TCS Daily

Service Subsidies

By Jeremy Slater - February 14, 2003 12:00 AM

Decades-long efforts by the European Union to wean industries off of government subsidies face being undermined by the European Court of Justice in the next few months.

Depending on how the judges in the EU's highest court rule in three upcoming decisions, member states could be able to spend as much on subsidies as possible without European Commission intervention.

The cases involve AltMark, a German rail company; GEMO, a French slaughterhouse business, and ENI, an Italian energy firm. These concerns can all be defined as services of general economic interest (SGEIs) under EU law. They therefore have their finances analysed in a way that commercial operations would not.

The Court of Justice's earlier findings questioned the extent to which companies should get financial compensation if they offer public services. In one decision the court ruled that the aid given to the French postal service, La Poste, was justified as it was needed to maintain nationwide coverage. But other findings have questioned the ability of the commission to decide on state-aid cases and this could mean that individual nation states would be given a carte blanche to spend as much on SGEIs as they liked.

"The commission should be able to control financing of SGEIs by member states," said Jacques Derenne, partner at Brussels-based law firm Lovells. "If the Court of Justice [finds] that in certain circumstances this sort of financing does not constitute state aid, because of compensation reasons the commission will lose a priori control. There is a fear that placing the member state as the last judge of an aid is not an acceptable solution."

As one person who is close to the decision-making process points out, the conflicting findings are making it difficult to set clear rules. "We need to decide what is state aid and what is compensation," the source said. "We need to also look at cases like Electricite de France and see what can be done. We certainly don't want to see the lessening of competition rules."

However, the commission is not the only EU institution that is preparing proposals on state support for SGEIs. The Council of Ministers, which represents the interests of the EU's member state governments, is considering its reaction to any proposal in this area via a working party, but is expected not to make any announcement until the commission announces its ideas.

The debate is also producing a similar schism to that created by the probable war against Iraq, as there seems to be a Franco-German way of thinking about the issues and a more free market approach proposed by some other member states.

Commission President Romano Prodi said recently that the EU executive does not want to undermine the single market by producing proposals that will allow subsidies to prop up any services of general economic interest.

"The commission has no intention of calling into question the single market as regards services of general interest," he said. "Achieving the single market and liberalising network industries has been fundamental to our strategy to improve the efficiency and the quality of a number of services of general interest. It has also contributed to European integration."

The commission was expected to produce a green paper on SGEIs next month, but because it has to wait for the court's decisions and an ongoing internal debate on market definitions this has now been put back until at least the summer.

These services are exactly the ones the EU has been trying to liberalise since the introduction of state aid rules and the inception of the internal market.

Observers in Brussels are worried that - even if the court does not undermine the proposed green paper's rulings and is free market in its tenor - forces within the European Parliament and elsewhere that support state subsidies could hijack it.

In a debate held earlier this month at the Convention on the Future of Europe, which intends to produce a constitution for the EU, very few of the speakers spoke of the need for pro-competition measures to be considered when considering how to regulate SGEIs.

"The Germans in particular have pressed for some time the need to have a legislatory framework in this area," said Michael Tscherny, director at Brussels-based EU affairs consultancy G-Plus Europe. "They are worried that the Commission could interfere in the services that are run by [German states]. The Germans have wanted the Commission to back away from subject. The French also have strong views on the universality of services."

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