Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.5.2.1:3.5.2.1 The balancing test under Article 107(3)(b) TFEU

Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.5.2.1

3.5.2.1 The balancing test under Article 107(3)(b) TFEU

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Article 107(3) TFEU gives the Commission the sole competence to determine whether the conditions for compatibility of State aid with the internal market are fulfilled. In exercising its wide discretionary powers, the Commission has to balance the necessity and the proportionality of the aid measure in achieving an EU objective versus the distortion of competition brought about by it (the ‘balancing test’). State aid in the EU should only be granted, if it can reach objectives of common interest which cannot be achieved by the free market only.1

Over time, there has been a growing willingness at the level of the EU and the Member States to consider the effectiveness of State subsidies in pursuing public policy objectives, and to look more closely at the costs and benefits of State aid. The stated aim was to strive for ‘less and better targeted State aid’. This objective was pursued by the Commission through its State Aid Action Plan published in June 2005,2 and more specifically through the introduction of the refined economic approach, consisting of an effects analysis of State aid awards in the application of Article 107(3) TFEU. The main thrust behind the introduction of a more refined economic approach in the State Aid Action Plan has been to make the positive and negative implications of the State aid measure at issue more explicit and to ensure a more systematic assessment of the positive and negative effects.3 The refined economic approach is embodied in the balancing test under Article 107(3) TFEU.4

In essence, the balancing test assesses (i) whether the State aid addresses a market failure or other objective of common interest; (ii) whether there is an incentive effect (i.e. whether the aid affects the behaviour of the recipient in a way which meets the objective); (iii) whether the aid leads to distortions of competition and trade and; (iv) whether given the magnitude of the positive and negative effects, the overall balance is positive.5 In most cases this balancing is not carried out explicitly, but rather by reference to predetermined criteria based on certain principles.6

The balancing test originates from Article 107(3)(c) TFEU.7 The GC however confirmed in its judgment of 17 July 2014 in the case Westfälisch-Lippischer Sparkassen- und Giroverband v European Commission that the balancing test also applies under Article 107(3)(b) TFEU.

In this case, a shareholder in WestLB, a commercial bank in Germany that had received State aid, put forward that the objective of remedying a disturbance in the economy of an EU Member State is always in the common interest, as a result of which authorisation of aid under Article 107(3)(b) TFEU cannot be made subject to conditions seeking to protect competition. The GC considered it clear from the actual wording of Article 107(3)(b) TFEU (at that time, Article 87(3)(b) EC Treaty) that the Commission, when it finds that State aid is intended to remedy a serious disturbance in the economy of a Member State, is not, by the fact alone, obliged to consider that aid to be compatible with the common market. Moreover, according to settled case-law, Article 107(3) TFEU confers on the Commission a discretion the exercise of which involves economic and social assessments which must be made in a Community context. Accordingly, the difference in wording between Article 107(3)(c) TFEU, which allows the authorisation of some aid provided that it ‘does not adversely affect trading conditions to an extent contrary to the common interest’ and Article 107(3)(b) TFEU, which lays down no such condition, cannot lead to the conclusion that the Commission cannot assess the impact of aid authorised under the latter provision on the relevant market or markets in the EU as a whole.8

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