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State Aid Cases: The Case of Airbus

Introduction

Due to the current economic and financial crisis, state owned enterprises are finding it difficult to operate thus accumulating a lot of debt and sometimes making losses. Due to this uncertain economic viability, some member states are taking measures to finance and even write of the debts, restructure, privatize these state owned enterprises. All measures involving state aid are always implemented after it has been approved by the relevant commission. An assessment of the compatibility of state aid is done on the basis of the treaty on the functioning of the European Union. This treaty contains the rules and regulations necessary for the smooth running of the state aid hence minimizing conflicts.

State aid is composed of four components which are vital for it to be considered a state aid. A state aid must be granted by the member state or through its state resources with regard to stated rules. It can be delegated to the department of state like the municipalities or even the regions of the state. The undertakings of state aid are made public since it’s considered imputable to the state due to the state resources involved. The undertaking of state aid is done in favor of certain production of goods and services due to its selective advantage. The recipient of state aid thus is to solve an economic activity thus enhancing the provision of goods and services despite its legal framework. The state aid rules apply for both private and public undertakings weather its run for profit or not.

Mandate of the commission on state aid

The state aid procedure is developed to ensure smooth and orderly operations, thus avoiding several state aid cases which are likely to come up (EU, 2012). According to EU working paper, the state aid measures and schemes must be notified and approved by the commission before its commencement. The commission the looks at the guidelines and considers its effects before approval. The commission is thus mandated to oversee the adherence of the state aid undertakings with the rules so as to minimize conflicts as possible (Salmon, 2012). Any state aid done without the approval of the commission is considered unlawful and may be recovered without notice. The commission always approves the state aid measures within a period of two months from the period of notification (Salmon, 2012). The commission is mandated to decide weather a measure is aid or not or weather it is aid but compatible with market forces and also to investigate the effects on the market forces. The commission is mandated to begin an investigation procedure and carry out assessment as to determine possible grounds of compatibility. The commission less restricted with when it comes to investigations and thus able to carry out investigations any time it deems appropriate. The final commission decision closes its formal investigation and it then makes recommendations regarding its findings. The commission recommends whether a measure is an aid and if its aid, the commission determines if it’s compatible to the market forces (Salmon, 2012).

Competition Policy in EU.

The experience of the global financial crisis of 2008 and is reinforcing a need to dialogue between the policymakers and the relevant stakeholders (ERT, 2012). Its recommendations are to provide best conditions for growth and investments thus promoting entrepreneurship and job creation. It calls for the need to address the effects of globalization, technological changes as well as emerging economical powers that pose challenge societies face. The EU competition policy is crucial to the internal market since it determines the pattern of investment and the levels of profits to be made from businesses (ERT, 2012). The policy aims at preventing jeopardy in the market especially in times of economic crisis and thus ensuring stability in the market. The adoption of EU competition policy ensures a fair competition in the global scale and thus ultimately benefiting both the producers’ and the consumers in equal measure. The EU competition policy addresses the efficiencies in EU merger control and whether they are properly accounted for. The policy also addresses role of state aid and market definition and regulation. Condition for efficiency aims to benefit consumers, merger specifically and variability.

