3Economic support measures
29.Aside from its tragic consequences for individuals infected and their loved ones, the outbreak of the virus has also caused a severe economic crisis that is likely to tip the world economy into a recession in 2020. Restrictions on travel and large gathering have had dramatic consequences for the profitability of entire sectors, notably aviation, tourism and retail, and by extension for the livelihood of millions of workers employed in those industries. Although banks also face particular challenges, no specific EU proposals to change or relax prudential rules for the banking sector has been put forward to date to help them weather an increase in loan defaults.34
30.In recognition of these severe economic pressures, individual countries have announced a range of domestic policy measures seeking to limit the long-term economic damage. For example, on 17 March 2020, the Chancellor of the Exchequer announced that the UK Government would provide “unprecedented support” to British businesses, including a scheme to subsidise 80 per cent of the wages of all businesses’ employees who would otherwise be at risk of redundancy (the “Coronavirus Job Retention Scheme”), and a year-long business rates “holiday” for the retail, leisure and hospitality sectors.35 Further measures appear likely.
31.As set out in more detail further below, the European Commission has proposed a number of steps in recent weeks in a bid to support such efforts undertaken at Member State (and UK) level. These are mostly general in nature, for example by waiving normal restrictions on use of subsidies, loans or tax breaks to help struggling businesses (“State aid”), or by relaxing the EU’s rules on public debt and deficit under the Stability & Growth Pact. The European Central Bank has also launched a massive bond-buying programme, and use of the European Stability Mechanism, established to prevent another Eurozone sovereign debt crisis, is under consideration to boost EU countries’ spending power.
32.In addition, the Commission has proposed a specific amendment to EU law to relieve the struggling aviation industry from an obligation to operate empty flights. The EU is also preparing to use its own budget to provide direct financial support to affected countries and businesses. This is discussed further in chapter 4.
33.The Committee notes the potential knock-on effects on the stability of the banking sector of the economic damage caused by COVID-19 if borrowers begin to default on their loans on a large scale. We note that at present neither the Government nor the EU appears to consider legal changes to regulation or supervision of the banking sector necessary at EU level. We would welcome the Government’s confirmation of this assessment.
Relaxation of EU State aid rules
34.One of the European Commission’s core functions is to monitor the application of EU competition and State aid laws in the Member States. Generally speaking, EU rules prohibit governments—be they national, regional or local—from providing financial support to individual businesses or sectors (for example in the form of a selective subsidy, tax break or loan on non-commercial terms) where this distorts or threatens to distort competition and affects trade between Member States, subject to certain exceptions. The European Commission has to approve State aid schemes which do not fall within any of the agreed exemptions, and has extensive powers to block, or demand adjustments to, Government support measures it considers in breach of EU rules.
35.Doubts around the application of these EU rules in the current circumstances could hinder the fiscal stimulus packages being implemented by EU countries and the UK to deal with the economic fall-out of COVID-19. Those are designed, after all, to keep individual businesses hit by the economic repercussions of the pandemic solvent. On 13 March, the European Commission stated that EU State aid rules would not prevent Member States from taking “swift and effective action”.36 It identified several routes of financial support that would be in line with (or outside the scope of) EU law, including emergency liquidity assistance for businesses facing bankruptcy due to the coronavirus to help them restructure,37 and compensation to companies for actual losses suffered because of the pandemic.38
36.The Commission has also noted that the EU Treaties allow the Commission to approve further derogations from European State aid rules if there is a “serious disturbance in the economy of a Member State” under Article 107(3)(b) TFEU.39
37.Having already enabled Italy to make use of this option earlier in the month, on 19 March the Commission published new interpretative guidance on the application of EU State aid rules to any such “exceptional” support granted by EU countries and the UK in response to the pandemic under Article 107(3)(b).40 This so-called “Temporary Framework” sets out guidance for four different types Government support schemes which fall within the scope of EU State aid law,41 but which the Commission considers to be in line with those rules in the current circumstances.42 It does not apply to support provided by Governments that is available to all businesses, such as the UK’s Coronavirus Job Retention Scheme to help firms pay their furloughed employees’ wages.
38.The key category of Government support covered by the new Framework is that of selective State aid measures in the form of grants or tax breaks, i.e. taxpayer-funded support targeted at specific sectors or indeed firms. For these, the Commission has listed five cumulative conditions which, if met, mean that the scheme will be considered compatible with European law. This includes for example a rule of thumb that support for a company should not amount to more than €800,000 (£740,000).43 However, the Commission also notes that Member States can seek rapid approval of different approaches that do not meet these predefined criteria.44 For example, as of 23 March, the Commission is known to be processing an application by the UK Government for the business rates ‘holiday’ for all retail, hospitality and leisure companies (which is a sector-specific tax advantage, and therefore in the scope of EU State aid law and the Temporary Framework). The fact that a particular scheme does not meet the five conditions set out in the Framework does therefore not automatically mean that the EU would block it.45
39.A draft of the Temporary Framework for EU State aid rules during the COVID-19 crisis was circulated to Member States for comment a few days before its formal publication on 19 March, but it is unclear if the UK Government and Competition & Markets Authority were also consulted in advance.
