State Aid and the Single Market Abbreviations and Symbols Used
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European Commission EUROPEAN ECONOMY Directorate-General for Economic and Financial Affairs 1999 Number 3 © European Communities, 1999 Printed in Belgium State aid and the single market Abbreviations and symbols used Member States B Belgium DK Denmark D Germany WD West Germany EL Greece E Spain F France IRL Ireland I Italy L Luxembourg NL The Netherlands A Austria P Portugal FIN Finland S Sweden UK United Kingdom EU-9 European Community excluding Greece, Spain and Portugal EU-10 European Community excluding Spain and Portugal EU-12– European Community, 12 Member States including West Germany EU-12+ European Community, 12 Member States including Germany EU-15+ European Community, 15 Member States including Germany EUR-11 Group of 11 Member States participating in monetary union Currencies ECU European currency unit EUR Euro ATS Austrian schilling BEF Belgian franc DEM German mark (Deutschmark) DKK Danish krone ESP Spanish peseta FIM Finnish markka FRF French franc GBP Pound sterling GRD Greek drachma IEP Irish pound (punt) ITL Italian lira LUF Luxembourg franc NLG Dutch guilder PTE Portuguese escudo SEK Swedish krona CAD Canadian dollar CHF Swiss franc JPY Japanese yen RUR Russian rouble USD US dollar iv Other abbreviations ACP African, Caribbean and Pacific States having signed the Lomé Convention ECSC European Coal and Steel Community EDF European Development Fund EIB European Investment Bank EMCF European Monetary Cooperation Fund EMS European Monetary System ERDF European Regional Development Fund Euratom European Atomic Energy Community Eurostat Statistical Office of the European Communities GDP (GNP) Gross domestic (national) product GFCF Gross fixed capital formation LDCs Less developed countries Mio Million Mrd 1 000 million NCI New Community Instrument OCTs Overseas countries and territories OECD Organisation for Economic Cooperation and Development OPEC Organisation of Petroleum Exporting Countries PPS Purchasing power standard SMEs Small and medium-sized enterprises toe Tonne of oil equivalent : Not available v Contents Introduction and synopsis, by R. Meiklejohn 7 1. Outline of this volume 7 2. The economics of State aid 8 3. Trends and patterns of State aids 9 4. Recent developments in State aid policy 10 5. Market definition 12 6. Restructuring and privatisation 15 7. The case of the new German Länder 18 8. The international context 19 PART I Chapter 1 — The economics of State aid, by R. Meiklejohn 25 1.1. Public goods 25 1.2. Merit goods 26 1.3. Economies of scale 26 1.4. Externalities 28 1.5. Imperfect information 29 1.6. Institutional rigidities 30 1.7. Imperfect factor mobility 30 1.8. Frictional problems 31 1.9. Foreign subsidies 31 1 Chapter 2 — Trends and patterns in State aids, by E. Vanhalewyn 32 2.1. Introduction 32 2.2. General overview 33 2.3. Sectoral distribution of aid 34 Box 1: Classification by objectives of aid 36 Box 2: German State aid to the new Länder 40 2.4. Conclusions 44 Chapter 3 — Recent developments in State aid policy, by S. Simon 46 3.1. Introduction 46 3.2. State aid as defined by the EC Treaty 46 3.3. Horizontal rules 49 3.4. Regional rules 54 3.5. Sectoral rules 55 3.6. Procedural and technical matters 60 PART II: Expert studies Chapter 4 — Market definition and State aid control, by J. Fingleton, F. Ruane and V. Ryan 65 4.1. Introduction 65 4.2. Market definition in anti-trust policy 66 4.3. Taxonomy of State aids 76 4.4. Market definition and State aids 82 Chapter 5 — State aids, restructuring and privatisation, by D. Harbord and G. Yarrow 89 5.1. Introduction 89 5.2. The application of Community articles and guidelines with respect to State aid 90 5.3. Economic analysis and State aids policy 92 5.4. State aids and the restructuring of public enterprises 102 2 5.5. Privatisation 112 5.6. Conclusions 118 Appendix 1: Financial structure, incentives and firm behaviour 122 Appendix 2: The ‘options’ theory of investment 129 Chapter 6 — State aid, restructuring and privatisation in the new German Länder, by L.