By plegding to help the national airline Alitalia financially, and by announcing the grant of a 300 million euros loan, the newly-elected Italian Prime Minister Silvio Berlusconi has entered into a difficult battle with the European Commission. Alitalia was created in 1947. It started facing severe financial hardships in 2001 and the situation just kept worsening. The Italian company is now close to bankruptcy: its debt averages 1,4 billion euros, and its losses total 1 million euros per day.

See the article published in the NY Times:

http://www.nytimes.com/2008/04/24/business/worldbusiness/24alitalia-web.html?_r=1&scp=1&sq=alitalia&st=cse&oref=slogin

State aids in the European Union, an antitrust law notion

As a Member State of the European Union, Italy must abide by European law and legislation, which has prohibited State aids (European law wording for subsidies) since the founding of the European Union in 1957. This prohibition ensures that governmental actions do not distort competition among Member States and intra-European trade. If the loan to Alitalia was to be analized as a “State aid”, it could be struck down by the European Commission, that is the European antitrust authority. And if nevertheless, Italy decided to implement the measure, the European Commission would be entitled to recover the amount of the loan, as a penalty.

A State aid is an advantage in any form whatsoever granted by national public authorities on a selective basis and which favours undertakings (for the complete definition, refer to Article 87 of the Treaty establishing the European Community:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12002E087:EN:HTML )

See also the document “Application of Articles 92 and 93 [currently 87 and 88] of the EC Treaty (…) to State aids in the aviation sector”, which provides for a specific regime of scrutiny:

http://ec.europa.eu/dgs/energy_transport/state_aid/doc/art_92_93_en.pdf

Any aid measure by a Member State must be notified first and exclusively to the European Commission for approval. In the Alitalia case, the European Commission has expressed some doubts about the legal nature of the loan to the airline. Prime Minister Berlusconi argues that the measure would be a “commercial” loan, that is, a loan with the same characteristics and interest rate as any other loan granted on the open market, so that Alitalia would not be treated more favorably than any other economic operator. But the European Commission takes the view that such measure would nevertheless be analysed as a State aid where the creditor knows that advantage is conferred to an insolvent debtor. The interpretation given to the notion of State aid by the European Court of Justice is very broad, both in terms of origins of the subsidy (State or State-controlled entities) and nature of the grant (it may be positive grants of money, or tax exemptions…). Loans with preferential interest rates have already been struck down as amounting to State aids, hence the preference for a “commercial” loan for Alitalia.

Explanations: European Commission strict scrutiny

With respects to subsidies to airlines, the European Commission will scrutinize several points (see “Application”, p.690):

- “whether the loan is made on normal commercial terms” (interest rate charged, security backing the loan sufficiently enough to repay it in the event of default), and

- “whether such loan would have been available from a commercial bank”.

The test used is the “market economy investor” test: if the expenses incurred to invest in the airline would yield structural profits in the future, which would cover expenses, then the loan can be granted (see “Application” p.689). But if the sole effect of the loan is to cover operating losses, than it is sure to be struck down by the European Commission.

Italy has a particular incentive to label the State measure as a “commercial” loan: it has already resorted to subsidies in aid of Alitalia with the consent of the European antitrust authority. The State aids prohibition is not a full-scale one: Articles 87(3) and 87(2) of the Treaty establishing the European Community set forth exceptional situations (called “exemptions”) where aid measures are deemed “compatible to the [European] common market”. In the case of Alitalia, could Italy ground its contention on Article 87(3)(c) and argue that the loan “promote[s] the development of [a] certain economic activit[y]” in a way that preclude airlines market concentration (thus promoting competition on the European territory)?

The reasoning, if used, is not likely to convince the European Commission. The “Application” guidelines set forth a strict scrutiny and a restrictive interpretation of Article 87(3). Insofar as the measure does “not adversely affect trading conditions to an extent contrary to the common interest” (Article 87(3)(c)), the State aid to airlines must be part of a “comprehensive restructuring programme”. In short, the airline should not have received previous State aids, and the aid measure should render it viable structurally, within a reasonable time (for details, see “Application”, p.692 and 693).

But another limit applies: a 10-years buffer period must be left between 2 grants. Italy had already been authorized to grant State aids to Alitalia (1,49 billion euros) from 1997 to 2001. For European Commission Transportation Spokesman Jacques Barrot, any new aid measure should consequently not be granted before 2011.

Suspense

Should this “commercial” loan granted by Italy and designed to save a doomed company and its employees (some 21,000) be upheld? After this overview of European law, the answer by the European Commission is likely to be negative.

On the European Commission and its European trade law policies, see its website:

http://ec.europa.eu/index_en.htm

Submitted by Tina