Darach Connolly from law firm DLA Piper on how Ireland can compete as countries across the EU rush to support business
Two weeks ago, the Taoiseach, Leo Varadkar announced stringent new measures designed to tackle COVID-19 in Ireland. The message was clear: Stay at Home.
For all the right public health reasons, Ireland has taken unprecedented measures to respond to the emergency, with a clear understanding that the economic impact of the ongoing lockdown will be profound. Gloomy predictions abound.
“As a smaller Member State, Ireland must be mindful of a tension within the EU State aid regime: some bigger Member States have deeper pockets to support business”
The Economic & Social Research Institute warns that the Irish economy may contract by over 7pc and unemployment may rise to around 18pc.
Across the EU, businesses of all sizes are facing severe liquidity issues and the prospect of irreparable damage.
While tough choices lie ahead, the full flexibility of the EU state-aid rules is being used to allow governments cushion the blow with huge financial support for business.
A new temporary EU framework
Under State aid rules, Member States can grant aid to remedy a “serious disturbance in the economy” after approval from the European Commission. In Ireland, this was used to authorise extensive aid for NAMA during the financial crisis.
To fast-track applications, the European Commission adopted a Temporary State Aid Framework on 19 March to allow EU Member States support business.
Under the Framework, Member States can swiftly offer business five types of aid:
- Direct grants, selective tax advantages and repayable advances
- State guarantees for loans
- Subsidised public loans to companies
- Safeguards for banks that channel State aid to the real economy
- Short-term export credit insurance
Essentially, these measures aim to facilitate Member States providing liquidity to the economy. The message to national treasuries was ‘open the chequebook’. Member States do not need to be told twice.
By 9 April, the Commission had in record time approved 50 support schemes across Austria, Bulgaria, Croatia, Denmark, Estonia, France, Germany, Greece, Hungary, Italy, Ireland, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Spain, Sweden and the UK. Further measures are in the pipeline.
Enormous sums of State aid are being deployed, inconceivable in almost any other setting. Even during the financial crisis, the Commission estimated the total State aid used by Member States between September 2008 – December 2010 was €1.24trn. That was sustained across a period of over two years.
According to our calculations based on decisions published over the past few days (and excluding major schemes with undisclosed total budgets), the Commission has approved over €430bn in State aid in the space of three weeks.
This is about a third of the total amount used in all of 2009 and 2010. This is cash for European business on a staggering scale. By contrast, the Commission often takes more than a year to approve State aid in complex cases.
In recovery cases, the Commission has pursued Member States for many years: the Commission chased Ireland for over a decade in the long-running alumina saga for unlawful State aid of just over €8m While these cases are merited to preserve the integrity of the Single Market, it is reassuring that in times of great crisis the rules are sufficiently flexible to allow for the necessary economic response.
Ireland can use its financial firepower to stimulate business
On 31 March, Ireland joined the list of EU approved schemes with a €200m scheme for repayable advances. According to the information available, funding will be available from Enterprise Ireland to firms in Ireland in the manufacturing or internationally traded sectors with 10 or more staff that experience a decline in turnover of at least 15pc compared to previous revenue.
Other financial levers remain open to Ireland outside of the State aid rules. For example, Ireland can grant wage subsidies, suspend collection of corporate tax, VAT and social security payments for all companies or offer financial benefits directly to consumers.
Some of these measures are now in place: the Irish Government rushed through emergency legislation for a €3.7bn temporary wage support package for employees.
Other measures include a €200m fund to support loans for SMEs; a €200m Rescue and Restructuring Scheme to support vulnerable (but viable) firms to restructure or transform their business; Covid-19 loans for sole traders and small firms with up to nine employees, with six-month moratoriums on interest and repayments; and grants for businesses to access consultancy support to undertake immediate finance reviews.
On 8 April, the Government went one step further, announcing €1bn of extra support for SMEs impacted by Covid-19. The measures will see an expansion of two Strategic Banking Corporation of Ireland (SBCI) Loan Schemes to provide an extra €250m for working capital and €200m for longer-term loans, as well as a €13m expansion of Microfinance Ireland funding for loans and a €180m Sustaining Enterprise Fund to assist companies in the manufacturing and international services sectors.
However, difficult questions lie ahead. For example, will Ireland financially support core sectors facing serious difficulty, such as the aviation industry?
France has obtained EU approval to defer collecting air transport taxes payable by French airlines. Italy appears to have used the crisis to finally take control of ailing Alitalia. Other sensitive areas might include food supply chains, where Ireland previously introduced emergency examinership legislation in the Companies Act 1990 to support the beef industry in the face of an export crisis.
Also, it is not yet clear whether fiscal support for Irish banks similar to the financial crisis will be needed. Still, it is noteworthy that for the first time ever the “escape clause” from the EU fiscal rules is activated to allow EU countries spend above the safety margin of 3pc GDP in the short term.
A tricky path ahead
And yet, we are all agreed that there is urgent need for intervention. It is unhelpful that this debate has (re)surfaced at a time when there is pressing need for European solidarity. The efforts by certain EU Member States to introduce so-called “coronabonds” (i.e., pooled borrowing across the EU) has been rejected thus far – amid angry scenes at the highest levels.
So far, the Eurogroup of single currency zone finance ministers have been at an impasse – but a work around solution will be crucial to rebuild the EU economy after the drastic measures taken to fight COVID-19.
It is notable that Ireland appears to have withdrawn from the fiscal austerity championed by the Hanseatic League, comprised of mainly richer northern EU states.
In the end, as a smaller Member State, Ireland must be mindful of a tension within the EU State aid regime: some bigger Member States have deeper pockets to support business.
Potential competitive distortions within the EU’s Single Market may emerge. Consider France – it has clearance for a €300bn liquidity support scheme for business.
Consider Germany – it has clearance for subsidized loans of up to €1bn for companies of all sizes.
Commentators in Europe have rightly pointed out that, on other occasions, those States supported austerity measures, neatly encapsulating a ‘Do as I say, not as I Do’ outlook.
In the past, Ireland has carefully and skilfully navigated these challenges and has been well served as a global platform for business rather than a promoter of national champions.
Darach Connolly is a Senior Associate at DLA Piper specialising in EU and Irish competition law.
Published: 10 April, 2020