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Di Carlo, D., Eisl A. and Zurstrassen, D. “Together we trade, divided we aid: Mapping the flexibilization of the EU state aid regime across GBER, IPCEIs and Temporary Frameworks”, Policy Paper N°307, Jacques Delors Institute, November 2024

This joint JDI-LUHNIP Policy Paper documents the pressing policy problem of growing Single Market fragmentation due to the increasing EU Member State use of state aid and makes recommendations for how to address these risks at the European level. Starting out with a brief overview of key changes in EU state aid law and policy over the course of the last decades, our paper is providing an in-depth analysis of the evolution of national state aid expenditures across different state aid instruments. These instruments include the General Block Exemption Regulation (GBER), the Important Projects of Common European Interest (IPCEI) instrument and the various temporary frameworks set up to respond to the Covid-19 pandemic and the Russian invasion of Ukraine. Beyond immediate crises responses, these instruments have been set up to foster the green and digital transitions, ensure economic resilience, and promote and protect domestic industries in the face of growing geoeconomic competition. Across the different state aid instruments, our paper highlights a substantial cross-country variation in the level and composition of national state aid, leading to significant imbalances in the EU Single Market. The lack of supranational fiscal and political capacity to provide state aid at the EU level has exacerbated these disparities, creating the risk of subsidy races within the Single Market. To address these challenges, our policy paper proposes several policy solutions. First, it argues that state aid temporary frameworks should be phased out by 2025 to prevent further fragmentation of the Single Market. Instead, the EU should focus on consolidating its permanent state aid instruments to improve efficiency and coherence. Second, a more European approach based on the IPCEI instrument is needed, prioritizing project selection based on merit rather than a Member State’s fiscal capacity to aid. This European approach needs to be supported by more common funding to provide aid to industry, which could be further leveraged by national expenditure by making use of the exemption of national co-financing of EU-funded programmes in the new fiscal rules of the Stability and Growth Pact.