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A Brief Glimpse Into State Aid

What is State Aid?

At the European level competition policy is much more than the national focus on the competition areas of Anti-Trust, Collusion and Mergers. Indeed, the European Commission (EC), as the institution responsible for the defence of the European Union (EU) Treaties, also focuses on a very important area within competition policy that refers to the possible non-competitive action of states. This area, conveniently referred to as “state aid”, aims at ensuring that the intervention of the governments does not distort competition and trade within the single market of the EU. In line with the above, the EC briefly defines state aid as ‘…an advantage in any form whatsoever conferred on a selective basis to undertakings by international public authorities’ (DG Competition, 2013).

The Legal Provision: Article 107:

The legal provisions adopted under the founding Treaties of the EU narrow, to some extent, the above highlighted definition. Indeed, article 107 of the Treaty on the Functioning of the European Union (TFEU) – transcribed from article 87 of the Treaty establishing the European Community (TEC) and highlighted in annex – not only clarifies which state actions constitute “state aid”, but also empowers the EC with the discretionary power to evaluate the inclusion of state actions into the scope of the definition presented in the first paragraph of article 107. Accordingly, this article sets a two-stage approach. First, through article 107 (1), it is established whether a particularly state action constitutes “state aid”. Second, via article 107 (2) and (3), an assessment of compatibility by the EC is foreseen, defining whether a particular state action breaches the conditions enshrined in the Treaties.

The Two Steps that Define State Aid:

In what concerns the first step to define whether a particular state action constitutes “state aid” in accordance with article 107 (1), attention is focused on four conditions that need to be fulfilled jointly. In this regard, “state aid” implies that: i) there must be a government intervention entailing a transfer of state resources; ii) such intervention must bring an advantage on the recipient; iii) such intervention leads to the distortion of competition; and iv) such intervention is able to affect trade between member states. Note that from an EC perspective, the last two conditions – distortion of competition and effect on trade – are considered fulfilled if the state action is selective in terms of granting an advantage, i.e. if the measure favours certain companies, specific products or specific regions. In this regard, Hans et al (2007) highlight the importance of economic analysis in establishing the extent to which an aid measure is selective, likely to bring a distortive effect on competition and trade, and prone to confer an economic advantage.

The second step to define whether a state measure constitutes “state aid” consists on a compatibility check in accordance with article 107 (2) and (3). The first of these – article 107 (2) – confers automatic exemption from the definition of “state aid” to those state actions that target social imbalances, that are a response to natural disasters and that concern the unification of Germany. The second of these – article 107 (3) – allows considerable discretion to the EC in the process of assessing compatibility. In order to better understand EC’s reasoning under this paragraph, it is worth noticing that this discretionary power is guided by the following principle:

‘The general principle behind the Commissions’ compatibility assessment is to balance the positive impact of the aid measure (pursuing an objective of common interest) against its potential negative effects (distortions of trade and competition).’ (Hans et al 2007:630).

Different Times and the Future of Article 107:

By acknowledging the historical importance of article 107 of the TFEU and by exploring, as above, some of the important notions that define the concept of “state aid”, one can ‘…infer that the Treaty of Rome was founded following a liberal philosophy…’ in which:

‘State intervention, (…) only made sense as a way of correcting failures of the free market or with the purpose of social justice. It was following this philosophy that the creators of the Treaty of Rome included an article that would help control state intervention…’ (F. Universitat Berlin, 2013).

However, the economic rational and ideology that inspired the 50’s and the signatories of the Treaty founding the European Economic Community, may have evolved. Indeed, much has changed in the last 50 years and not only the push for European integration has recently grown weaker, but also new challenges have arisen that may well propel European policymakers to adopt a new stance towards control of state intervention. In this note, an idea of Rodrik could be appropriately highlighted. Indeed, whilst referring to the coexistence between liberalism and mercantilism, this Professor from Harvard refers in a recent article that:

‘We have now reached the end of this happy coexistence. The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned. Medium-term growth prospects for the American and European economies range from moderate to bleak. Unemployment will remain a major headache and preoccupation for policymakers. So mercantilist pressures will likely intensify in the advanced countries.’ (Rodrik, 2013)

Can such a mercantilist pressure within the EU lead towards the repeal of article 107? Or will Europe, through increasing integration, be able to maintain its internal original market rules whilst positioning itself as a trading block in an extremely competitive and globalised world? Time will tell.

Tancredo Duval

Annex 1:

Article 107 (ex Article 87 TEC) accessible at:


DG Competition (2013) State Aid Control – Overview, webpage accessible at:

F. Universitat Berlin (2013) The introduction of Art. 107 TFEU, webpage accessible at:

Hans W. Friederiszick / Lars-Hendrik Röller / Vincent Verouden, (2007) “European State Aid Control: an economic framework”, in Handbook of Antitrust Economics, (Paolo Buccirossi, ed.), MIT Press 2007; accessible at:

Rodrik, D. (2013) The New Mercantilist Challenge, Project Syndicate


Author: studentnovasbe

Master student in Nova Sbe

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