40.In the context of the transition period, we ask the Government to explain whether the Government was sighted of the draft Temporary Framework for exceptional State aid measures when it was circulated by the Commission to the EU’s Member States on 17 March, or in any event before its final publication; set out its position on this new emergency approach to EU competition rules; and clarify whether its views were taken in account when the Commission finalised the formal Framework.
Waiver of fiscal rules under the Stability & Growth Pact
41.The Stability and Growth Pact (SGP) requires all EU Member States to comply with budgetary discipline with respect to both public debt and deficit.46 For Eurozone countries, breaches of the Pact can result in financial sanctions.
42.To provide legal certainty, and avoid damaging rows about whether EU fiscal rules prevented Member States from taking action to stabilise their economies, the European Commission initially announced on 13 March that it would to a large extent ignore COVID-19-related expenditure when assessing public debt and deficit figures this year. On 19 March, the Commission went a step further and proposed triggering the Pact’s “general escape clause”. This would in effect suspend the previous (strict) “fiscal adjustments”—spending cuts and tax increases—required of EU Member States to decrease their public debt and deficit to meet EU limits, giving them more flexibility to spend without formally breaching European rules.47 EU Finance Ministers are expected to endorse this proposal in the coming days.
43.The Committee takes note of the Commission’s triggering of the flexibilities in applying the public debt and deficit adjustments EU countries were required to make under the Stability and Growth Pact following the COVID-19 crisis. It further notes that these EU measures have no implications for the Treasury’s fiscal response, due to the UK’s non-participation in the euro and its opt-out from key elements of the Pact.
Pandemic Emergency Purchase Programme
44.The COVID-19 has also spurred Central Banks across the world into action, leading to interest rate cuts in a bid to keep money flowing in the real economy. Moreover, on 19 March, the European Central Bank announced that it would launch a “Pandemic Emergency Purchase Programme”, a €750 billion (£704 billion) bond-buying scheme that aims to increase demand for Eurozone sovereign debt.48 This will also make it easier for those Governments to finance the necessary fiscal measures to respond to the COVID-19 crisis through borrowing.49
45.The exact operation of the ECB’s bond-buying programme is unclear, but—given its scale—is likely to have to be carried out through the extensive financial markets infrastructure provided by the City of London with its proven indigenous systems, particularly after Brexit. More generally, the economic crisis caused by the COVID-19 pandemic has also once again put a spotlight on the relative fragility of the Bank’s position as a lender of last resort for the Eurozone, given that it has to develop a monetary policy response taking into account the divergent demands of the individual countries of the Eurozone, which are all represented on the ECB Governing Council and whose positions are driven to a large extent by their different national economic contexts.50
46.The impact of this fragmented governance structure is also clear from the further discussions taking place with respect to the coordination of the Eurozone’s overall fiscal response to the pandemic. For example, the 19 Euro area countries are engaged in difficult discussions about the potential use of common debt obligations in the form of “Eurobonds” or the European Stability Mechanism (ESM), a body that provides financial assistance to Eurozone governments facing balance-of-payment difficulties established after the previous sovereign debt crisis, as a way of boosting governments’ spending power through an Enhanced Conditions Credit Line.51 The outcome of those talks is not yet clear, but the Netherlands in particular appear to be opposed to using the ESM for such a purpose because it believes it would be creating a moral hazard for other countries to forego structural economic reforms to improve their fiscal position instead.
Amendment to the Airport Slots Regulation
47.Within the Single Market, EU law governs airport “slots”—the times at which commercial passenger planes can take off and land.52 In the context of the COVID-19 crisis, which has led to a dramatic decrease in demand for air travel, the Regulation has caused problems for the aviation industry because of its “use-it-or-lose-it” rule. This states that airlines must use 80 per cent of their allocated slots in a season if they want to retain them in future years, a requirement which is now incentivising carriers to fly empty planes.53 In early March 2020, UK became one of several countries voicing its concern over this unintended side effect of the legislation.54
48.On 13 March 2020, the European Commission therefore proposed an amendment to the Slots Allocation Regulation to protect the allocation rights of airlines that have not been able to meet the 80 per cent threshold for slots during the current seasonal period.55 In essence, the draft legislation would require EU Member States—and the UK—to consider all slots for the period 1 March 2020 until 30 June 2020 as having been operated by the air carrier to which they were initially allocated, even if they were in practice not used.56 These time-frames could be amended rapidly if the pandemic causes disruption in air travel beyond June this year.57 Airlines have called on the EU to go further and suspend the “use-it-or-lose-it” rule altogether.58 Although the legislation would apply to the UK during the post-exit transition, the Government has no role in the EU legislative process.
49.The Government called on the EU to amend the Airport Slots Regulation in view of the drop in demand for air travel caused by COVID-19 and will therefore, in principle, have welcomed the recent European Commission proposal to that effect. We ask the Government to include in its forthcoming Explanatory Memorandum on the proposal its assessment of whether it goes far enough in terms of the amount of time for which slot allocation rules would be relaxed, or whether a suspension is required and set out how it is engaging with the European Commission and the other EU institutions to ensure its views on the proposal are accounted for in the legislative process.
