European Union's State Development - Case Study Example

Working Paper for the Croatian Ministry of Foreign Affairs Aims and Objectives The aim of this document is to present a brief overview of the current developments in the European Union and its member states.Where as some discussion is presented of the recent developments on State Aid and Open Skies Agreements,the rest of this document will discuss how significantly the EU regime of state aid affect the prospect of Croatian membership in 2009. Introduction As it is known already that the first round of Eastern enlargement took place in the 2003 with the likes of Central and Eastern Europe as well as Cyprus and Malta joining the EU.This also included Romania and Bulgaria.Most of these countries had to go through several Interim Agreements to allow for the application of the provisions of the Stabilization and Association Agreement (SAA) that are under the competence of the Community.These are aimed at the gradual integration towards the EU in the period before ratification process is finalized. (Boromisa 2004).A thorough knowledge of the impacts of the monitoring and evaluation of the candidate countries is indispensable for a the success of the upcoming talks in 2009 for Croatia.This is because the progress of the candidate countries is monitored and evaluated regularly once a year by the European Commission and its main findings are published in Regular Reports.Even after the candidates are have signed the Accession treaty they are still monitored.This evident from the recent "Monitoring Report of the European Commission on the State of Preparedness for EU Membership of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia" (European Commission, 2004c).When Croatia was given the candidate status it was stated by the European Council at Brussels stated that "The European Councilconfirms that the negotiations will be based on Croatia's own merits and that the pace of accession will depend solely on Croatia's progress in meeting the requirements for membership". (European Commission, 2004c).As it can be seen that Croatian candidature was already dependent upon the evaluation of its functioning of the ideals of liberty, democracy and human rights (parliament, executive, judiciary). A stable political and economic system is thus the key to Croatia's success in achieving the timely membership of the EU.For Croatia then the ultimate integration into the EU will means inclusion into the internal market, i.e. free movement of goods, persons, services and capital. (Boromisa, A. and Miki, M., 2003).Also there will be an impact upon the trade patterns followed by the removal of trade barriers (e.g. tariffs, quotas, voluntary export restrictions) and harmonization of policies (e.g. agriculture, competition, trade and industrial).Finally there will also be a multilateralization of individual free trade agreements which will require substantial adjustments to the local investment policy and regulation. It also has to be taken into account that there is a risk of delays in the ratification procedure rises with the number of the EU member.states vying for EU membership increasing. (Boromisa, A. and Miki, M., 2003). Also Croatia might have to deal with some politically tough decisions which may form the basis for the requirements for the EU like decreased public expenditure. (Frederik Sorensen 2001 ) .Current issues faced by the EU include the controversy relating to open skies agreements, and state investor disputes. The issue of Open Skies recently created many headlines and in the context of Croatian membership it can be seen that the matter is no longer economical or legal. The issue is purely political. (Frederik Sorensen 2001 ). This became a tug of war that took place between EU and USA authorities over the recent Open Skies Agreement. The Agreement aims to liberalise transatlantic airspace yet European transport Ministers were reluctant to agree to it at first as they felt it gave the US an unfair advantage over European interests and its major airline and cargo.This was expressed in a statement by the EU commission which remarked that many Member States felt "that EU airlines should have more opportunities to access the American domestic market". (Frederik Sorensen 2001 ). Many critics lashed out over the delay in this agreement as they believed that a large opportunity was being missed with regard to open access to markets for the benefit of consumers, carriers, workers and airports on both sides of the Atlantic. If negotiated earlier this agreement would agreement would have established 'open skies' between the US and 25 European nations. The advantages of this would have been inevitable in