A More Economic Approach to the Control of State Aid

The European Commission is the sole authority that can determine the compatibility of State aid with the internal market. According to the Commission, “an effective internal market requires the deployment of two instruments: first, regulation to create one integrated market without national borders and, second, competition policy including State aid control to ensure that the functioning of that internal market is not distorted by anticompetitive behaviour of companies or by Member States favouring some actors to the detriment of others.” Moreover, in order for State aid control to achieve its objective of ensuring the functioning of the internal market, it can allow only “aid which is well-designed, targeted at identified market failures and objectives of common interest, and least distortive (‘good aid’)” (European Commission, State Aid Modernisation, COM (2012) 209, 8 May 2012, p. 12.). At first glance, the prevention of distortions and the permission of “good aid” appear to be contradictory policy aims. On reflection, however, they do not have to be so and can even be complementary. This is because markets do not always function perfectly and under certain conditions government intervention is needed to correct market failure. The purpose of this chapter is to examine how the Commission assesses the compatibility of aid, and to argue that the principles on which the compatibility assessment is carried out lead to a more economically rational treatment of aid. In addition, this chapter will argue that the use of a more economic approach does not necessarily mean that the Commission carries out a cost-benefit analysis. Finally, this chapter reviews some of the more quantitative methods that the Commission employs to first determine the existence of aid and then ensure that it is proportional to the objective it seeks to achieve.