The EU plays an important role in the restructuring process, by means such as regulating and endorsing state aid packages and the specific help given by the European Social Fund (ESF) and the European Globalisation Adjustment Fund (EGF). During the crisis, the Commission’s policy response has centred on a number of Communications setting out how it intended to apply state aid rules to government measures aimed at supporting the banking sector and the real economy.
Most specifically, temporary measures, adopted under Article 107(3)(b) of the Treaty, have proved to be an important tool in coping with the crisis. The Commission does not impose any specific restructuring measure from the outset and there is no specific business model that is rejected in principle. The starting point of the analysis is always the restructuring plan submitted by a Member State. A temporary framework for state aid has been prolonged until 2011, which will maintain some measures that facilitate access to finance, especially for SMEs, ie subsidised state guarantees and subsidised loans, for example for green products.
The ESF has been the EU’s main financial instrument for the anticipation and management of change since its creation in 1957. Its specific aim is to render the employment of workers easier and to increase their geographical and occupational mobility within the Union, and to facilitate their adaptation to industrial changes and to changes in production systems, in particular through vocational training and retraining. Over 400 000 enterprises have benefited from ESF interventions in the field of adaptability, and the ESF has been particularly supportive to actions anticipating economic change.
More specifically, in the context of restructuring and change, the EGF was established in 2007 to help workers made redundant due to structural changes in world trade patterns, assisting them in finding alternative employment. The EGF can co-finance active labour market measures to benefit redundant workers, such as job-search assistance, training, incentives to take up alternative employment and the promotion of entrepreneurship. A total of 29 applications for an EGF contribution were submitted to the Commission in 2009, representing a significant increase on previous years.
Change and restructuring, in the context of globalisation, has a significant impact in the EU regions. Globalisation brings about rapid changes and an increasing speed of structural adjustment. In particular, low-skilled labour as well as low value-added economic activities have felt the force of global competition in recent years. Many regions throughout the EU will therefore have to restructure their economy and promote continuous innovation in products, management and processes, as well as human and social capital, in order to remain competitive. The crisis has had a varying impact and additional disparities for long-term growth perspectives. Particularly negatively affected are regions in the UK, Spain, Italy and Greece, which have become more vulnerable compared with their situation before the crisis. The European Regional Development Fund (ERDF) has played a vital role in facilitating structural adjustments initially induced by internal factors such as the establishment of the Single Market and industrial restructuring, and will most likely continue to play a particular role in supporting adjustments of particular EU regions. There are a number of examples of specific success stories in terms of regional adjustment and regeneration, from all parts of the European Union.
1: THE ROLE OF STATE AID
The concept of state aid is defined in Article 107(1) of the Treaty on the Functioning of the European Union (TFEU)72 and covers all aid granted by Member States or through state resources in any form whatsoever which distorts or threatens to distort competition on the internal market. Member States’ interventions designed to help ailing companies can take different forms, but tend to include, in particular:
capital injections;
debt waivers;
debt rescheduling;
debt to equity swaps;
soft loans; and
loan guarantees.
If the public authorities claim that they are prepared to grant the above measures to companies on the same conditions as market operators, and thus these interventions do not grant any economic advantage to the company, the Commission will verify the existence of an advantage under the so called market economy operator principle.73 Provided this test is not satisfied and the measure constitutes state aid, its compatibility with the internal market is assessed by the Commission under the Rescue and Restructuring Guidelines.74 The Rescue and Restructuring Guidelines are based on Article 107(3)(c) of the TFEU and apply to all sectors, except the coal and steel sector.
Rescue aid to firms in difficulty can only be awarded as a temporary assistance in the form of a loan or guarantee to keep an ailing company afloat for a period of six months during which a restructuring plan or liquidation plan is devised. Restructuring aid can be granted in any form on the basis of a restructuring plan fully endorsed by the Commission which would lead to long-term viability of the company on the basis of realistic assumptions and in a reasonable timescale. The restructuring plan should include compensatory measures, in particular divestment of assets, reductions of capacity or market presence or entry barriers to the market concerned, in order to compensate for the distortive effect of the aid on the market. Write-offs and closure of loss-making activities which would at any rate be necessary to restore viability cannot be considered reduction of capacity or market presence for the purpose of the assessment of compensatory measures.
The underlying principle of both rescue and restructuring aid is ‘the one-time-last-time principle’ which means that a company in difficulty which has benefited from a rescue or restructuring aid in the past 10 years, is not eligible to receive further state support.
