State Aid and its Compatibility with the Common Market in the European Union

State aid control is an important section of competition policy and an important defend to protect effective competition and open trade in a common market. The twenty requirements on the state aid put into account that when giving state aid, the affiliate states aims to encourage social development and the economic in their regions. They may achieve that by attracting overseas direct investment. Company’s decisions to settle, expand and develop or just retain production in a given region normally produce sizable advantages for the host country.

They may maintain or create work opportunities, huge tax revenues or economic development. State aid funded by national government also can affect trade movements in services and goods in the European nation union as the receiver of the aids may attain a competitive advantage more than its foreign competitors. Because of these, it may decrease its prices or increase its investments.

However, the European country agreement also takes into consideration that, when looking at the state aids controls, national government frequently do not consider  the negative effects on the other nations. The member states may have reason to use state aids tactically to enhance economic and financial interest on their country, which may affect the interior market and fight against common European interest.

If the states aid redirect same aids somewhere else, it may be harm other successful nations, and specifically to harm the poor nations. State aid to domestic companies also extends rents far away from overseas competitors who lose market share and profits and may chose consequently to reduce employment and decrease investments (Ababou, 2013). Lastly, relieve with such cross-border things may activate reactions and actions by the other member states. Such kind of financial support can lead to extreme amount of relieve, at the cost of taxpayers and could critically destroy the internal market.

Article no. 87.1 of the European country agreement hence establishes the standard that state aid, which threatens or distorts competition, is forbidden in so far as it influences trade between the member states (Psaroudakis, 2012). Nevertheless, the state relieve which contribute to clear objective and aim to general European interest without excessively twisting competition bet and undertakings between the trade member states, can be measured compatible with the common market. Article no. 87.3 of the European country accord hence allows exceptions to the universal exclusion of state aid to achieve such goals and objectives in common interest (Psaroudakis, 2013).

As an effect, for events found to fall under the article no. 87.1, the European commission has to drop their compatibility under action no. 87.3.

Within this authorization, the commission examines a variety of aids targeted by the member states at goal of similar interest (common interest) of social and economic development. This research should be based on the function of sound economic principle. In the plan of state aids, the commission hence announced that it would reinforce its financial approach to this compatibility study. The very important element of the advanced economic/financial approach is the balancing check.

The current paper focuses on providing extra details and clarifications on the method applied for the assessment of commission under the test balancing. The balancing method is already recognized in the past commission practice and was obtainable with a minor degree of features in the plan of state aid action. The general logical standard of test balancing is also reproduced, with modification in light of the particular strategy context, in a numerous principles for particular aid categories and has been used in a number of commission’s decisions, with both outside and inside the range of submission of that strategy (Van der Hout, 2013).

For that reason, the current paper does not reinstate any existing principles, though it focuses on the examples in areas covered by such principles to demonstrate certain points.

The cases which are discussed by specific does not meet all conditions therein will be confirmed not compatible and the European commission will not re examine them using current paper.

The method in the document is significant with the respect to help measures, which clearly fall outside the range of any block exemption or guideline. Nevertheless, the paper does not presume the commission’s judgment of the power accredited to specific control in a particular case, specifically the relative power to be credited to the claimed equity benefits of a particular aid, for the same interest and the distortive consequences of the aid on rivalry between member states and undertakings. Additionally, the level of commission’s details assessment will be modified case to the particular situation nearby.

Where the member states alerts an aid to a personal beneficiary and the project, the commission centers its study on the expected effects of the explicit aid. Where a specific member states proposes to introduce an aid project which potentially reimbursement many of the undertakings, a study is intense on the classic analysis which are anticipated to be covered by the project as one as on situation which represents a worst example as they could provide rise to large distortion.

A balancing test work out generally requires the same framework to compare and evaluate various elements being measured. Such basis provided by the study of the effect that state aids of the wellbeing of the stockholders and in specific welfare of the beneficiary, consumers, and its competitors additionally also input suppliers (Psychogiopoulou, 2014). The main results that the state aid can be anticipated to have on the wellbeing of stakeholders is summarized below.

As consideration to the first question, the European commission provides contracts only for some exclusion to the common prevention of the state aid. Thus, it is of essence to first examine whether the aim and objective persuaded by the state aid is certainly one that can be considered as being general interest , and study the acceptance of the objective. Relating ideas, which were developed in the economic assumption, whether a measure adds to the aim of general interest, can be viewed in terms of its donation either to the all efficiency and welfare, or in terms of fairness and justice. All the objectives of the general interest can be described and viewed as a donation to equity, and/ or efficiency.

