Europe’s Need for Growth is Rising – Smart State Aid Regulation is Key

The foreword of Mario Draghi’s report for the European Commission states it in one sentence: “Europe’s need for growth is rising”. ^[1] Commission President-elect Ursula von der Leyen made clear in her political guidelines for 2024 to 2029 that the key concern of the next Commission’s work will be Europe’s prosperity and competitiveness. There is a broad political consensus, not just since the US stipulated its massive Inflation Reduction Act, that the EU must become more competitive to create economic growth and master the pressing challenges of the green transition, an ageing population, technological change, and geopolitical risks. However, the latest figures suggest that the EU is far from desirable economic indicators, with a meagre 0.3 % GDP increase. Germany, its former economic engine, even appears to slide into recession again with a 0.1 % GDP decrease into recession with a. 0.1 % GDP decrease in 2024.

In responding to these challenges of missing growth and competitiveness, the issues of excessive red tape, legal uncertainty, and a huge funding gap must be addressed. The latter becomes even more obvious in times of increasingly tight budgets and the ongoing accumulation of public debt. Thus, the answer to the challenges appears to be simple: we need to mobilise private capital, both through setting it free and enticing it via smarter regulation. Yet, the implementation of this solution, especially when it comes to its details, is not that straightforward and rather intricate, given the diverging interests.

Firstly, to set private capital free, both the Letta and the Draghi report advocate for a further integration of capital markets and finalise the Capital Markets Union (CMU) in the EU as a solution for financing the green and digital transition and supporting small and medium-sized enterprises (SMEs), particularly innovative start-ups an scale-ups. Certainly, not just companies, but also savers, especially in Germany with high savings levels and an uncertain pension outlook, would thus profit from having more and better opportunities to build up wealth and invest in private pension plans.

However, one topic impacting Europe’s funding gap is represented by state aid rules, a topic which very rarely hits the focus of the public eye, as it is a complex and complicated rulebook that is mostly left to legal experts and may not attract masses at the election booth. As the Draghi report correctly finds, “access to EU funding is complex and bureaucratic for private actors, and there is limited room to accommodate new policy priorities or respond to unforeseen developments.”^[2] This is very unfortunate, as, secondly, state aid compliance may require the leverage of private capital and entails a central market-based approach.^[3] Importantly, the EU’s state aid framework is a significant economic factor^[4] as well as an essential tool that keeps the single market open, integrated, and, crucially, also competitive.^[5]

This is due to the fact that this framework relies on the concept of an ‘incentive effect’, i.e. measures of state aid need to have a visible effect of incentivising private money where it would have not been invested otherwise, and on securing a level playing field through preventing market distortions in the EU at the same time. The Draghi report acknowledges the significance of the state aid framework and calls for a revision of its rules, especially those on energy and on research and development and innovation.^[6] And there have been steps in the right direction of improving the framework and making it smarter.

For example, the introduction of the so-called general block exemption regulation (GBER) in 2014 simplified state aid rules and “reduces administrative burdens on national and local authorities” as it exempts Member States from their obligation to notify the Commission and have state aid measures cleared by it before being able to grant it.^[7]Thus, it enables Member States to give higher amounts of funding to a wider range of companies. Moreover, another welcome step was the recent increase of the so-called de minimis threshold from EUR 200,000 to EUR 300,000, so that Member States are allowed to grant a higher amount of money over a certain period that will not fall under state aid control.^[8]

However, what is urgently needed is a further simplification and streamlining of the often very complicated, complex, and overlapping rules – especially of those on equity capital, which would directly benefit SMEs, start-ups, and scale-ups, and save costs for them. Thus, a wider range of financial instruments, especially for risk capital, would be made more attractive – an omission the Draghi report confirms: “The EU budget should also be better leveraged to support private investment through different types of financial instruments and more risk appetite by implementing partners”.^[9]

For example, making legal definitions clearer and more consistent, e.g. on the notion of start-ups and innovative companies, would bring clarity for local and national authorities implementing state aid measures, for private investors, as well as for benefitting companies. In particular, a revision of the SME definition and its independence criterion would help smaller companies backed by private equity financing to get access to state aid designed for SMEs, as they currently do not qualify as such. This hurdle makes private investors reluctant to bring in their own financing for those companies in the first place.

Moreover, the increase of financial thresholds (as with de minimis aid) would enhance access to financing options for companies. Next to a legal review, it is crucial for the success of state aid in leveraging private money that local and national authorities can and know how to apply them correctly and as easily as possible. Therefore, more trainings and guidance by the Commission is necessary: to facilitate an understanding of the rules, periodic de minimis/GBER consultations, training seminars, and awareness campaigns should be organised.^[10]

Therefore, with the incoming EU Commission, Member States and national policymakers, companies, and the wider public should put reforming the EU’s state aid framework on the agenda. Of course, stakeholders should engage with the new Commission to directly reach for reforms of the state aid framework and a revision of its rules using the momentum of the Draghi report. At the same time, it is also important to highlight the importance of this topic vis-à-vis national policymakers as well as decision makers and experts of national promotional banks as key intermediaries and implementation bodies. Once state aid rules are under revision, it is paramount that industry stakeholders share their expertise and experience within and beyond the consultation rounds of the Commission. A reform would be to the great benefit of companies, private investors, and eventually enhanced competitiveness, growth, and innovation in the EU and its Member States.

Photo Source: EC – Audiovisual Service. Photographer: Aurore Martignoni

[1] The Future of European Competitiveness, Report by Mario Draghi, September 2024, Foreword, p. 2.

[2] The Future of European Competitiveness, Report by Mario Draghi, September 2024, p. 25.

[3] For instance, the European Commission recently published a guidance for Member States on the so-called Market Economy Operator Test (MEOT) for risk finance measures, the compliance of which means that a public intervention will not be considered to constitute state aid as an economic advantage is not given when the measure in question mobilises private capital, requiring certain minimum private co-investment levels. Under this guidance, the Commission also highlights the importance of the risk finance market and access thereto, especially for start-ups, SMEs, mid-caps and innovative mid-caps.
European Commission Website, p. 1, last access: 30.08.2024.

[4] European Commission Website, State Aid Scoreboard 2023, p. 28: “The overall trend in the last decade shows a stable increase in State aid expenditure, with a huge spike in 2020 and 2021 due to the COVID-19 crisis, followed by a decrease in 2022,”, from EUR 352.92 billion to EUR 349.7 billion.

[5] Florin Dascalescu, State-aid Compliant Equity Risk Finance Measures under the GBER: a Witch’s Brew?, EStAL 2/2024, p.152; and
Mario Monti, ‘Report to the President of the European Commission, A New Strategy for the Single Market at the Service of Europe’s Economy and Society’ (2010), Section 3.7. The single market and industrial policy 87. For another recent study which demonstrates that State aid control is needed to preserve the level playing field within the EU internal market, see Joanna Piechucka, Lluís Saurí-Romero and Ben Smulders, ‘Industrial Policies, Competition and Efficiency: The Need for State Aid Control’, Journal of Competition Law & Economics (2023) 19(4) 503-526.

[6] The Future of European Competitiveness, Report by Mario Draghi, September 2024, p. 301.

[7] EUR-Lex Website, last access: 02.08.2024.

[8] European Commission Website, last access: 02.08.2024.

[9] The Future of European Competitiveness, Report by Mario Draghi, September 2024, p. 62.

[10] Florin Dascalescu, State-aid Compliant Equity Risk Finance Measures under the GBER: a Witch’s Brew?, EStAL 2/2024, p.163.