The Rescue and Restructuring Guidelines take into consideration policy objectives such as social and regional policy and recognise the beneficial role played by small and medium enterprises in the economy. On the other hand, the Rescue and Restructuring Guidelines clearly underline that rescue and restructuring aid cannot be justified to keep ailing companies artificially alive in a sector with long-term structural overcapacity or allow companies to survive only as a result of repeated state interventions.75
1.1: THE COMMISSION’S POLICY RESPONSE TO THE FINANCIAL CRISIS
In order to assist Member States in taking urgent measures to preserve financial stability and provide legal certainty, the Commission adopted a number of Communications between October 2008 and July 2009, setting out how it would apply state aid rules to government measures aimed at supporting the banking sector and the real economy (which is that part of the economy which is concerned with producing goods and services, in contrast to that which is concerned with buying and selling on the financial markets) in the context of the economic crisis. The primary rationale of this guidance was to ensure that emergency measures taken for reasons of financial stability maintain a level playing field between firms which receive public support and those which do not, as well as between companies located in different Member States. These rules were adopted under Article 107(3)(b) of the Treaty in the light of the seriousness of the crisis and its impact in the overall economy of the Member States. An overview of these Communications is provided below.
1.1.1: STATE AID TO THE FINANCIAL SECTOR
The Commission’s Communication entitled The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis,76 issued in 2008, was the Commission’s first response to the worsening financial crisis. Based on the principles of the existing guidelines on rescue and restructuring aid, this Communication provided guidance on the criteria for determining the compatibility of state support measures for the financial sector within the special circumstances of the crisis. In particular, the Communication provided detailed guidance on government guarantees for bank liabilities, which were the most widespread initial response to the crisis, when it was necessary to re-start the interbank lending markets.
The Communication of October 2008 recognised the importance of recapitalisation schemes in preserving the stability and proper functioning of financial markets. In response to requests for detailed guidance on the compatibility of recapitalisation schemes, the Commission issued a further Communication on 5 December 2008, entitled The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition.77 The Communication recognised that the recapitalisation of banks could serve a number of purposes, including not only the restoration of financial stability, but also the preservation of lending to the real economy.
Subsequently, several Member States announced an intention to complement guarantee and recapitalisation measures by providing some form of relief for impaired bank assets. In its February 2009 Communication on impaired assets,78 the Commission provided guidance on the treatment of asset relief measures by the Member States. This guidance is based on the principles of transparency and disclosure, adequate burden-sharing between the state and the beneficiary and prudent valuation of assets based on their real economic value.
The Communication of October 2008 made clear that a far reaching restructuring would be required for financial institutions with problems resulting from their particular business model or business practices, whose weaknesses had been exposed and exacerbated by the crisis. Other, fundamentally sound institutions might require less substantial restructuring in order to ensure long-term viability. The Commission’s July 2009 Restructuring Communication79 clarifies some aspects of restructuring in the context of the present financial crisis. In particular, it gives detailed guidance on how restructuring plans need to address long-term viability, burden-sharing between the bank, its shareholders and the state, and distortions of competition created by the aid.
The Commission does not impose any specific restructuring measure from the outset and there is no specific business model that is rejected in principle. The starting point of the analysis is always the restructuring plan submitted by a Member State. In that respect, the first priority when dealing with the restructuring of banks is to ensure that they can operate profitably without state support. The benchmark of long-term viability may call for different solutions across banks, ranging from limited restructuring with no divestments to an orderly winding-down of unviable entities.
Any restructuring plan has to adequately address measures to limit distortions of competition. Taking account of the market circumstances of each case and the scale of State intervention, measures to limit competition distortion may include divestments, temporary restrictions on acquisitions by beneficiaries and other behavioural safeguards.
If, in all restructuring cases that have been dealt with by the Commission, the principles of the Restructuring Communication have been carefully applied, account has also been taken of the specificities of each individual case. Reaching the right balance between the multiple aspects of a restructuring case requires thorough knowledge of the facts and specificities of each bank. However, the principles guiding the Commission’s approach are clear and consistently applied across cases.
In parallel to the measures directly addressing financial institutions, the Commission also adopted a temporary framework80 for state aid measures in order to counteract the increasing difficulty of the real economy in obtaining credit and other types of financial support, while maintaining a level playing field and avoiding undue restrictions of competition.
The additional state aid measures provided for by the temporary framework basically pursued two objectives:
to immediately unblock bank lending and thereby help provide continuity in company access to finance; and
to encourage companies to continue investing into a sustainable future, including the development of green products.
