A financial helping hand in times of the coronavirus: can the State do that?

March 19, 2020 | Blog

The coronavirus, or COVID-19, is dominating international conversation. On 11 March 2020, the World Health Organization (WHO) officially classified the coronavirus as a pandemic. On 12 March 2020, the RIVM [Dutch National Institute for Public Health and the Environment] announced that 614 people in the Netherlands had tested positively for the virus. New announcements on measures to combat the spread of the virus follow each other in rapid succession. Many of these measures have drastic economic consequences. For example, Italy has ordered the closing of all non-essential shops, while the United States banned all European travellers from entering its territory. Countries like Belgium and Germany announced measures intended to mitigate the profound economic consequences of the coronavirus. In the Netherlands, public demand for aid measures has increased.

In principle, aid measures announced by the governments of EU Member States, which distort or threaten to distort competition and affect trade between Member States, are covered by the European prohibition against state aid. But does this prohibition oppose measures to compensate "corona losses”? Not necessarily. The European Commission has established a dedicated contact point for Member States to provide them with guidance on aid measures related to the coronavirus. The result was that a Danish aid scheme to compensate organisers for the loss suffered from the cancellation of large events was approved by the EC within 24 hours.

In this blog, we will discuss several exceptions to the state aid prohibition that (may) allow Member States to provide aid in the event of “corona losses”.

Exceptional occurrences

Firstly, Article 107(2)(b) of the Treaty on the Functioning of the European Union (“TFEU") provides that aid to make good the damage caused by natural disasters or “exceptional occurrences” to be compatible with the internal market. Case law of the Court of Justice of the EU makes clear that this exception must be interpreted narrowly. Case law requires a direct connection between the damage caused by the exceptional occurrence and the state aid, and the damage suffered by the company concerned must be estimated as accurately as possible.

In 2005, the European Commission held that only material damage caused directly by a natural disaster was eligible for compensation. No state aid was allowed for losses and foregone profits associated with a temporary interruptions in the production process or with the loss of customers or markets. The European Commission has allowed Member States, in exceptional situations, to widen eligibility to compensation. The 11 September 2001 terrorist attacks in the United States, for example, were classified as an exceptional occurrence. A communication informed the Member States that they could provide state aid to airlines that had suffered damage as a result of the American airspace being closed for four days.

The European Commission has classified the coronavirus pandemic as an exceptional occurrence as well. It concluded that “exceptional interventions” of the Member States are justified. According to the European Commission, the Danish scheme compensates economic damage directly associated with the coronavirus outbreak. It also found the measure proportionate as the foreseen compensation does not exceed what is necessary to make good the damage. Given these circumstances, aid to compensate damage related to the coronavirus outbreak can be approved under Article 107(2)(b) TFEU.

Serious disturbance in the economy

Secondly, Article 107(3)(b) TFEU provides that aid to remedy a serious disturbance in the economy of a Member State may be considered to be compatible with the internal market. In its communication to the press, the European Commission noted that this exception applies to the situation Italy finds itself in. The possibility that this may soon apply to other Member States as well cannot be precluded.

Rescue aid

Thirdly, an undertaking in difficulty (meaning an undertaking that will almost certainly be condemned to “going out of business in the short or medium term”) may be eligible for rescue aid on strict conditions. The European Commission has pointed out that its Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty (2014), based on Article 107(3)(c) TFEU, may be relied upon by undertakings in dire straits as a result of the coronavirus.

Crisis rules

Fourthly, it is possible that the European Commission will adopt specific rules. When the financial crisis broke in 2007, an extensive framework for coordinated action to support the financial sector was introduced. In order to secure financial stability and restrict to a minimum the disturbances in the competition, the European Commission published several Communications setting out detailed conditions for state aid for the financial sector. It has been reported that the European Commission is considering specific crisis rules pursuant to which Member States may grant aid to mitigate the economic consequences of the coronavirus (for sectors badly hit).

Compensation for loss resulting from administrative acts

Lastly, applications for compensation of losses resulting from administrative acts (nadeelcompensatie) in connection with the coronavirus are unlikely to be successful. It follows from case law of the EU Court of Justice and from the decisions of the European Commission that, under circumstances, this type of compensation does not classify as state aid. Nadeelcompensatie is the compensation allowed for losses caused by governments or local authorities in the administration of their powers or duties, in so far as this affects a specific party (or parties collectively) and exceeds the societal risk considered normal. One condition for eligibility is a “special” burden. This means that the aggrieved party (or parties) must be particularly affected, where other, similar parties are not or not as much affected.

The nadeelcompensatie doctrine is unlikely to offer affected undertakings a way out of any coronavirus crisis. Although it is conceivable for an undertaking to be affected by a government measure taken in the administration of its powers (when that government orders the undertaking to close its doors temporarily, for example), there is unlikely to be a special burden.

The end of the outbreak and the scope of its repercussions are impossible to predict. We will keep a close eye on all - legal - developments.

If this blogs prompts questions or you wish to know more about the state aid prohibition, then contact Tom Binder or Marilou van der Feltz.

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