The subsidy race is jeopardizing prosperity in the EU

Subsidies are prohibited in the European Union (EU) as they are not compatible with the objective of a internal market with free competition. This is provided for in the Treaty on the Functioning of the European Union (Article 107 (1) TFEU). The internal market is a core element of the Union, which is intended to enable the free movement of goods, services, labor and capital.¹

So much for good intentions

According to the EU, the 27 EU member states have paid around 2.5 trillion euros in subsidies directly to companies over the last ten years. France leads the way with direct subsidies amounting to 654 billion euros, followed by Germany with 468 billion euros. The amount of direct subsidies paid by the two countries is comparable to the total economic output (GDP) of Croatia or Bulgaria in the same period.

In relation to economic output, Belgium has paid the highest average direct subsidies over the past ten years at 4.0% of GDP. France is in second place with an average of 2.7 percent of GDP.

However, direct subsidies only provide a small insight into the universe of state support programs. The total of all state subsidies is much higher, as indirect subsidies, tax breaks, investment grants and equity investments are not included in the EU statistics.  In Germany, for example, according to calculations by the Kiel Institute for the World Economy, total subsidies are 3.6 times higher than the EU figures.²

A dynamic has emerged

While the amount of direct subsidies as a proportion of GDP remained constant and even fell in some cases in the ten years prior to the coronavirus crisis, they skyrocketed during the crisis. This was made possible by Article 107 (2b) TFEU, which grants exemptions for the repair of damage caused by exceptional occurrences.

After the crisis, however, the level of direct subsidies has not fallen back to pre-crisis levels. Most recently, direct subsidies averaged around 2.0% of GDP in the member states. Before the coronavirus crisis, they amounted to around 1.5% for a long time.

21 of the 27 EU member states paid around a third more direct subsidies in the first half of 2023 than on average over the same period before the pandemic. The increase in direct subsidies was particularly strong in Belgium and France. Only six countries have reduced the amount of direct subsidies paid.

Exceptions confirm the rule

The ban on subsidies can also be circumvented by means of "important projects of common European interest" or "to remedy a serious disturbance in the economy of a Member State" (Art. 107 (3b) TFEU). EU Commission President Ursula von der Leyen's Green Deal has elevated the climate-neutral transformation of the European Union's economy to such a common interest. Russia's attack on Ukraine also constituted such a disruption from the European Commission's perspective.

The list of officially named "temporary frameworks for crisis management" is now long. Exception after exception and extension of one exception after the next.³  It has become the norm for the ban on subsidies to be circumvented.

Billions are being pumped into the economy by the EU states. Politicians want to promote and shape the economy, for example in key technologies. Companies hold out their hands, the states are happy to give and the European Commission nods off the aid.

The subsidy race is in full swing 

However, subsidies are distorting competition in the EU. Producers offer goods such as electric cars or solar panels at prices that would not be possible without subsidies. Countries with high tax revenues or great potential to take on more debt can support their economies more generously or attract industries with subsidies. Small or highly indebted countries are at a disadvantage.

This is why the subsidy race is not met with enthusiasm by all member states. While the German government is even insisting on a relaxation of the state aid regulation, smaller EU members such as the Czech Republic or highly indebted states such as Italy fear that they will not be able to keep up with the financial strength of large economies such as Germany. A further relaxation of the state aid rules could result in an even greater distortion of competition.

The internal market is at the heart of the EU, which has brought growth and prosperity to small and large, new and old member states. The ban on subsidies serves to maintain a functioning internal market. However, the constant circumvention of the ban on subsidies in the EU distorts competition and undermines the internal market. In the long term, this endangers prosperity in the Union.

¹ Compare European Commission „Temporary Crisis and Transition Framework“

² See Aims and Values of the EU.

³ See Kiel Subsidy Report 2023: Federal subsidies in times of Ukraine war and energy crisis

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