Selectivity, distortion of competition and effect on trade: can the Article 871 EC screen be improved

1. Selectivity, distortion of competition andeffect on trade: can the Article 87(1) ECscreen be improved? Penelope Papandropoulos GCLC conference, Brussels, 21-22 September 2006

2. 2 Overview of presentation The screening role of Article 87(1) EC Link between selectivity and economic advantage Is a Selective Advantage a sufficient condition for distortion of competition? Is a Selective Advantage a sufficient condition for effect on trade? Conclusions

3. 3 The screening role of Article 87(1) EC (1/2) Article 87(1) EC prohibits any State measure that �� distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods (�) insofar as it affects trade between Member States�. According to case-law, a measure that satisfies A87(1) is deemed a �State aid� and should be prohibited (unless exemption under A87(3) applies) State measures deemed as �non-aid� are authorized

4. 4 The screening role of Article 87(1) EC (2/2) A measure is a �State aid� if 4 (or 5?) conditions are met 1)Transfer of state resources (see earlier presentation) 2) Selective in providing an economic advantage ( �favouring certain�) 3) Distortion of competition 4) Effect on trade Philip Morris: Measures that are selective in providing an economic advantage will distort competition and affect trade (only a few exceptions: Levant, Dorsten, Brighton Pier) In practice, the focus has been on determining whether a selective advantage has been granted through state resources (limited role for distortion and trade)

5. 5 The case-law: Which cases are caught? Selectivity has been defined mainly with respect to eligibility criteria (are all undertakings with a MS eligible for the aid?) The following measures are selective: State measure affecting one firm State measure affecting a region (though not always, decentralisation) State measure affecting one or several sector (even whole �manufacturing� sector) The following are not selective: General tax measures (e.g. labour charges, corporate taxes) Selective measures that are �justified by the nature or general scheme of the system of which it is part� (e.g. subsidies for environmental objectives) Side question: What is the link between selectivity and economic advantage? Both selectivity and advantage should be jointly covered

6. 6 Can the screening role of A87(1) be improved and how? Main objective of the work in WG6: Is the current interpretation of A87(1) an effective screen? Are potentially harmful measures caught? Are unharmful measure left out? Should the Commission be concerned with German swimming pool, Austrian dentists or Dutch zoos? Which cases can be �safely� left outside of the Commission�s scrutiny?

7. 7 A economist�s view on the concept of selectivity First comment: Favour the term �selective advantage� (SAAP) (Caveat : this only works well if we worry about rivals � see later) Selective measures do not necessarily confer an economic advantage (SGEI, Structural disadvantage, MEIP) Second comment: Favour an approach looking at �selective effects� Non-selective measures can have differential effects on undertakings (i.e. �selective effect�): [a] because firms are different, [c] because foreign competitors do not have access Selective measures do not necessarily have �selective effect� if all competing firms benefit �Selective effect� approach would require identifying competitors Looking at �selective effects� would catch �general measures� � do we really want that? Not really, as general tax harmonisation issues are dealt with outside State Aid control

8. 8 A five-step approach proposal