EU Council Regulation on State Aid

State aid control comprises a fundamental pillar of EC competition rules. State intervention affects the way the market perform by favoring  a certain operation and at the same time giving tough challenges to the competitors in the different or same member state . The major objective of the commission is to make sure that its operations does not affect the smooth running of the internal market. State intervention sometime may be against the economy of the market through free and undistorted completion as indicated in the treaty.

Along with the goal of market integration .EC has introduced political commitment to decrease state aid which has remained at high level for a long time. The further we move toward the entire market integration, the more destructive distortion of competition is. Conversely aid may be issued to help in technological developments which play a great role in the economy. State resource is taken as state aid when their granting considered imputable to the state .

The merits conferred by the state so that it can be counted as an aid should be backed up by the state resources in terms of potential or actual financial liabilities This means that aid must have budgetary result for the government ( Phedon Nicolaides, 2005 )

It is very vital to put in to consideration at an early stage the implications that relate state aid. This allows assistance to be planned and issued quickly and effectively to avert potential problems later. Any programme of assistance which does not follow these may be compelled to close and also giving state aid illegally might result to very serious consequences to the recipient.

A public body aspiring to provide any kind of assistance should first consult the state aid basic guide which instruct on how to offer the any assistance. Providing office equipment at low cost to a nonprofit organization could be termed as a state aid the same way giving a cover for any pension liability for an employee under TUPE rules and if giving assistance happen to be a state aid, then it should be redesigned to make sure it is not but if issuing a state aid is unavoidable, it would then be quicker and easier to  go for the  accepted mechanism instead of seeking separate approvals which could take long  ( Phedon Nicolaides, 2005 )

De minimis Aid Regulations

De minimis aid is helps to explain little amounts of state aid that do not need European Commission approval.  European Commission expects that public funding   which agree with the de minimis directives has a small force on trade and competition, and does not need notices and approval. The whole de minimis aid that can be issued to a single receiver is €200,000 for period of three year fiscal period which can be given for many reasons such as operating aid which is not project related.

This does not mean all funding below  €200,000 margin should be taken as de minimis.  It is sturdily recommended to issue even little amounts as aid under an exact established scheme, or prevent exemption, and to maintain the de minimis cover as a support when no more option remains (Themistoklis K Giannakopoulos, 2011).

Community Guidelines on State Aid For Environmental ProtectionAid can be used as a motivation to companies to attain a level of environmental fortification that is higher than what they would target for in the absence of obligatory standards. The Commission dictates the circumstances under which such aid can be given to activities without of this aid affecting proper performance of the common market.

Managing State aid because environmental fortification is mainly proposed for assurance that aid measures will direct to advanced levels of environmental fortification than would be in the absence of this aid. The helpful effects of aid must prevail over the unhelpful effects as far as distortions of competition are concerned; taking account of the polluter pays principle (philippe sand et al, 2012).

States might also take State aid as a constructive incentive to attain advanced levels of environmental fortification. Aid must motivate its recipient to alter their manners and to build investments which advance environmental fortification levels. Conversely these investments could also offer economic profit to the undertaking. It is vital to confirm that the aid is actually desirable and that the task would not have started the investment if they had not benefited from the aid policy.

Aid must have a motivation effect and be relative. This is the case simply if equal consequence could not be attained with less aid. The aid sum must be restricted to the least amount wanted to achieve the environmental protection. All the economic profit which the investment brings to the task must be subtracted from the total cost of investment. Aid should be in a position to rectify market faults that are destructive to the environment. The most widespread market fault on the ground of environmental protection is connected to harmful externalities. As part of their improvement strategy latest technology should be employed.

Forms of State Aid

As mentioned earlier, state aid is the financial aid to business by a member state, which meets the criteria as provided for in Article 107(1) on the Functioning of the European Union Treaty (Wishlade, 2008). The article states that State aid which could by any means distort competition and consequently affect trade through favouring certain initiatives or the creation of certain products is incompatible with the common market. The key criteria for State aid has four characteristics as discussed below:

First, State aid is granted by the State and in some cases through State resources. In this case, State resources can in form of state funds as administered by a Member State through the local, regional, or central authorities. It comprises of indirect benefits such as tax exceptions that can affect the public budget.

Secondly, State aid favours certain productions of products or undertakings such as entities engaged in economic activities. These can include either private agencies such as charities or universities or non profit making agencies.