Treaty on the Functioning of European Union

Article 1[1] of the treaty confers the establishment of Union in which member states belong to attain objectives they have in common (EU, 2012). This close establishes and proclaims the supremacy of the treaty and the member’s signatory to the treaty. Article 2 of the treaty focuses on the union values as it strives to achieve its goals. It states that the treaty is founded on respect to human dignity, democracy, freedom, equality, rule of law and respect for human rights including minorities (EU, 2012). Article 3 outlines the union objectives which are to promote its values and the well being of its people. This article outlines how the act provides for human freedom and security coupled with justice without international involvement thereby promoting free movement of people from one area to another. This article outlines the rights of an individual within borders of countries, immigration rights and asylum in order to reduce and prevent crime. The article states that the union sole responsibility is to work for sustainable development bases on economic growth aimed at maintaining price stability while creating an atmosphere for fair competition. The union is obliged to protect and improve the quality of environment and improve the quality of life among its citizens and to promote scientific and technical advancement. Under this article, the union is also mandated to combat social exclusion and discrimination in order to promote social justice thereby protecting equality to its people. The union is required to uphold and respect cultural diversity and ensure the rich cultural heritage of English people. Economic, social and cultural cohesion is critical to the development of Europe and the Union is mandated to protect it. The union is mandated to provide a common currency which can enable it to trade properly with the wider world and the currency is the euro. In order for the union to relate well with the world, its mandate is to promote peace, security ad respect for all. Article 4 outlines the relationship between the union and the member states which is contained in the treaties signed by the member states to ensure cordial relationship. The union is required to respect and uphold the equality of the member states regardless of their identities or political affiliations. It’s required to promote the respect of state functions and territorial integrity thus promoting national security among its members which is vital for business development. The member states is required to assist each other in task spelled out by the treaties. The member states are obliged to refrain from any act which may jeopardize the peace and tranquility within its members. The competencies and the fundamental principles relating to it are contained in article five whereby it’s governed by the principle of conferral.  Under this clause, no union is expected to act outside the limits of the competencies conferred upon it by the member states in the relevant treaties. Article 6 of the act contains the fundamental rights, freedoms and principles which are vital to the smooth operations of unity within the union and its relationship with the outside world. The suspension of certain rights resulting from union membership is also possible and it’s contained in article 7 of the act. This is upon thorough consideration and a debate by the majority of the member states is when this can be made possible. The union council is also mandated to revoke or vary its earlier decisions depending on the change in circumstances and every decision is made by voting. Article 8 outlines the relationship between the union and its neighbours for the good relationship to flourish. The good neighbour relationships aims at ensuring that peace and tranquility prevails which in turn brings about prosperity socially, politically and economically as the union demands (EU, 2012).

The Airbus Case

Like other industries, the aircraft manufacturing industry has seen some substantial governmental interventions in the form of aids to enhance their business. The airbus is argued to have overcome its competitors like Boeing to become the leader of in aircraft manufacturing operations. The state aid granted to the Airbus put the EU state aid to test as more questions are being asked about its legitimacy especially during the global financial crisis. This is coupled with the fact that the EU state aid has faced a lot of criticism of its financing during the tough economic times (Brown and Tieman). The monopolistic nature of the market enjoyed by Boeing is believed to be the result of the tussle between the two aircraft manufacture’s with both of them trying to be the market leader. The monopolistic nature of the aircraft industry is known to have dire effects to competition in the market which results to high prices and inefficiencies. In some instances, monopolistic competition results to positive impacts due to the availability of funds for R&D thus bring a positive feedback to the economy. This is particularly of great importance in aircraft industry which needs a lot of R&D lest it collapse due to market forces or technical hitches. Boeing controlled a market share of 81% by 1995 and thus enjoyed the economies of scale and huge profits while airbus only enjoyed 19% of the market share in the same time (Brown and Tieman). This is quite different in 2010 because they have an equal share of the market thus projecting a negative future for Boeing. By today, it’s projected that Airbus has gone a head of Boeing in terms of market share and everybody is keen to understand the secret behind Airbus success.

The government support stands out to be the greatest driving force behind Boeing success which is contrary to the situation in Boeing. Its might have survived in the absence of state aid but in a different form and speed thus state aid cannot be ignored in such a huge success (Brown and Tieman). This therefore explains that the subsidies received by Airbus from the government are the biggest driving force behind its brighter fortunes and success in a tough completion world. The increased airbus dominance in the market is beneficial to consumers due to reduced travel cost which is not possible with the king of monopoly witnessed in Boeing few years back. Pumping state aid to finance private corporations is however receiving criticism form some people who argue that its done at the expense of the taxpayer thereby leading to inefficiencies and loss of welfare among citizens.  Some countries are also being accused of oversupplying aid to their firms in order to compete with other multinationals firms in other states thus leading to poor allocation of resources.