the sense of further competition and offering travellers and shippers more transatlantic choices at a lower cost. In the context of Croatia it is worth pursuing a "wait and see" policy in order to be better able to assess the future of the local tourism industry if these talks are successful. Croatia will benefit from such an agreement as it is already being anticipated that the rights of passage in the Open Skies will cause an extension of the tax advantages enjoyed by companies having their seat in the Member State to permanent establishments. (Frederik Sorensen 2001 ) CASE STUDY- The Nordic Problem and the state aid experience of France and the UK The problem of State Aid: How competition law will affect Croatian membership In the recent years the control of State Aid has become essential for the EU especially in terms of the new member states as the single market cannot function properly if its member states were giving subsidies to their industries to give them an unfair edge over the rest of the Member States. The Single market was instrumental in pulling down tariff walls and other trade barriers. However this does not mean that State Aid cannot be legitimate and the EU policy and law does allow for it for example in support of regional development or new investments. This case study discusses the rather unusual say of the EU Commission in allowing Member States' to use or grant State Aid which can potentially be cleverly disguised as cash grants, fiscal exemptions or fake loans. What follows is a general discussion of State Aid in the European Union followed by the Judicial and Academic attitudes towards it in the United Kingdom and how these will affect Croatian membership prospects and subsequent compatibility of the . Although in the past State Aid was considered a "poor relative" of European competition law and viewed as a rather politically motivated/policy based phenomena. Things have changed in the past two decades however and the EU version of State Aid control has assumed the significance of its American counterpart pertaining to antitrust enforcement and merger control. Every year the EU commission reviews thousands of state aid cases each year, as lengthy investigations are undertaken to and many companies have found themselves going bankrupt following large illegal State Aid repayments. Social contributions and tax benefits and subsidies have been recognised as State Aid alike and likely to distort market competition. The EU's basic aim is to achieve a perfect competition like situation with liberalisation and State Aid control.The EU state aid control framework has not spared large financial institutions and multinationals (take the example of high profile disputes like Alstom, France Tlcom, British Energy or WestLB) and this has put these corporate "big fish" much favoured by State Aid previously at their guard from loans and large capital injections, shady compensation for public services, lenient tax measures, and feigned Research and Development measures. The nature of the Nordic Economy The Nordic group of countries popularly refers to countries which due to their geographical location , lingual uniformity and similar economic regimes have come to be classified as "Nordic" or Scandinavian countries which rely relies heavily on income distribution and a high level of Government interference and can be broadly classified as a "Social democratic state" or "welfare capitalism". (Emerson, M., 2002)The reason Croatia is subsequently going to have a problem with its ties with the Nordic political culture is due to their strong social democratic parties and a centralised approach to political bargaining. (Emerson, M., 2002.)The EU competition policy is unlike to be able to put up with the concept of the "Nordic Welfare State" which protects local businesses etc.The economy is heavily egalitarian based and not supportive of the capitalist liberalism so characteristic of the majority of the EU countries. This has led to a large amount of " Euroscepticism" amongst the Nordic countries . (Emerson, M., 2002.)The problem then is that Croatia will have trouble maintaining its strong business ties with the EU membership on the line.Croatia also has a lot to learn from the Nordic experience of the European integration which will pose a threat to its collective outlook.Indeed the Nordic model will not sit comfortably with the EU policy on Competition law as the state aid and welfare is believed to have detrimental effects on the economy of a country and its trading partners and rivals. (Grimm, S., 2004). It can potentially distort competition and cause wastage of the society's resources by e.g. supporting an outdated industrial structure