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Over the years, there has been a growing willingness at the level of both the EU and the member states to consider the effectiveness of State aid in pursuing public policy objectives. This has resulted in stricter requirements as regards the incentive effect criterion in the compatibility assessment of aid and in the introduction of an ex post evaluation requirement for large aid schemes. This article reviews the main policy choices in the recent State Aid Modernisation (SAM) in this regard and considers the nexus between the incentive effect of aid and distortions of competition and trade.
Keywords: Compatibility of Aid, Incentive Effect, Distortion of Competition, Effect on Trade
I. Introduction
Subsidies to firms present us with something of a dilemma. On the one hand, subsidies are given by public authorities - so one would hope - for sound public policy reasons. For instance, subsidies are given to promote R&D activity, to foster environmental protection or to improve the fate of certain disadvantaged regions. On the other hand, subsidies that are given to some firms but not to others may distort competition between these firms and may negatively affect, in awider context, trade between countries.
Already in 1956, the authors of the Spaak Report, 1which prepared the ground for the 1957 EEC Treaty, saw the need to control the extent to which the individualmember states of the future European Economic Community would be able to financially support their firms. Precisely in a deeply integrated trade zone as the common market was soon to become, the authors sawState aid control as an integral part of EU competition policy and a natural companion to the rules governing the internal market. The Spaak Report thus proposed a rather strict principle of prohibition of State aid. However, it also foresaw the need to allow for certain grounds for exemption.
Accordingly, in the present constellation, measures which constitute State aid within the meaning ofArticle 107(1) TFEUare subject to EUState aid control and suchState aid is inprinciple prohibited. State aid can, however, be declared "compatible" under Article 107(3) TFEUwhen it is deemed to be in the common interest by the European Commission.
The general principle behind the Commission's compatibility assessment is to balance the positive impact of the aid...