The European Commission has published new guidance to inform Member States about how they can assist struggling financial institutions without violating EU state aid rules. In general, the state aid rules prohibit the use of tax dollars by Member States to subsidize or otherwise prop up national businesses in a way that distorts cross-border competition. An exception to the state aid rules allows certain measures to be taken “to remedy a serious disturbance in the economy of a Member State” (Article 87(3)(b) of the EC Treaty). The new guidance clarifies how Member States might use this exception, and how the Commission will review proposed measures in light of the present global financial crisis.

The guidance provides that to ensure compliance with the state aid rules and the exception for serious economic disturbances, Member States should disclose state aid plans to the Commission before they are implemented. The Commission has pledged to respond to requests for approval of proposed state aid plans, where necessary, within 24 hours or over the weekend. To be approved, plans such as guarantees or recapitalization schemes must meet certain conditions to ensure that they are narrowly tailored to stabilize the target institutions and minimize any distortion of competition. Such conditions include, inter alia, that (i) eligibility for aid not be based on nationality of the beneficiary institutions; (ii) aid is limited in duration and scope so as to provide only as much assistance as is required to endure the current economic turmoil; (iii) conditions for receiving aid prevent abuse by institutions that might seek to leverage aid to enhance their competitive positions; and (iv) appropriate follow-up measures are included that provide for necessary structural adjustments to the financial sector as a whole or beneficiary institutions.

The guidance document may be downloaded from the Commission’s website.