and delaying a necessary restructuring process in firms. (Emerson, M., 2002. ) Background of the State Aid politics The European Unions efforts to control any measures by its member states to curb competition have made their presence felt for the member states mainly because of the European Unions strict control over competition policy which gives it the power to rule on mergers, takeovers, cartels and the use of state aid. In the recent years the European Union has been able to develop competition regulation into a key area of EU leadership by imposing its rules/policies pertaining to open market competition on member states. Most of these measures have often proved controversial1 as threatening the social market model of its members with its open market policies competition policy dates back to 1957 in the Treaty of Rome wide ranging powers were given to EU authorities to oversee and prevent anti-competitive activities in the firms of its member states.This is particularly true for the Nordic aspirants for the EU candidacy who will have to make quite a few changes to their system. The decades of the nineties saw an increase in the control and activism of the EU in pursuing breaches of competition law, and this contributed to a significant amount of case law as well. Until 2004 these rules were accused of being hot potch and allowing too much interference by the EU authorities in what it deems to be breaches of its Competition regulations.The Treaty of Rome empowers the EU commission2 to investigate the allegations of price fixing, abuse of market position by dominant firms, cartel agreements. Competition policy is run by a part of the EU Commission called the Directorate-General for Competition.3 Along with the European Court of Justice (ECJ) the EU commission will Look into potential breaches of competition law Prosecute companies that fail to comply with it. This will be a mixture of active investigation, (inclusive of the EU authorities going to extent of raiding suspicious businesses) The main sanction includes monetary fines for non compliance Recent State Aid figures Table 1: Total state aid by EU member state, 2004 million Euro per capita EU25 = 100 Germany 17,236 155 France 8,915 108 Italy 7,037 90 UK 5,443 68 Spain 3,975 73 Poland 2,873 55 Sweden 2,746 228 Finland 2,293 326 Netherlands 1,814 84 Portugal 1,475 106 Austria 1,427 132 Denmark 1,375 188 Hungary 1,015 74 Belgium 972 70 Ireland 951 180 Greece 473 32 Czech Republic 352 26 Slovenia 250 92 Slovakia 212 29 Cyprus 184 194 Malta 134 248 Lithuania 122 26 Luxembourg 79 146 Latvia 44 14 Estonia 35 18 EU25 61,427 100 This Table shows total expenditure on state aid by member states in 2004 alone. (Source: European Commission, published in the Commission's State Aid Scoreboard The legal challenges ahead for Croatia under EU competition law Of much concern and relevant to the context to Croatia is the power of the EU commission to stop governments of the member states from backing up uncompetitive companies with state aid. State Aid has always had a poor relation in terms of competition law and has gained a lot of significance in EU competition policy over the last few years. The EU competition policy encourages a low level of State Interference and generally disfavours the concept of State Aid .It has been noted that the UK has one of the lowest levels of State Aid yet other member states like France try to defend their right to back of their failing champion industries. Whereas Arts 81 and 82 EC (ex 85 and 86) prohibit undertakings from distorting competition by entering into anti-competitive agreements or abusing a dominant position, Arts 87 and 88 EC (ex 92 and 93) prohibit states from distorting competition by aiding undertakings, unless that aid has been notified to and approved by the European Commission.4 State assistance has been defined as some kind of aid that confers an advantage and confers certain undertakings which have been defined to mean as applying to any entity engaged in an economic activity (whatever its legal status or whether it is making profit).The test will always be whether the organisation has commercial competitors competing against it and whether it is affecting trade between Member States and Distorts or threatens to distort competition. 5 When such a situation occurs Article 87 of the EC Treaty will prohibit any aid granted by a member state or through state resources which may ultimately lead to such distortion of competition. 