An economic analysis
Timothy Besley and Paul Seabright
When should action by an EU member state to assist the competitiveness of its own firms in world markets be of concern to other member states, and when is it a private matter between the government of that member state and its taxpayer/ citizens? The use of state aids to industry by the governments of EU member states or by regional and local governments within those member states is probably the least well understood domain of competition policy, as well as raising some of the most difficult political questions of enforcement and the allocation of powers. In describing it as not well understood we mean that the fundamental principles for the economic analysis of the phenomenon remain unclear. As far as the magnitude of the phenomenon and its incidence among member states is concerned, we now know a great deal more than was known a few years ago, thanks in good measure to the European Commission’s own efforts to improve the transparency and accuracy of statistical reporting. However, our ability to describe the phenomenon has moved far ahead of our capacity to analyse its effects and evaluate its implications for public policy. When exactly such aid should be viewed as a distortion of competition is something there are few agreed criteria for determining. This chapter should therefore be viewed as a preliminary account of a rudimentary and in many ways unsatisfactory academic debate, though one upon which we have sought to impose a degree of order.
The chapter is structured as follows. In the second section we review briefly the literature relevant to the state aids problem and summarize the reasons why the policy implications of this literature are so often conflicting and confused. This is a selective rather than an exhaustive review, to enable the issues to be brought out rather than drowned in a sea of references. In the third section we outline an analytical framework that in our view helps to reconcile the different approaches in the existing literature. We give an account of some of the main results that can be derived in this analytical framework. In the fourth section we draw out the implications for policy of these results, taking care to distinguish those issues where the policy implications are relatively clear from those that will require further research. In the fifth section we confront these implications with the actual practice of the European Commission as revealed in decisions of the last few years. In the conclusion we summarize the main unresolved questions and propose an agenda for future discussion.