Thirdly, it distorts competition by strengthening the position of recipients in comparison with competitors. Fourthly, State aid has implications on trade between the Member States. Most products or services are traded between the Member States and as such aid has the capacity to impact on trade between Member States. The only exception to this case would be single businesses such as hairdressing with local markets (Adelina, 2013).

State aid can take several forms as illustrated below (Wishlade, 2008):

As Băcilă (2012) contends that there are categories of aid that the Treaty declares as compatible. The article 107 (2) provides for three types of aid that are compatible:

v    Aid to certain areas in Germany that are affected by the Germany’s division

v    Aid to repair damage caused by natural calamities or other exceptional occurrences

v    Social aid that is granted to individual consumers

According to Adelina (2013), there are categories of aid that can be considered compatible on the basis of the provision of article 107(3). The article allows for the approving State aid to:

v    Promote economic development in areas of abnormal low living standards or serious unemployment

v    To facilitate development of given economic areas or economic activities where such aid does not significantly affect trading conditions and the competition to an extent that is contrary to common interest

Operating Aid

Operating aid can be granted if all of the three requirements are satisfied:

v    Operating aid is justified on the basis of its contribution to regional development

v    It is also justified in the case that its level is proportional in consideration of the handicaps that it seeks to alleviate

v    It can also be justified when it is limited in time as well as progressively reduced

                        Aid for SMEs

It is within the Member State’s onus to demonstrate the existence and importance of these handicaps. Concerning aid schemes for newly created SMEs, eligible costs include advisory, administration costs, legal, and consultancy directly associated with the creation of the enterprise. Annual aid for the same should not exceed 33 percent of the amounts provisions of the Article 107(3) (a) &(c) (Băcilă, 2012).

Aid focused on Research and Development and on Innovation

The current provision on State aid concerning R&D and innovation that came into force in 2007 allows Member States to fund business for research and innovation projects, research infrastructure and services, and high-tech start-up companies. Allowable state aid for R&D includes fundamental research, industrial research, experimental development, and technical feasibility studies. Member states are expected to provide headline figures annually. They are also required to submit detailed annual reports in regards to any aids approved under the R&D and innovation framework and also disclose the names of the beneficiaries, the aid intensity, the aid amount per beneficiary, and the sectors where the projects are undertaken (Adelina, 2013).


Within the context that provides free competition in the internal market, member states of the European Union in some instances intervene through the offering of public resources in promoting certain economic projects or to protect national industries. However, by favouring some firms over their competition, state aid is often liable to distort competition. Notably, state aid is prohibited under the Functioning of the European Union Treaty. Nevertheless, some exceptions authorize aid that is justifiable through common interest objectives such as general economic interest on the condition that it does not distort competition in a way that contravenes public interest. The EU monitors State aid to maintain a balance between its positive and the negative impacts


Ababou, D. (2011). The General Court Confirms The Commission’s Economic Approach Of             State Aids. European State Aid Law Quarterly, 10(1), 149-152.

Adelina, V. (2013). STATE AID POLICY IN THE EUROPEAN UNION, STUDY CASE:            ROMANIA. Annals Of The University Of Oradea, Economic Science Series, 22(2), 126-  133.

Băcilă, N. (2012). The Implications Of State Aid To R&D On Economic Development In The           European Union. Annals Of The University Of Oradea, Economic Science Series, 21(1),           96-101.

Giannakopoulos, T. K. (2011). Safeguarding companies’ rights in competition and anti-          dumping/anti-subsidies proceedings. Alphen aan den Rijn: Wolters Kluwer Law &      Business.

Nicolaides, P., Kekelekis, M., & Buyskes, P. (2005). State aid policy in the European           Community: A guide for practitioners. The Hague: Kluwer Law International.

Psaroudakis, G. (2012). State Aids, Central Banks and the Financial Crisis. European Company        & Financial Law Review, 9(2), 194-220. doi:10.1515/ecfr-2012-0194

Psychogiopoulou, E. (2013). State Aids to the Publishing Industry and Cultural Policies in       Europe. European State Aid Law Quarterly, 12(1), 69-82.

Sands, P., Peel, J., Fabra, A. A., & Mackenzie, R. (2012). Principles of international             environmental law. Cambridge: Cambridge University Press.

Van der Hout, R. (2013). Export Aid May Also Distort the Internal Market – State Aid Control         Internationalised?. European State Aid Law Quarterly, 12(4), 710-717.

Wishlade, F. G. (2008). Competition and Cohesion – Coherence or Conflict? European Union           Regional State Aid Reform Post-2006. Regional Studies, 42(5), 753-765.            doi:10.1080/00343400701291575