While state aid is granted at Member State level, it is strictly regulated by the EU. It is prohibited in principle (Article 107 of the Treaty on the Functioning of the European Union) because it is deemed incompatible with the internal market insofar as it may affect competition or trade between Member States. However, certain derogations permit Member States to use it. State aid is used to steer the economy by supporting certain sectors (such as agriculture, regional and sectoral development, the environment or R&D) using grants, loans, guarantees or tax incentives that benefit a country’s economic players (Chart 1). Although the European Commission is tasked with ensuring that Member States comply with the principles governing the use of such measures, there has been an unprecedented boom in state aid in recent years. After peaking at 2.6% of EU GDP in 2020 (Chart 1), state aid accounted for 1.5% in 2022, compared with only 0.8% over the 2000-07 period (European Commission).
This increase has been driven by the gradual relaxation of state aid rules, especially to counter the economic effects of Covid-19 and geopolitical crises (US-China trade war and Russia’s invasion of Ukraine). These crises have highlighted the need for the EU to reduce its numerous dependencies (trade, energy, technology) and bolster its strategic autonomy. A temporary framework limited to the financial sector was introduced in the wake of the 2008 financial crisis. More recently, in 2020, the Covid-19 crisis led to specific measures (the State Aid Temporary Framework) for sectors including tourism and transport, while a new dedicated framework (the Temporary Crisis Framework) was introduced in 2022 to address the economic impact of the war in Ukraine on the energy and agriculture sectors.
State aid has become a key component of the green industrial policy that the EU is trying to deploy in order to achieve carbon neutrality by 2050 while boosting its strategic autonomy (Veugelers et al., 2024). The most recent easing measures were introduced in 2023 in response to the US Inflation Reduction Act (the Temporary Crisis Transition Framework). The objective is to support certain highly exposed sectors, facilitate the financing of renewable energies, and respond to the widespread use of industrial policy for economic security purposes (Juhàsz et al., 2023) in most advanced economies, as exemplified by the US initiatives launched as of 2021 (the Jobs Act (2021) and CHIPS Act (2022)). For example, in July 2024, the Commission approved a state aid scheme for France, for a potential amount of EUR 10.82 billion over 20 years, to support the development of offshore wind energy.
The race for subsidies: the risk of distorting the single market
There is no consensus among Member States on relaxing the rules for providing state aid, and some fear that this could risk distorting the market. Despite the “targeted” and “temporary” nature of the aid granted and the European Commission’s desire to maintain a balance between state aid and the single market, concerns remain. Criticism from certain countries focuses mainly on the perceived unfairness of the use of aid between Member States and the risk of distorting competition. These Member States (most notably Sweden, the Czech Republic, Denmark, Ireland and Poland) contend that state aid mainly benefits the largest, least indebted countries, which is contrary to its purported exceptional purpose. From this perspective, the granting of state aid could actually exacerbate regional disparities within the EU and, in the long term, contribute to the fragmentation of the single market (IMF, 2023).
However, as we will demonstrate below, the risk of distorting the single market through the use of EU state aid needs in some respects to be put into perspective. First, there is actually considerable disparity in the use of state aid by Member States in relation to their economic clout within the EU. Admittedly, in terms of amount, Germany, France and Italy are the top three countries, accounting for 34%, 19% and 9%, respectively of total state aid actually spent in the EU between 2000 and 2022 (i.e. a cumulative total of nearly EUR 820 billion, EUR 460 billion and EUR 210 billion, respectively, for these three countries at 2022 prices). However, when expenditure is measured as a percentage of GDP, Germany, France and Italy rank only 6th, 13th and 24th among Member States (Chart 2).
Chart 2 – State aid by amount (EUR billions) and by % of GDP (2000-22)