6 Examples of such aid include state grants interest relief tax relief state guarantee or holding; Provision by the state of goods and services on preferential terms. State Aid itself can be broadly categorized into Sector Aid (which is aimed at supporting recession struck industrial sectors by aiding its reform and investing in it) Regional Aid (aimed at aiding reform of economically underdeveloped regions) Horizontal Aid(involves the heavy of subsidies and Research and Development support to Private firms). Before getting EU membership despite its already heavy liberal economy Croatia will have to rethink its welfare policy .As mentioned above for Croatia if all these kinds of Aid are granted in conformity with all the conditions set out in these regulations then they will not be penalized by the EU commission. States have a choice of notifying any such aid to the Commission which they doubt matches with the legal requirements under EU law. Unless a member state takes this pre-emptory step it runs the risk of the Commission initiating an investigation on the instigation of a complaint from a third party or another member state. The EU Commission reserves the right to find such Aid incompatible with its policy and can legally force the state to take its Aid back inclusive of interest.7. State Aid :A comparison with UK and France. The EC has showed an increased activism in the area of the application of EC state aid rules to the UK communications and media sectors in the past two decades. Judicial opinion has differed variably into what kinds of State Aid are acceptable to these public concerns. Although the EU Member States have traditionally been reluctant to accept the application of state aid rules to their public enterprises relating to telecommunications and broadcasting ,the last few years have seen an increase in the commercial operators filing an increasing number of complaints to the Commission for distortion in competition. Recent case law has indicated that the Commission has recognized annual payments from state resources as well as exemptions from corporation taxes to be State Aid.In the UK it is said that there have been fewer judicial reviews of State Aid issues based on government decisions than based on decisions by UK competition authorities.This has been attributed to frequent notification to the EU Commission of State Aid Grants,which subject to approval by the European Commission,is barred from challenge in a UK court and can only be challenged at the ECJ level.8It should also be noted that this prohibition does not apply to state aid between EEA members.9 There has been a considerable amount of case law regarding grant of non-notified and unapproved and approved aid.10 How the UK has dealt with the State Aid problem recently One of the many grounds in the UK 11 for challenging the alleged grant of state aid is likely to be based on error of law,made in the interpretation of Art.87(1) EC and the Art.88(3) EC, then it is unlawful.12Showing the illegality of the aid is a six fold test under case law 13,where the existence of aid/benefit/ advantage has to be shown14,which should be granted out of state resources15,which will discriminate certain firms over others and give them unfair advantages16,which will which threaten to distort competition17,affecting trade between United Kingdom and at least one other EEA Member State18,a measure not notified to the Commission19. The idea of Aid in EU law stretches beyond the concept of a simple subsidy (like tax advantages)20Once Judicial review is effective in challenging state aid to a competitor the court can by way of remedy the court can grant the appropriate order requiring the aid to be repaid.Infact sometimes restitution may not be an appropriate remedy as ruled by the ECJ in the case of Banks v Coal Authority,21 where the Court of Justice ruled that the proper remedy was an order for repayment of the aid while following the case of R. v Secretary of State for Transport Ex p. Factortame (No.4)22. Conclusion and recommendations for Croatia Croatia is well advised to pay attention to the recent judicial trends in UK and France and the Political ties with the Nordic countries as this will all count towards it membership prospects in the year 2009.Although efforts are underway in the EU to ensure that funding from national budgets can and should co-exist with the EU Structural Funds. The new EU State Aid rules for 2014 are not yet close but there doesn't seem to be changing towards a more flexible stance for the Nordic cultures. EU enlargement has increased the workload on the DG Competition by almost double of what it used to be. The ongoing recessive trends of the over all EU economy demand an increased role of the Governments to employment policies and rescue actions particularly for the new member countries like Croatia and the Nordic Group. References 1. Baldwin, R. E., Francois, J. F. and Portes, R., 1997. "The costs and benefits of eastern enlargement: the impact on the EU and central Europe". Economic Policy, (24), 125-177. 