EU must exact a return for more crisis aid

Lack of certainty about economic improvement poses a dilemma for the Commission.

When, if ever, will Europe emerge from the economic doldrums? It is unlikely that this weekend’s meetings of the International Monetary Fund and World Bank will come up with a single answer. On both sides of the Atlantic – and Pacific – politicians and economists are trading predictions and counter-predictions. The risk of a double-dip recession is, for some of them, uncomfortably close. Others believe that there have been enough stimulus medicines and greater fiscal rectitude is now called for.

At the Asia-Europe meeting in Brussels this week, Nick Clegg, the UK’s deputy prime minister, observed that the summit brought two contrasting economic worlds together: the Asians full of optimism about their economies, the Europeans very pessimistic. In Asia, the crisis was a typhoon that passed swiftly by. In Europe, it was an almighty explosion that has left piles of rubble. Whether they have introduced sweeping austerity measures (as in Romania) or are struggling to make any (as in France), the countries of Europe all have reason to be gloomy about the consequences of a crisis that will linger even after the figures for gross domestic product have improved.

The lack of certainty about economic improvement poses a very specific dilemma for Joaquín Almunia, the European commissioner for competition. This week he disclosed that he was minded to prolong for another year a relaxation of the European Union’s state-aid rules that has given governments greater leeway to help ailing companies, both a special regime for banks and easier loans and guarantees to the industrial sector.

The emergency rules on state aid were to have ended in December; Almunia now thinks they should be extended to the end of 2011.

This is no small matter. The single market is a vital part of the European Union and the state-aid rules were put in place to make the single market meaningful. Without those rules, the subsidies or tax-breaks provided by national governments to their own companies (but not to others) distort the single market. Hence, the gradual tightening in the application of state-aid rules over the course of the past decade.

So is all that groundwork to be undone, by the extension of a temporary reprieve given at the height of the economic crisis?

The difficulty for Almunia – and for the European Commission as a whole – is that the economic recovery is uneven across the EU. The economy of Poland, for instance, is in a much healthier state than that of Ireland. Yet, by definition, the state-aid rules have to be the same across the EU. He cannot use the state-aid rules to get tough with one state, while giving leeway to another.

So Almunia has to play a subtler game. He has to demand longer-term change in return for short-term dispensation. That appears to be his tactic with the banking sector.

Successive German governments have resisted Commission efforts to stop regional governments from propping up the Landesbanken, the highly politicised, under-capitalised banks, some of which, according to the stress tests conducted earlier this year by the Committee of European Banking Supervisors (CEBS), are among the weakest in Europe.

Germany, at both the federal and regional level, has to respond to the Commission by embarking on some serious reform. Almunia is giving the banking sector more time, but he has to exact a return.

His cause is helped by the general restraints on public finances. Few governments have excess supplies of money to splash around on subsidising companies (loans and state guarantees are more likely). Even in those countries that are emerging earlier from the economic despond, there is less chance of the extra leeway being exploited to the extent that it would have been during the years of plenty.

Nevertheless, Almunia and his staff cannot let up their guard. The state-aid rules should not lightly be set aside. The single market is too important for that.