34 The European Commission’s special State aid framework created in response to the COVID-19 pandemic contains the option for EU countries—and the UK—to introduce “safeguards to maintain bank lending levels”. Eurozone Finance Ministers have also said they will offer guarantees worth €1 trillion collectively to incentivise banks to provide loans they would otherwise consider too risky.
35 HM Treasury, “COVID-19: support for businesses” (accessed 23 March 2020). Within the EU, other countries have also announced policies as varied as suspension of mortgage and rent payments, cuts in VAT and other taxes, and fiscal stimulus packages, including for the self-employed.
36 Commission document COM(2020) 112, p. 6.
37 Article 107(3)(c), as interpreted by the European Commission’s “Rescue and Restructuring Guidelines”, allow EU Member States to grant “urgent and temporary assistance in the form of loan guarantees or loans to all types of companies in difficulty”. This was used, for example, in February 2019 to approve a €400 million support scheme in Ireland to cover “acute liquidity and rescue and restructuring needs of SMEs as a Brexit preparedness measure”.
38 Article 107(2)(b) TFEU permits “aid to make good the damage caused by natural disasters or exceptional occurrences”.
39 This option was last invoked during the financial crisis. See: “Temporary Community framework for State aid measures to support access to finance in the current financial and economic crisis” (22 January 2009).
40 European Commission document C(2020) 1863: “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”.
41 The “Temporary Framework” deals with four different types of State aid usually subject to restrictions under EU law, including direct grants and selective tax advantages, government-backed guarantees for loans taken by companies from banks, subsidised public loans to companies, and safeguards to maintain bank lending levels.
42 The Commission’s temporary relaxed interpretation of EU State aid rules will apply, at first instance, only to Government support provided before the end of 2020.
43 The other four interpretative criteria established by the Commission for selective grants and tax breaks to companies are that the scheme must have an “estimated budget”; it cannot be provided to firms already at risk of collapse before 2020; the support is only granted up until 31 December 2020; and special rules apply for the agricultural sector.
44 Paragraph 16 of the Temporary Framework states: “The Commission sets out in this Communication additional temporary State aid measures that it considers compatible under Article 107 (3)(b) TFEU, which can be approved very rapidly upon notification by the Member State concerned. Moreover, notification of alternative approaches—both aid schemes and individual measures – remains possible”.
45 The European Commission has in recent days already approved a number of schemes that went beyond the “a priori” conditions of the Temporary Framework, including an Italian scheme to support the production of medical equipment, a Portuguese scheme for small businesses and a Danish plan to compensate the organisers of large-scale events cancelled because of the pandemic.
46 Unless the debt-to-GDP ratio is “sufficiently diminishing and approaching the reference value at an acceptable rate”.
47 Monitoring of countries’ compliance with the Pact is done by their peers in the EU’s Council of Finance Ministers, on the basis of information provided by the European Commission.
48 European Central Bank, “ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP)” (18 March 2020)
49 As noted elsewhere in this Report, any fiscal measures to boost the economy are primarily a Member State, rather than EU, responsibility.
50 See for example Barnabas Reynolds, David Blake and Robert Lyddon for Politeia, “Managing Euro risk: saving investors from systemic risk” (27 February 2020) and Barnabas Reynolds for Politeia, “A template for enhanced equivalence” (July 2017).
51 See for more information the ESM website: www.esm.europa.eu.
52 These rules are intended to ensure that airlines have access to the busiest EU airports on the basis of (competitive) neutrality, transparency and non-discrimination. Slots are allocated by independent coordinators—e.g. Airport Coordination Limited in the UK—and are governed by Regulation (EEC) No 95/93 (the Slots Allocation Regulation).
53 Slots are ‘grandfathered’ to incumbent airlines from year-to-year subject to the use-it-or-loose-it obligations. As a consequence, if an airlines operates 80% or more of their allocated slots, they have, in effect, an indefinite right to their retention. If they do not use 80 per cent of their allocation, they risk losing the slots.
54 Letters from the Secretary of State for Transport (the Rt Hon Grant Shapps MP) to Adina-Iona Valean, European Commissioner for Transport, dated 9 and 12 March 2020.
55 European Commission document COM(2020) 111: Proposal for a Regulation amending Regulation (EEC) No 95/93 on common rules for the allocation of slots at Community airports.
56 Similar changes to slot allocation rules were made by the EU in the immediate aftermath of the 9/11 terrorists attacks, the outbreak of SARS and the onset of the war in Iraq, and the financial crisis in 2009.
57 Such changes would be made by means of EU Delegated Acts under an ‘urgency procedure’, allowing them to enter into force “without delay” rather than being subject to a pre-emptive veto by either the Council or the European Parliament.
58 This is as slot usage is based on an average of slots flown throughout a season; an assumed usage of 100% for the period as proposed by the Commission would still require a significant number of flights to be undertaken towards the tail-end of the summer season for slots to be retained as of right in 2021. See also IATA, ‘IATA Welcomes EU Suspension of Slot Use Rules’ (14 March 2020)
Published: 1 April 2020