A recent judgment of the European Court of Justice has for the first time imposed financial sanctions on a Member State for the failure to recover State aid previously declared to be incompatible with European Union (EU) law.
In case C496/09 Commission v Italy (II), of 17 November 2011, the Italian Republic was ordered to pay both a lump sum of Euro 30 million and a substantial penalty payment (calculated by multiplying a basic amount of Euro 30 million by the percentage of the incompatible aid not yet recovered) for not complying with a Court ruling of 2004, pursuant to which Italy was bound to recover aid previously declared to be incompatible with EU law by the European Commission.
The duty to recover incompatible state aid
When the European Commission concludes that a notified State aid measure is incompatible with EU law, the Member State concerned cannot put the measure into effect. The Treaty provides for a stand-still obligation until a final Commission decision is adopted, and if the incompatible State aid was not notified, or it was meanwhile put into effect, the Member State should recover the aid from its beneficiaries, with interest. If the Member State does not comply with this decision, the Commission may refer the matter directly to the Court of Justice.
Commission V Italy II
This case goes back to 1999, when the Commission decided that certain aid granted by Italy to promote employment (by a reduction of the social security contributions paid by companies by recipient companies) where incompatible with the Internal market, and ordered its immediate recovery. As Italy did not comply with the decision, the Commission in 2002 initiated infringement proceedings in the Court of Justice, which declared on 1 April 2004 that Italy had failed to fulfill its obligations (Commission v Italy (I)).
The Treaty requires Member States to take immediately the necessary measures to comply with a judgment of the Court. In 2009, considering that Italy had still not adopted the necessary measures to recover the incompatible aid, the Commission started a second infringement case (Commission v Italy (II)), where it asked the court to impose both a lump sum and a penalty payment until full compliance with the 2004 Court judgment.
In this second case, the Court started by observing that, on the reference date (1 April 2008), the aid that had been wrongly paid had not been fully recovered by the Italian Authorities. Italy invoked a temporary absolute impossibility of recovering the incompatible aid because of the large number of recipient undertakings and of the non-availability of information necessary to quantify the sums to be recovered. This argument was summarily rejected by the Court, noting that, under settled case-law, neither internal difficulties nor the need to examine the individual situation of each recipient can justify a failure to comply with a Court judgment. The Court therefore declared the infringement as requested by the Commission.
Heavy financial Sanctions for the non-recovery of illegal aid
The failure by Italy to comply with the 2004 judgment led the Court to impose for the first time heavy financial sanctions on a Member State for the non-recovery of wrongly paid aid. A penalty payment was found to be an appropriate measure by which to encourage Italy to take the necessary measures to put an end to the infringement. According to the Court, the Treaty rules on competition, in particular those have a “vital nature” and “are the expression of one of the essential tasks with which the EU is entrusted. The failure to recover wrongfully paid aid therefore was a serious infringement, and the Court imposed a penalty of an amount calculated by multiplying the basic amount of Euro 30 million by the percentage of the unlawful aid not yet recovered, for every six months of delay.
The seriousness of the infringement also led the Court to apply, cumulatively, a lump sum payment of Euro 30 million, as a deterrent measure, in order to effectively prevent the future repetition of similar infringements of EU law. The Court considered relevant that was a ‘repeating offender’, as it had already been the subject of a number of judgments for its failure to recover wrongly paid State aid.
Future implications for member states
Commission v Italy (II) reminds Member States that the granting of State aid without previous notification and approval by the Commission may entail serious financial consequences. It also emphasizes the importance of full compliance by Member States with the duty to recover incompatible State aid from the recipient undertakings.
Recovery operations are frequently complex and difficult to implement, especially when recipients are numerous, amounts granted are small and recovery decisions are challenged in the national courts. Such difficulties however, even if significant, do not justify non-compliance with a ruling of the Court of Justice. Considering that the Commission and the Court have shown willingness to penalize heavily the non-recovery of aid, national authorities have increased incentives not to grant State aid without first ensuring that it is compatible with EU law.
