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Coronavirus - The EU and the UK prepare State aid packages in response to COVID-19 crisis – Europe

  • United Kingdom
  • Coronavirus - Country overview
  • International trade
  • State aid

23-03-2020

As the COVID-19 crisis in Europe worsens, governments are striving to reassure businesses and the general public that they will provide much needed support to help societies survive these testing times. The European Commission (“Commission”) and the UK Government have been devising State aid measures to prevent the economy from spiralling down further.

EU State aid measures

On 13 March 2020, the Commission presented its proposals for tackling the socio-economic impact of the coronavirus outbreak.

The Commission stated that it will use all the instruments at its disposal to mitigate the consequences of the pandemic, including:

  • ensuring the necessary supplies to health care systems by preserving the integrity of the Single Market and of production and distribution of value chains (in this regard, the Commission already imposed restrictions on the export of protective equipment outside the EU – please see our briefing here);
  • supporting people so that income and jobs are not affected disproportionally, to avoid permanent effects of the crisis;
  • supporting businesses and ensuring that the liquidity of the financial sector can continue to support the economy; and
  • allowing Member States to act decisively in a coordinated way, using the full flexibility of State aid and Stability and Growth Pact Frameworks.

Brief overview of the EU State aid framework

Article 107 of the Treaty on the Functioning of the European Union (“TFEU”) sets out the framework for State aid in the EU. Under Articles 107(2) and (3), certain measures are, or may be, deemed compatible with EU law. These include:

  • aid to make good the damage caused by natural disasters or exceptional occurrences;
  • aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State (this was the favoured tool for providing support during the 2008/2009 financial crisis);
  • aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment; and
  • aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

EU State aid rules also enable Member States to help companies cope with liquidity shortages and those requiring urgent rescue or restructuring aid. The Commission generally regards this type of aid as being one of the most distortive. Accordingly, there are strict conditions that must be met for this type of aid to be found compatible.

COVID-19 aid measures to be permitted under EU State aid rules

The Commission announced that it considers the COVID-19 pandemic to be “unusual events outside the control of the government”, which will accommodate exceptional spending to contain the outbreak, such as health care expenditures and targeting relief measures for firms and workers.

The Commission will also recommend adjusting the fiscal efforts required from Member States in case of negative growth or large drops in activity.

Moreover, the Commission said it stands ready to propose to the Council that it activate the general escape clause to accommodate a more general fiscal policy support. This clause would – in cooperation with the Council – suspend the fiscal adjustment recommended by the Council in case of a severe economic downturn in the euro area or in the EU as a whole.

State aid designed to alleviate the damage to the economy caused by COVID-19 can be complemented by a variety of additional measures, such as under the de minimis Regulation and the General Block Exemption Regulation which do not require involvement of the Commission.

Other State aid measures would need to be notified to the Commission for assessment, however, given the presumption of compatibility of COVID-19-related aid with Articles 107(2) and (3) TFEU, such measures are unlikely to be challenged. In fact, the Commission already cleared coronavirus-related aid proposed by Denmark, France and Germany.

In addition, on 19 March 2020, the Commission adopted a Temporary Framework based on Article 107(3)(b) TFEU, to enable Member States to use the full flexibility foreseen under State aid rules to support the economy during the outbreak. The Framework will be in place until the end of December 2020 and provides for five types of aid:

  • direct grants, selective tax advantages and advance payments - Member States will be able to set up schemes to grant up to €800,000 to a company to address its urgent liquidity needs;
  • State guarantees for loans taken by companies from banks - Member States will be able to provide State guarantees to ensure banks keep providing loans to the customers who need them;
  • subsidised public loans to companies - Member States will be able to grant loans with favorable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs;
  • safeguards for banks that channel State aid to the real economy - some Member States plan to build on banks' existing lending capacities, and use them as a channel for support to businesses – in particular to small and medium-sized companies. The Framework makes clear that such aid is considered as direct aid to the banks' customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks; and
  • short-term export credit insurance – the Framework introduces additional flexibility on how to demonstrate that certain countries are not marketable risks, thereby enabling short-term export credit insurance to be provided by the State where needed.

Given the limited size of the EU budget, the main response will come from Member States' national budgets. The Temporary Framework will help target support to the economy, while limiting negative consequences to the level playing field in the Single Market.

UK State aid measures

Last week, Chancellor Rishi Sunak set out a stimulus package of temporary, timely and targeted measures to support public services, individuals, and businesses through the period of disruption caused by COVID-19.

The proposed measures to support businesses include an unprecedented £330bn in loans and £20bn in other aid. These measures are comprised of:

  • a statutory sick pay relief package to allow small and medium-sized businesses and employers to reclaim Statutory Sick Pay (SSP) paid for sickness absence due to COVID-19;
  • a 12-month business rates holiday for all rental, hospitality and leisure businesses in England;
  • a one-off small business grant funding of £10,000 for local authorities to support all business in receipt of small business rate relief or rural rate relief;
  • grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000;
  • a new temporary Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank;
  • a new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge coronavirus disruption to their cash flows through loans; and
  • the HMRC Time to Pay Scheme supporting all businesses and self-employed people in financial distress, and with outstanding tax liabilities.

There are different eligibility criteria to access the aid measures, depending on the objective of the relevant scheme.

The Chancellor stated that “any business who needs access to cash to pay their rent, their salaries, suppliers or purchase stock will be able to access a government-backed loan or credit on attractive terms” and that the government is prepared to go further and provide as much capacity as required – “whatever it takes”.

Commentary

It is to be expected that many businesses will struggle during the COVID-19 crisis and the effects on the economy are likely to be profound.

The flexible treatment of coronavirus-related aid measures under the EU State aid framework as announced by the Commission, and the measures offered by the UK Government, are most welcome in these difficult times. The £330bn package offered by the UK Government is 15% of the value of the economy – a powerful response to the drastic social isolation advice which is likely to deliver a blow to businesses and individuals.