This Monday, the European Commission President Ursula von der Leyen gave the green light to EU member governments to discuss and adopt state aid rules aimed to assist companies impacted by the coronavirus outbreak.

State aid should only be used when it is the appropriate tool to benefit the general public and when its effect on competition is minimal. The current coronavirus situation does constitute an “exceptional circumstance,” making it easier for Member States to adopt state aid measures.

As the coronavirus outbreak is already affecting Slovenia's economic activity, such measures are now seen as a necessity rather than an overreaction. What remains unclear is whether the “injections” envisaged by Slovenia will be enough to heal the “infected” economy.

A quick response in support of employers: The Law on the Interim Measure of Partial Reimbursement of Salaries

Slovenia's Ministry of Labour, Family, Social Affairs and Equal Opportunities was quick to react with a draft of the Law on the Interim Measure of Partial Reimbursement of Salaries, which aims to retain jobs by protecting employees and, at the same time, assisting the affected companies.

According to the law, the state would help employers who, due to their poor business situation, could no longer guarantee work to at least 50% of their employees. While waiting to be called back to work, employees would be entitled to compensation of 80% of their base salary and some of the burden would be borne by the State. Partial reimbursement of salary cost is also envisaged in cases where, due to a quarantine ordered by the Minister of Health, the employee would not be able to perform their regular activities.

In each of the above cases, 40% of the employee’s salary is to be borne by the state. The period of this partial reimbursement to the employers is limited to a maximum of three months or the prescribed quarantine period (whichever is longer).

The employer will exercise the right to reimbursement by applying in electronic and written form to the Employment Service of Slovenia. Note that some employers (tax debtors, those in breach of labour law, insolvent companies) will not be entitled to a partial reimbursement of wage compensation.

The bill is expected to be adopted under an urgent procedure within the next few days.

What is state aid and when is it justifiable?

State aid, in the EU framework, is the name given to a subsidy or any other aid provided by a government. Since a company that receives government support gains an advantage over its competitors, state aid is seen as an instrument that distorts competition. That is why the TFEU generally prohibits state aid unless it is justified for reasons of general economic development. To ensure that the prohibition is respected, and exemptions are applied equally across the EU, the EU Commission ensures that any state aid measure adopted complies with EU rules.

State aid is compatible with the internal market when:

(a) it has a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) it makes good the damage caused by natural disasters or exceptional occurrences (the exemption applicable to coronavirus outbreak);

(c) it is granted to the economy of certain areas in the Federal Republic of Germany affected by the division of Germany, if such aid is required to compensate for the economic disadvantages caused by the division.

The financial crisis proved to be an “exceptional circumstance” for state aid

State aid is of crucial importance in situations that have a major impact on the market. One such example is the state aid provided to the Slovenian banking sector. Following the global financial crisis, the Bank of Slovenia determined in 2013 that five Slovenian banks were showing capital shortfalls. Given the scale of those shortfalls, the banks had insufficient assets to satisfy their creditors and cover the value of deposits. Due to the risks connected with the potential downfall of those banks, the Bank of Slovenia decided to institute exceptional measures to ensure the recapitalisation of the Nova Ljubljanska banka and Nova Kreditna banka Maribor, the rescue of Abanka Vipa, and the winding up of Probanka and Factor banka. Considering the importance of those banks for the Slovenian market, the general financial situation worldwide and the commitments made by Slovenia, the EU Commission approved the state aid.

Not every injection is compatible with EU

However, such measures are not always accepted by the EU. In 2012, the EU Commission ordered Slovenia to recover EUR 10 million of state aid granted to the leisure equipment manufacturer Elan in 2008. At the time of the capital injection, Elan's shares were at least majority owned by the Slovenian state. The investigation by the EU Commission revealed that the capital injection had not been made on market terms (the so-called “market economy investor principle”) and therefore constituted impermissible state aid according to the TFEU. Since the company was in financial difficulties at the time, the Commission assessed the aid in line with the EU guidelines on the rescue and restructuring of companies in difficulty. These guidelines require that the aid beneficiary implements adequate compensatory measures to minimise the distortions to competition arising from the state support. As Elan did not carry out any such measures, the company was instructed to pay back the aid and hence restore the level playing field in the EU's internal market.