The EU and the US are in the fore front of providing a lot of aid to their domestic industries to make them relevant at a global glance. This has proved profitable for supported industries most of which have recorded double digits in their growth figures and employs a lot of population in their workforce. Since aircraft industry is a multibillion dollar industry, government subsidy and effort is vital to the existence and growth of its portfolio. The airbus dispute started in 2004 and lasted for about seven years drawing a lot of interest and converging views. A final report submitted by the dispute resolution committee thus provided a legal framework which showed the way forward.  The report provided by the dispute resolution committee is so technical and large that it requires a lot of time and intellectualism to understand. Since the Americans emerged the super power after the Second World War, Boeing which is an American company dominated the world aircraft industry for about four decades. The Europe decided to step to end the American dominance of the aircraft industry consequently leading to the long standing duel between EU and US. The Americans are interested to continue enjoying their monopoly which comes with economics of scale but Europe also wants a share of the cake. French, Germany and Britain combined forces to challenge the American dominion in the aircraft industry and they are succeeding so far. The airbus was established in 1969 and ten years later it combined the consortium of Germany, France, Spain and UK, thus forming a strong economic base which would shake the markets of aircraft industry. Of great importance is that this industry is partially state owned thus posing a great impact in its development and external competition. What draws great interest is that airbus is getting more state attention than Boeing which is also receiving state attention but at a comparatively lower scale. By 1980, airbus positioned itself as a worthy competitor of Boeing, drawing a lot of state attention and support which has brought it this far. By 1997, the market share of Boeing and Airbus were 53.6% and 44.7% thereby creating a duopoly in the global scene thus climaxing state supremacy between EU and US. This encouraged the EU to improve its funding to Airbus due to the opportunity which presented itself of becoming a world leader in Aircraft operations. This rivalry provoked the US government who also began overspending in Boeing to protect their economic territory (Washington Post, 2013). This rivalry has become so fierce that Boeing accused airbus of receiving up to 18billion dollars from illegal means in order to compete them in the industry.

Both EU and U.S are so much interested in protecting and controlling this industry because it’s characterized by excessive development costs, technological risks and steep curves. The industry is time consuming and risky and thus very costly that private businesses may be reluctant to venture into therefore it’s largely a state business. The rivalry between these two companies has gone up to the extent of airbus hindering Boeing from selling its Boing 757 due to the discount given by Airbus. This ultimately led to the multilateral WTO Agreement on trade and subsidies which was quite unexpected in the global trade. This led to the capping of the limits of government spending and a subsidy which is now growing out of control. This led to restrictions in issuing subsidies and thus some subsidies are now given as a loan with regulated payment scheme. When airbus tried to develop the superjumbo airbus, the dispute reached climax since this required state funding and the U.S saw this as an attempt to scuttle the gains made so far. The U.S finally withdrew from the earlier agreement and request for further deliberations over the issue. This finally leads to the calls of both U.S and EU to bring in their subsidy schemes under conformity with WTO law to help quell the ever rising economic temperatures. The reports of the panel and the appellate body a year later ruled against EU in their dirty tactics to lead the aircraft industry. The agreement is thus formulated to ensure level playing field for all WTO members to avoid economic disputes. This agreement is binding to all members and limits the freedom to grant subsidies without the due process which is unhealthy for smooth running of global business. As a result, the conclusions are that airbus subsidies are detrimental to Boeing sales, export and market in the industry thus unhealthy for business. Its argued that the EU may be reluctant to accept the report of the joint committee due to high stake both financially and the jobs opportunities. To conclude, the EU state policy is dangerous in global context and thus should be reversed in order to achieve healthy global competition.

