The EU's regime for controlling state aid is a central pillar of the 'acquis'. It complements the Union's antitrust and merger control regimes. Its main aim is to prevent member states from protecting or promoting companies to the detriment of competitors within the EU. The term 'state aid' encompasses all forms of assistance provided by the state (or its organs) to particular businesses or industries.
While the EC Treaty itself does not define state aid, it does stipulate that state aid is incompatible with the internal market. Aid can take the form of state grants, interest relief, tax relief, state guarantees or holdings, as well as the provision by the state of goods and services on preferential terms. State aid is prohibited if it affects trade and thereby distorts competition. The exemptions - which include regional development aid, aid to 'sensitive' sectors and also certain 'horizontal' aid measures - are spelled out in the Treaty. Through a rigorous system of ex ante control, the Commission must clear all forms of state aid.
Before the fall of the Iron Curtain, all Central and Eastern European countries (CEECs) had state economies with industries being heavily subsidised by the state. With the start of the enlargement process, the EU wanted to make sure that the candidate countries' governments would not attract foreign investment by granting all kinds of state aid. The bilateral Europe Agreements with the candidate countries already included provisions to adjust national legislation on state aid to EU norms.
An important issue is the dichotomy between 'existing state aid' and 'new aid'. Annex IV of the Accession Treaty differentiates clearly between those two. Existing aid is admissible but the Commission can suggest appropriate measures for its future amendment.
Another main challenge for the new member states was the establishment of a centralised surveillance authority to supervise state aid systems.
The negotiations on competition policy (including state aid provisions) were closed with Estonia, Latvia, Lithuania and Slovenia in late 2001. These four countries did not request any transitional arrangements. With the other six candidate countries (Cyprus, Czech Republic, Hungary, Malta, Poland and Slovakia) negotiations ended in 2002 with some transitional arrangements, especially as regards fiscal aid schemes to attract foreign investment and measures to restructure the ailing steel industries of these countries (for an overview of all transitional measures, see DG Competition - Janne Känkänen: "Accession negotiations brought to successful conclusion" (in: Competition Policy Newsletter Spring 2003, p. 24-28)).
In the autumn 2004 issue of the State Aid Scorecard, the Commission established that although the EU-10 countries spend more than the EU-15 on state subsidies to businesses as a percentage of their GDP, this is likely to be corrected as the new member states overcome problems specific to their economic prior to accession.
"The new Member States have done a remarkable job in adapting to a market economy and in keeping business subsidies under control. The EU-15 has also in the last few years responded positively to a call for less and better aid. But more must be done by all 25 countries to further reduce the overall levels of aid and to shift the emphasis from supporting individual companies towards increasing Europe’s competitiveness through aid to research and development, environment, cohesion and other horizontal policy objectives,” said Competition Commissioner Mario Monti.
In its latest monitoring report, the Commission said that the new Member States have by and large implemented effective controls over their respective state aid procedures, although improvements were still needed in certain areas. These include the so-called 'fiscal incentives' (such as tax holidays) which aim to attract inward investment, as well as aids to 'sensitive sectors' (eg steel industry).
During the period leading up to their accession on 1 May 2004, the new member states were obliged to notify the Commission of all aid measures still in force, and had to provide assessments from their respective competition authorities on these measures' compatibility with the acquis. The notified and approved measures were to be included in an annex entitled 'existing aid' to the Accession Treaty. Following their accession, the EU's rules on state aid are enforced in the new member states by the Commission.