2. Bayar, A., 1998. European Enlargement to the East and its Implications for the Mena Region. Paper prepared for the First GTAP Annual Conference, June 8-10, 1998, Purdue University, West Lafayette, Indiana, U.S.A. 3. Boromisa, A. and Miki, M., 2003. "The European Union as determinant of Croatian trade policy" in K. Ott, ed. Croatian accession to the European Union: economic and legal challenges. Zagreb: Institute of public finance : Friedrich Ebert Stiftung, 139-157. 4. COREPER, 2004. Provisional consolidated version of the draft Treaty establishing a Constitution for Europe. Brussels, 25 June 2004, CIG 86/04 5. Emerson, M., 2002. "The wider Europe as the European Union's friendly monroe doctrine". CEPS policy brief, No. 27, October. 6. Emerson, M., 2003. "The shaping of a policy framework for the Wider Europe". CEPS policy brief, No. 39, September 2003. 57 7. Eurostat, 2004. Statistics in Focus, No 53. Brussels: European Communities. 8. European Commission, 2004. Croatia: Opinion on the application of Croatia for membership of the European Union. COM (2004) 257 final, 20. 4. 2004. 9. European Commission, 2004. Council Decision on the principles, priorities and conditions contained in the European Partnership with Croatia. COM (2004) 274 final, 20. 4. 2004. 10. European Commission, 2004. Comprehensive monitoring report of the European Commission on the state of preparedness for EU membership of the Czech Republic, Estonia, Cyprus, Latvia,Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia. 11. Grimm, S., 2004. "European Development cooperation to 2010, What scenario for the future" [online]. EDC Briefing Papers, January 2004. Available from: [www.eadi.org/edc2010]. 12. Gros, D., Crum, B. and Turmann, A., 2004. "Enlargement - A Process rather than a Point in Time". CEPS Policy Brief, No 51(April). 13. Lejour, A., de Mooij, R. and Nahuis, R., 2001. "EU Enlargement:economic implications for countries and industries". CPB document, No 11. Hague: Centraal Planbureau. 14. OECD (1997), The Future of International Air Transport Policy: Responding to Global Change, Paris: Organization for Economic Co-operation and Development. 15. OECD (1999), Regulatory Reform in International Air Cargo, DST/DOT(1999)1, Paris: Organization for Economic Co-operation and Development. 16. Frederik Sorensen (2001), "Market Access Liberalisation of Air Transport", Paper presented at an ICAO Air Transport Committee Dialogue on Trade in Aviation Services, Montreal: International Civil Aviation Organization, (12 June). 17. Williams, Frances (2000), "WTO seeks to spread its wings over air services", in Financial Times, (29 September). 18. World Trade Organization (2000), Communication from New Zealand: Developments in the Air Transport Services Sector, S/C/W/165, Geneva: WTO, (15 September). 19. The DAC Glossary of Development Terms, http://www.oecd.org/glossary. 20. .See COM (2004) 313 final "Proposal for a Regulation on Access to Community External Assistance", enacted by the Council in December 2005, Regulation 2110/2005, [2005] O.J. L344. 21. See Commission's Communication "The Untying at Community Level of Member States' Bilateral Development Aid to Non-Member Countries", SEC (91) 2273 final. 22. Weatherill, Cases and Material on EU Law 7th edn. (2006), at p.340; Barnard, The Substantive Law of the EU: the Four Freedoms (2004), at p.87. 23. Craig and De Burca, EU Law: Text, Cases, and Materials 3rd edn. (2003), at p.590. 24. Arrowsmith, The Law of Public and Utilities Procurement 2nd edn. (2005), at Ch.4. 25. Cassese, International Law (2005), at p.53. 26. Dischendorfer and Stempkowski, "The Interplay Between the EC Rules on Public Procurement and State Aid" (2002) 11 P.P.L.R. NA47 at NA50. 27. Commission Communications COM (2002) 639 final, COM (2005) 133; 28. Eu State Aid Rules: How the European Union is setting the framework for member states' own regional policies, Steve Fothergill,Centre for Regional Economic and Social Research,Sheffield Hallam University, UK,Paper prepared for the RSA conference, Leuven, June 2006 29. De la Mare, "EC State Aid Rules: Why Should Public Lawyers Care" [2000] J.R. 100.22., EC Law OF State Aid (Clarendon Press, 1997); 30. 'Sa, European COMMUNITY Law ON State Aid (Sweet & Maxwell, 1998); Hancher, Ottervanger and Slot, EC State Aids, 3rd edn (London: Sweet & Maxwell, 2006); 31. Quigley and Collins, EC State Aid Law AND POLICY (Hart, 2002). See also Vaughan and Robertson, Law OF THE European Union (OUP, 2007, forthcoming), Vol.6. 32. Bacon, "State Aids and General Measures" (1997) 17 Y.E.L. 269. Read More