Tax reduction for flights to and from certain North Sea Islands

Germany has finally decided to impose air transport tax on passenger flights mainly due negative effects of air transport on the environment. The government of Germany is doing this with the aim to provide incentives for environmental friendly behavior (Brussels, 2012). The government of Germany wants to reduce the negative impact of air transport due to continued emission of CO2 gas into the atmosphere. The government believes that by doing this, they are encouraging the use of other environmental friendly use of other means of transport. According to Brussels, the tax cut leads to carbon dioxide savings of up to 210 000tonnes yearly. The report also further notices that this tax emission also reduces the problem of noise pollution to the environment therefore the government is contented with this action. Since this act fulfills the conditions necessary for an action to be considered as aid, its aid. This is because the measure is funded by the state, it confers advantage over the beneficiaries and from the fact that it’s an undertaking of economic activity and has a potential effect on trade between member states. Such undertaking is thus able to distort competition in the market due to its economic nature and should thus be considered carefully (Brussels, 2012). Brussels further argues that a loss of revenue is equivalent to consumption by the state in the form of fiscal expenditure. This tax reduction is likely to favour air operations to the concerned destinations thus bringing additional demand thereby indirectly benefiting those companies providing those services. The government of Germany considers that there is no aid involved since the measure is not selective but other states and rival companies feel otherwise. According to European Commission, the measure confers a selective advantage to eligible airlines thus promoting unequal competition in the market. Germany believes that the measure is not promoting distortions in the market since it’s only confined to a particular area but the Commission feels otherwise. Germany also believes that the measure cannot impair trade between the member countries since the tax reduction comprise all flights to the concerned islands irrespective of the member state. The Germany government is further convinced that since those aircraft trading on those islands are small airplanes and are thus not linked to international airports. This they believe gives them advantage of not influencing international business and therefore they are at peace with international airlines. The commission on the other hand insists that since tax reduction relates to tourist, businesses and workers and is likely to affect business especially given that the concerned islands are close to Netherlands and Denmark. The commission therefore concludes that the tax reduction is capable of influencing trade flows especially between Germany, Netherlands and Denmark therefore, unhealthy to business. Since this tax reduction has e negative effect to the smooth competition of businesses, it can thus result into negative political relationships between concerned member states. Negative geopolitical relationships also result into negative academic relations between member states.

The two cases described above both represent how member states are trying very hard to achieve their economic goals with less regards to others which can pose serious economic, social and political challenges.

Conclusion

It is evident that in the absent of state aided measures, the global relationships can be negatively affected. In as much as the subsidies provided by the states are legitimate in fostering business and development, care should be taken to promote peaceful coexistence between states which is equally substantial for business. It’s essential to ensure respect for state aid rules and regulations in order to safeguard the benefits of the global market. Member states should therefore follow the rightful procedures in their business undertakings to minimize conflicts with others. A global strategy should thus be undertaken before commencement of potentially large scale global business for earlier identification of potentially problematic cases.

 

Bibliography

Brussels. 2013, European Commission: Tax reduction for flights to and from certain North Sea Island

Burges Salmon. 2012, Briefing: State aid update

Brown K & Tieman T2012, EU State Aid Policy and the EC: Airbus Case

European Commission. 2013, Competition: State Aid Cases. Retrieved from http://ec.europa.eu/competition/state_aid/register/

European Commission. 2012, The Commission Staff Working Document: Guidance Paper on State Aid  compliant Financing, restructuring and Privatization of State Owned Enterprises.

European Antitrust Review 2013. State Aid: Retrieved from http://globalcompetitionreview.com/reviews/47/sections/162/chapters/1821/

European Round Table 2012, Challenges in EU competition Policy

European Union. 2013, Official Journal of the European Union: Information and notices

Lisbontext  2012. The Treaty of Functioning of the European Union

Washington post. 2013. Business: U.S claims victory in Airbus-Boeing case. Retrieved from http://articles.washingtonpost.com/2011-05-18/business/35232256_1_launch-aid-airbus-subsidies-a380

 

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