Aid to Compensate the Damage Caused by Exceptional Occurrences: The Limited Usefulness of Article 107(2)(b) TFEU in the Times of the Pandemic

Dr Dionysios Pelekis  –  Teaching Associate, School of Law, Nottingham University

 

Ever since early 2020, the Covid-19 pandemic has been a very trying period for all. Beyond the untold and incalculable human cost of this pandemic, its spread as well as the measures taken to combat it, have caused a serious economic downturn. In the context of this downturn, it is reasonable to assume that States may be inclined to assist some struggling parts of the economy. One of the most obvious ways to do so, is via the granting of State aid.

The granting of aid is prohibited under Article 107 TFEU, however, that prohibition is neither absolute nor unconditional, with exemptions being provided for by Articles 107(2) and 107(3) TFEU. This can be proven by the Temporary Framework for aid measures to support the economy during the Covid-19 pandemic.

Article 107(2)(b) can be of particular interest in the current climate, as it applies to “aid to make good the damage caused by natural disasters or exceptional occurrences”. The criteria necessary for this Article to be satisfied are quite straightforward, namely the existence of damage from natural disasters or exceptional occurrences. In the context of a pandemic, “exceptional occurrences” are arguably more relevant, as any occurrence for the consequences of which it is not possible to plan ex ante, would as per the General Court, be classified as an exceptional one. This would apply both to the pandemic itself, and the measures taken to combat it. Thus, the Covid-19 pandemic would be classed as an exceptional occurrence for the purposes of Article 107(2)(b), making the exemption applicable.

However, despite being rather obviously applicable, its application raises issues. This is because as an exception from a general principle, the derogation of Article 107(2)(b) must be interpreted narrowly, which in turn means that only economic disadvantages directly caused by exceptional occurrences qualify for compensation. This means that the damage must be the direct consequence of the exceptional occurrence, and not dependent on any other causes. In effect, any aid awarded under this Article must relate directly to the damage suffered, requiring as precise an assessment as possible of said damage. Thus, any aid awarded under 107(2)(b) can only compensate for the damage caused by the exceptional occurrence, and nothing more.

This is reasonable, given the necessarily narrow scope of the exception. However, it creates practical problems, when we start considering the potentially unpredictable effect of exceptional occurrences. This is a major limitation to the potential usefulness of Article 107(2)(b) in situations like a pandemic. In this context, it is useful to look at Case T-655/20 Ryanair v Commission.

The case concerned the grants of aid from Germany to Condor, an airline. Condor had gone bankrupt in late 2019, subsequently receiving aid in the form a rescue loan.  In April 2020, Germany made another award of aid to Condor, this time to compensate the damage caused by flight cancellations, as a result of travel restrictions and lockdown measures. This aid was duly approved by the Commission on the basis of Article 107(2)(b). Thus, the aid granted to Condor in 2020 could only ever compensate that specific damage, and not any other damage generally linked to the pandemic, or to Condor’s bankruptcy.

However, the aid grant, and the Decision approving it, were problematic in that regard. The Commission, by comparing profit forecasts made at different times, calculated the damage caused by travel restrictions. This calculation, while not perfect, would have been sufficient, given the overall uncertain – and ongoing – nature of the pandemic. However, the aid measure also compensated Condor for costs incurred as a result of the extension of their bankruptcy proceedings – the extension of those proceedings was partially linked to the pandemic, but not necessarily to the travel restrictions imposed. The cause of the bankruptcy was of course unrelated to the pandemic. The latter aid did not meet the criteria of Article 107(2)(b), as it was not directly linked to the exceptional occurrence – or at least it was not proven to be. This led the Court to annul the Decision.

The case of Condor illustrates the inherent limitations of the usefulness of Article 107(2)(b) as the basis for the granting of aid. The necessity for a direct link to be established, and the necessarily limited scope of the damage that can be covered, and by extension of the direct link, can be major stumbling blocks. For example, the uncertain nature of the events occurring concurrently or following an exceptional occurrence clearly make the narrowness of the scope of Article 107(2)(b) problematic – it is possible, even likely, that the buyer lined up for Condor pulled out due to the flight cancellations and travel restrictions, but the damage caused by that action and the extension of the bankruptcy proceeding cannot easily fall within that narrow scope, and cannot be easily proven.

This is only made worse if we consider the Commission’s obligation to state reasons to the requisite legal standard. That obligation in practice further limits the scope of the exception, as the directness of the link needs to be thoroughly established. In this context, another point illustrated by the case is the ever-increasing importance of regulatory technique – if Germany and the Commission had been more careful in the drafting and assessment of the measure, it is possible that the Court would not have been compelled to annul the Decision.

Thus, in brief, we are faced with a peculiar situation – the apparently most appropriate exception to the State aid prohibition in relation to the pandemic proves, in practice, to fall rather short of the mark.

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