-H. Röller and C. von Hirschhausen 132 6.1. Introduction 132 6.2. The specificity of post-socialist industrial restructuring in eastern Germany: turning socialist combines into enterprises 133 6.3. Economic rationale for State aid 137 6.4. The enterprisation of the east German shipbuilding industry 140 6.5. The enterprisation of the east German synthetic fibres industry 146 6.6. Conclusion 151 Chapter 7 — External aspects of State aids, by P. Messerlin 161 7.1. Introduction 161 7.2. State aids and trade measures: substitutes or complements 162 7.3. Lessons from the EC experience 164 7.4. The WTO regime 167 7.5. A comparison of the WTO and EC subsidy and anti-subsidy rules 169 7.6. The future evolution of the WTO and the role of the US 174 7.7. Conclusion — the need for unilateralism 177 Annex 1: A more detailed look at the three WTO exemptions 189 Annex 2: Subsidies in the steel industry 190 Annex 3: A worked example — Australian iron and steel industry 194 3 Tables 1. Overall national aid in the Member States 1992–94 and 1994–96 in million ECU and % of GDP, excluding agriculture 32 2. Distribution of State aids by sector, 1992–94 and 1994–96 (%) 33 3. State aid to the manufacturing sector, EU-12 (1990–94) and EU-15 (1995–96) 35 4. Aid to manufacturing at 1995 prices and exchange rates (million ECU) 35 5. State aid to the manufacturing sector in ECU per person employed (annual averages at 1995 prices and exchange rates) 35 6. Aid to manufacturing, 1994–96, broken down by sectors or objectives (%) 37 7. Aid to railways, 1992–94 and 1994–96 (million ECU) 42 8. Aid to the coal industry, 1992–94 and 1994–96 (million ECU) 43 9. Aid to the fisheries sector, 1992–94 and 1994–96 (million ECU) 43 10. State aid on an ad hoc basis and Treuhand aid awarded in the manufacturing, financial services and air transport sectors in the Member States, 1992–96 44 11. State aid on an ad hoc basis, excluding Treuhand aid, awarded in the manufacturing, financial services and air transport sectors in the Member States — annual averages 1992–94 and 1994–96 44 12. Examples of markets, industries and industry sectors 77 13. Trans-frontier effects of State aid 81 14. Heracles’ financial performance (million GRD) 111 15. Nationalised industries and firms in 1979 116 16. From the socialist Mathias Thesen Werft VEB to the MTW Schiffswerft GmbH — A case of creating ‘new’ capacities 153 17. Basic data on the restructuring of the east German shipbuilding industry, 1990–95 (as of December 1995) 154 18. The state of the European and world shipbuilding industry, 1980–94 155 19. Overcapacities on the European and world shipbuilding market 155 20. European market shares in the main shipbuilding market segments (%) 156 21. Market shares in European shipbuilding (production), 1987–94 (%) 156 22. Future productivity estimates for the east German yards compared to European and world standards 156 23. Completion of east German shipyards, 1985–94 156 24. Basic data on the restructuring of the east German chemical fibres industry, 1990–95 157 25. Capacities and overcapacities in the west European (EU-15 and Switzerland) synthetic fibres industry 158 26. Market shares in the European synthetic fibre industry (production), 1988–94 (%) 158 27. Changing capacities in the east German chemical fibre industry (synthetic and man-made), 1989, 1993, 1996/97 158 28. EC and US countervailing cases and EC State aid cases 178 29. The EU State aid case load, by year 179 30. The EU State aid case load, by Member State 180 31. EU State aid and other instruments of protection, by industry 181 32. The TOR and WTO regimes on State aids and subsidies — a synopsis 182 33. Types of subsidies under the TOR or WTO regimes — a comparison 183 34. US countervailing cases — frequencies of determinations 184 35. US countervailing measures — the impact 184 36. Exemptions for regional, R & D and environmental aid — a synopsis 185 37. Major EC imports of steel products 186 38. Steel prices for selected years and periods 187 4 Graphs 1. Economies of scale — production aid 26 2. Aid for entry into a monopolistic market 27 3. Economies of scale — support for a new product 28 4. State aid to the manufacturing sector at 1995 prices and exchange rates (billion ECU) 34 5. Breakdown of aid to manufacturing by objectives, % 37 6. Regional aid per head of population of assisted areas — annual average, 1994–96 41 7. Regional aid per head of population of assisted areas, including ERDF — annual average, 1994–96 41 8. Upstream-Downstream markets: Are non-traded inputs A and B in the same market? 73 5 Introduction and synopsis (1) 1. Outline of this volume Furthermore, unless some supranational discipline is imposed, competition between governments to attract This edition of European Economy forms part of a investment can lead to costly subsidies races. The EU’s series of publications on the economics of Community system of control, based on an agreed set of fundamen- competition policy which started with European tal principles firmly anchored in the Treaties therefore Economy No 40 of May 1989 on ‘Horizontal mergers makes an important contribution towards ensuring that and competition policy in the European Community’. the benefits of economic integration can be realised. This was followed in September 1991 by an edition (No 48) on the control of State aids and in 1994 by a However, the practical application of these basic princi- further edition (No 57) on merger control.