The temporary framework provides for a number of new measures that could be applied by Member States for a limited period of time, until the end of 2010, as well as a number of temporary derogations from existing state aid rules:
a lump sum of aid of up to € 500 000 per company for two years, which can cover investments and/or working capital. In October 2009, the Commission introduced an amendment to the Temporary Framework in order to allow for a compatible limited amount of aid of € 15 000 for the agricultural sector,81 which was initially excluded from the scope of application of this measure;
subsidised guarantees for loans at a reduced premium. The guarantee can cover up to 90 % of the loan and it may relate to both investments and working capital loans;
aid in the form of a subsidised interest rate;
subsidised loans for the production of green products (meeting environmental protection standards early or going beyond such standards); and
a risk capital injection for SMEs of up to € 2.5 million per year (an increase on the previous € 1.5 million per year) in cases where at least 30 % (instead of the previous 50 %) of the investment cost comes from private investors.
Further, Member States can benefit from a simplification of the ‘escape clause’ contained in the Communication on short-term export-credit insurance.82 This clause gives the possibility of using public funds to cover marketable risks, which are usually excluded from this benefit.
The temporary framework is, in principle, of general application to all types of firms. However, a significant exception was that it was not applicable to firms that were in difficulties on 1 July 2008. Aid to companies where difficulties date from before the economic crisis had to be assessed exclusively on the basis of general rules regarding rescue and restructuring aid (see above). This rule acknowledged that a number of companies might have found themselves cut off from financing due to the drying up of the lending market, although they had a sound business plan. The temporary framework could therefore be applied to relieve temporary financial difficulties. If the difficulties arose before the crisis, however, the normal rules of rescue and restructuring aid had to be applied. In this way, the Commission ensured that over-protective aid measures devised by the Member States would not revitalise structurally failing firms to the detriment of competition and healthier firms.
By way of example, the Commission approved guarantees to be issued by the Swedish state as collateral for a loan from the European Investment Bank to finance green projects by Volvo cars, after concluding that this company was not in difficulty on 1 July 2008.83 The Commission, following a notification by the United Kingdom, also approved rescue aid to the LDV Group.84 Since that company had been in difficulties for some time, the measure was based on the Rescue and Restructuring Guidelines.
Between 17 December 2008 and 1 October 2010, the Commission approved 73 schemes under the Temporary Framework, and 4 ad hocaid measures, including:
23 schemes for aid up to € 500 000 per company;
18 subsidised guarantee measures;
eight schemes for subsidised loan interests;
five schemes offering reduced interest loans to businesses investing in the production of green products; and
six risk-capital schemes and 13 export-credit schemes.85
Financial support from public authorities in the context of restructuring, including labour market measures that are undertaken by the public authorities particularly at regional and/or local level, may involve state aid. Care must therefore be taken to ensure that such support complies with the applicable rules on state aid.
1.2: WAY FORWARD
On 1 December 2010, the Commission prolonged into 2011 the crisis-related state aid measures that enable Member States to support their financial sector as well as the temporary framework, in both cases on stricter conditions.
The Commission believed there were still grounds to deem the requirements for the application of crisis-related rules fulfilled. But the continued punctual availability of specific crisis aid measures must go hand in hand with a gradual disengagement from the temporary extraordinary support86.
For the financial sector, this approach had already started with the tightening of conditions for new government guarantees from July 2010 through a fee increase and a closer scrutiny of the viability of heavy guarantee users. It is now required that, as of 1 January 2011, every bank in the EU having recourse to state support in the form of capital or impaired asset measures will have to submit a restructuring plan. Until now this was limited to distressed banks, ie banks that, in particular, received support above 2 % of their risk-weighed assets.
The prolonged temporary framework maintained some measures facilitating the access to finance, especially for SMEs, ie subsidised state guarantees and subsidised loans, inter alia for green products. In these areas, the market is not yet able to entirely meet small companies’ financing needs. The introduction of stricter conditions for those measures aimed at facilitating a gradual return to normal state aid rules while limiting the impact of their prolonged application on competition. This includes that, in 2011, for large firms working capital loans were excluded from the application of the Temporary Framework and that firms in difficulty could no longer benefit from the framework.
As companies still have difficulties in finding adequate trade insurance coverage from private insurers in many sectors and Member States, the Commission also extended the procedural simplifications on short-term export credit insurance that were introduced by the Temporary Framework.
The next section of this chapter looks in detail at the role of the European Social Fund in providing help to organisations to enable them to better anticipate and manage change.
