State Aid in a Pandemic Time – the New Temporary Framework of the European Commission

Manuel MagalhãesPartner, Sérvulo & Associados

One of the main characteristics of the time of COVID-19 is the constant adaptation required from societies, undertakings, persons, governmental institutions, either national or supranational, in order to balance the demands of public health (which is a responsibility of the States) with the need to keep the economy and society running.

During this time, as Sérvulo had the opportunity to state already, the European Commission will be called upon to cooperate with Member States to face problems and defeat COVID-19, in particular its systemic implications for families and economies. For this reason, it is essential for the European Commission to maintain a flexible posture before the need of Member States to adopt internal measures to mitigate the economic (and social) effects of the outbreak. It is important, however, to provide trusty, transparent and, mostly, flexible frames of reference.

This is why the European Commission adopted, on  March 19th, a Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak. On this Temporary Framework, the European Commission presents to Member States the centrepiece of its state aid policy regarding aid designed to remedy a serious disturbance in a Member State’s economy during these trying circumstances.

Firstly, the Temporary Framework broadens the possibility to grant such aid to all Member States, and not just to those in a situation similar to Italy’s as had previously been stated. Given the transversal and systemic uncertainty, with the disruption of the supply chain and brutal downturn in supply and demand, alongisde the negative impact on investment and, even more so, on the liquidity of undertakings, even those that where solvent and prospering, the European Commission aims at establishing a frame of reference in a formal scenery designed for treaties established upon growing open and competitive economies based on total freedom of movement of production factors, on the internal market and on the retreat of the State to a function of systemic guarantee of this autonomous system.

The effort is difficult and ungrateful, but the European Commission chose to set parameters, with relative flexibility, on the instruments that, according to the principle of subsidiarity, Member States are called upon to adopt in order to assure sufficient liquidity on the markets, balance the damages caused in undertakings, more or less solvent, and to preserve the continuity of the economies. Therefore, it is necessary that aid granted under the Temporary Framework can benefit solvent companies that, so far, did not suffer from any treasury or liquidity need, or that cannot prove such by reference to the period before COVID-19.

Under the Temporary Framework, the European Commission supplies guidelines on measures that it will immediately endorse, if adopted by Member States: (i) grants, repayable advances or tax advantages; (ii) guarantees on loans; or (iii) subsidised interest rates for loans. Member States have the possibility of cumulating these forms of aid amongst themselves but doubt remains regarding the possibility of cumulating the aids in the forms described in (ii) and (iii) whenever they are granted through a credit institution or any other financial institution.

Regarding the measures in (i), the European Commission establishes that they can be granted through an aid scheme with an estimated budget. The Temporary Framework establishes a maximum threshold (800.000 euros per undertaking, gross) and a limit date (December 31st of 2020). This maximum threshold is absurd, namely for Mid Cap and large companies. In the same manner, and given the objective, the European Commission excludes from the measures any undertaking in difficulty prior to the end of 2019. Furthermore, some sectors have specific rules (agriculture, fishery and aquaculture, transformation and commercialization of agricultural products).

Regarding the measures in (ii) and (iii), the European Commission has established minimum values for guarantee premiums and interest rates that can be modified by Member States, taking into consideration changes in maturity, pricing and guarantee coverage. The loan contract must be valid for 6 years or less. In any way, the maximum values for the guarantee and for the loan are also established by the European Commission and the loan may relate to investment and working capital needs. Again, undertakings in difficulty prior to the end of 2019 are excluded and the loans or guarantees must be granted by December 31st of 2020.

The Temporary Framework allows Member States to grant aid directly or through credit institutions or other financial institutions. When it chooses the latter, there are legitimate concerns regarding the possibility of those institutions also benefitting from the aid, which is not (for now) the purpose of these measures. In order not to submit this aid to the specific rules applicable to the banking sector (given that the objective is not to preserve or restore the viability, liquidity or solvency of the credit institutions), the Commission imposed an obligation of passing on the benefits for the borrowers, which are the ultimate beneficiaries of the aid.

Additionally, the European Commission lifted the prohibition on Member States supporting marketable risks in an insurance of export credit whenever Member States demonstrate that the market, due to the current situation, is unable to cover those risks.

The times we live in are complex and both national and supranational institutions are under growing pressure in their respective domains of attributions. The European Union, in this critical moment, must be an element of support and facilitate urgent measures that Member States must take. Additionally, it must adopt those that are under its competence, as granted by the Treaties.

However, in no way can Member States be prevented from supplying and guaranteeing undertakings and consumers, in a non-discriminatory and proportional manner, the means necessary to confront the difficulties felt by SMEs, Mid-Caps and even large enterprises, whom are fundamental in ensuring the functioning of the economy, the supply chain, employment and the financing of families and public and private consumption. We must survive the pandemic, but we must also prepare to live after it.

Miguel Gorjão-Henriques | mgh@servulo.com

Francisco Marques de Azevedo | fma@servulo.com