State Aid Decisions

German and French Schemes

With the domino spread of sub-prime mortgage happened in US that has been denounced as "the largest financial shock since the Great Depression" by IMF, there is mounting pessimism about the ability of the rest of the world to escape unscathed, especially the second biggest economy body around the world following US, Europe. Barely a week after Europeans rebuffed American pleas to join in their bailout of the banking system, Europe now faces a financial crisis almost as grave as that in the United States, therefore frequently discussing corresponding measures against the unprecedented challenge strongly detrimental to European economy as a whole.

In favor of stabilizing financial system in Europe which needs to resume their capability of lending to real economy directly related to performance of household, business and employment,The European Commission has published guidance Communication on how Member States can best support financial institutions in the current financial crisis whilst respecting EU state aid rules and so avoiding excessive distortions of competition, based in particular on EC Treaty rules allowing for aid to remedy a serious disturbance in the economy at whole national level (Article 87.3.b of the EC Treaty). The Commission can quickly approve the scheme in case that the state aid packages are well-targeted and aimed at stabilizing financial markets as well as necessarily equipped with certain safeguards against possible infringements to competition regulations and laws concerned, the last issue that the paper more analyses with respect to German and French Schemes.

In the German case, the package is intended to remedy a serious disturbance in its economy while avoiding undue distortion of competition in compliance with Article 87.3.b of the EC Treaty based on involvement in non discriminatory access, limitation in time and scope and also necessary safeguards to minimize distortion of competition. First of all, a recapitalization scheme, injecting new capital to banks and insurance companies in exchange for shares upon some extra restrictions like capping Managers’ remuneration and beneficiary’s future activities, was introduced to allow them to strengthen their balance sheets against possible losses. It was implemented on a non discriminatory basis, which means eligibility for benefiting from the scheme is not dependent on nationality of potential beneficiary, thereby ruling out possibility that exotic financial institution could exit relevant market without back of current government in capital and finally keeping competition available. Secondly, Sufficient behavioral rules for beneficiaries that prevent an abuse of state support, like for example expansion and aggressive market strategies on the support of a state guarantee, have to be satisfied before effective because beneficiaries benefiting from the scheme would probably take advantage of support derived from government to fulfill what can not be made under normal circumstance. So it is worth taking consideration of the adequacy of beneficiaries’ behavior. Thirdly, the need for temporary State Aid measures is justified as a result of continuity in companies’ access to finance by unblocking lending procedure and encouragement of investing in future sustainable industry by companies. Hence, government plays an important role in making financial institutions turn to redeem the loan capital after 36 months maximum for essentially the initial sales price not enjoy financial service for free easily against other competitors in the same market like subsidy. In particular the state takes over the assets but not bear their risk. Finally, Germany has also made the commitment to renotify the scheme after six months and to report every six months to the Commission on the implementation of the scheme. This will enable the Commission to determine whether the package should be terminated in accordance with concrete financial situation in restarting normal competition in the market.

Furthermore, following the close cooperation of French authorities and the Commission and a comprehensive set of documents submitted by France, the Commission has given the go-ahead to a capital-injection scheme for financial institutions aimed to stabilize the capital markets, restore confidence in consumers and enable French banks to increase lending to its real economy in accordance with the State Aid rules of the EC Treaty, especially including required safeguards to limit distortion of competition among relevant market. In comparison to those of Germany, we can find some similarities and differences between these bailout procedures to financial sector. Firstly, Unlike specific way of bailout in banking industry of Germany, Société de prise de participation de l'État (SPPE), a state-owned investment company, set by French authorities is expected to fulfill bailout procedure by investing in beneficiary banks in terms of securities, each of which will take the form of hybrid capital instruments and be remunerated at a fixed rate for the first five years and at a variable rate thereafter. Also under the scheme, the intervention of French authorities is ensured to be limited with capping at EUR 21 billion, half of amount initially effective. All above secure the French authorities to play as prudent loaner to banks rather than generous contributor, hence minimizing negative effects on competition as a result of bailout procedure to most extent. However, as both the two packages have to be compatible with EU state aid principles, the French package in particular also alike contains specific conditions of non-discriminatory access to financial resources, limitation of bailout in time and scope and proper safeguards against possible abuse of national support. Of course, there are other requirements related to senior management and functions of financing SMEs as expected.

Through the whole analysis of State Aid decision on German and French packages, we can realize that recapitalization schemes can be approved by the Commission only if they satisfy the following conditions arising from corresponding analysis of motivations:

•Non-discriminatory basis
Eligibility is not based on nationality for avoiding anti-competitive consequence

•An appropriate remuneration
Prevention of crowding-out effect on capital markets in favor of competitive environment.

•Sufficient behavioral rules
Prevention of an abuse of state support from expansion and aggressive market in anti-competition

•Limitation of time
Confirmation of well-targeted at current financial crisis

•Limitation of scope
Confirmation of well-targeted at current financial crisis

Proportion to the objective of stabilizing financial markets.

The European Commission has published Communication to guide Member States how to best support financial institutions in the current financial crisis whilst respecting EU state aid rules and so avoiding excessive distortions of competition. Therefore, the Commission was concerned with operation of remuneration payable to the state for the bailout capital and the establishment of mechanisms to ensure that the state's involvement in capital market is as brief as possible in order to minimize the distortion of competition and facilitate sustainable development of post-crisis.

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