of the impact standards in Article 107(1) TFEU. In order to be classified as aid, it has been argued that a measure must distort competition and affect trade between Member States to an appreciable extent and that the Commission must do more to reason its findings that this threshold is reached. This proposal narrows the notion of aid by excluding measures that have inconsequential effects on the dynamics of competition and trade on the internal market. This represents a more principled mechanism for narrowing the notion of aid that accords with the primary objectives of State aid control. In this way, it would be more effective than some of the more mechanistic alternatives to the discrimination standard that have been considered and applied in the case law. This proposal also makes a significant contribution towards the clarity and coherence of the law in this area by more transparently defining the relationship between these conditions for the identification of aid.

This change requires the CJEU to re-evaluate its existing jurisprudence and make targeted but significant changes to its approach in defining aid of all types. It is well established that while the Commission will most often reach a first instance decision on whether aid is present, the Union courts have the exclusive power to give authoritative interpretations of the Treaties and therefore to define the limits of the notion of aid.¹⁵⁵ However, this is not to say that the Commission does not also have an important role in shaping the standards for the identification of the notion of aid. The Commission must do more to systematize its decisional practice and provide guidance on the types of measures that are likely to fall below the relevant thresholds.¹⁵⁶

This also points to an important limitation of this article. While this article has sought to advance proposals for the reform on the law defining the notion of aid, it has done so primarily through the articulation of general frameworks and tests for assessing measures to determine whether they constitute aid. Even though this is an important step towards clarifying the law and placing appropriate limits on the notion of aid, there remains some inevitable ambiguity in the standards articulated in this article. The precise shape of the prohibition on aid that could emerge from these proposals will depend to a large extent on the application of these rules by the institutions of the EU—particularly the Union courts but also the Commission. It is up to these institutions to develop a body of case law and decisional practice that can give practical examples and analogies that will help Member States, beneficiaries, and their competitors to determine whether a given intervention constitutes aid.

Footnotes

Author notes