15.By application received at the Court Registry on 26 November 1992, the Federal Republic of Germany seeks the annulment of that Decision and, in the alternative, the annulment of Articles 2 and 3, on the following grounds:the envisaged aid is development aid within the meaning of the Article 4(7) of the seventh directive. It conforms with the definition of development aid given by the OECD and interpreted by the Commission in its letter to the Member States of 3 January 1989.SG(89)D/311 applying the previous Council Directive 87/167/EEC of 26 January 1987, the wording of which was the same (OJ 1987 L 69, p. 5) (Annex 11 to the application).
The criterion of the necessity of the aid for the recipient undertaking, laid down in the judgment in Philip Morris, cited above, in relation to Article 92(3)(c) of the EEC Treaty, falls outside the scope of Article 4(7);
the contested Decision is vitiated by an error of assessment;
it infringes three fundamental principles of Community law:
the principle of equal treatment;
the principle of the protection of legitimate expectations;
the applicant's right to a fair hearing.
<TI><P>Is the envisaged aid development aid within the meaning of Article 4(7) of the seventh directive?</P></TI>23.Article 92(3) provides:The following may be considered to be compatible with the common market:
- (a)...
- (b)...
- (c)...
- (d)Such other categories of aid as may be specified by decision of the Council acting by a qualified majority on a proposal from the Commission.
Emphasis added.
24.In its judgment in Belgium v Commission,Joined Cases C-356/90 and C-180/91 Belgium v Commission [1993] ECR I-2323.
the Court held in relation to Council Directive 87/167/EEC,Of 26 January 1987 on aid to shipbuilding (OJ 1987 L 69, p. 55).
which, like the seventh directive which superseded it, was adopted on the basis of Article 92(3)(d), that... the Council, in accordance with the ratio legis of Article 92(3 and on the basis of a finding of the incompatibility of the aid for shipbuilding, took account of a number of requirements of an economic and social nature which prompted it to use the power granted to it by the Treaty nevertheless to consider such aid to be compatible with the common market, provided that it satisfies the conditions for a derogation laid down in the directive.Paragraph 30.
25.That reasoning can be transposed to the seventh directive, which differs from its predecessor only in minor respects (the two directives have, essentially, the same Article 4). This brings the matter therefore within ... exceptional arrangements, which necessarily presuppose that the aid in question is at the outset incompatible with the common market.Paragraph 33.
26.How are powers shared between the Commission and the Council when the latter applies Article 92(3)(d)?27.As we know, when assessing the compatibility of aid in a given case, the Commission enjoys — subject to review by the Court — vested powers.See paragraph 1 of the judgment in Joined Cases C-72 and 73/91 Sloman Neptun Schiffarts [1993] ECR I-887.
The Council, for its part, has powers which are available only in exceptional circumstances, by virtue of the third subparagraph of Article 93(2).An example is Council Decision 73/209/EEC of 24 July 1973 concerning the present system of aid in the United Kingdom for the refining of raw sugar (OJ 1973 L 207, p. 47).
28.Under Article 92(3)(d), the division of powers between the Council and the Commission is thus clear. Whereas the Council may extend the range of aid which may be declared compatible, by fixing an abstract and general framework (categories of aid), only the Commission undertakes a specific examination to determine whether or not aid falling within the category defined by the Council is compatible with the Treaty. The Council does not therefore substitute itself for the Commission in making a specific assessment of the compatibility of aid in a given case. Moreover, when it relies on the third subparagraph of Article 93(2), it gives a decision at the request of a Member State and does so unanimously, whereas, in order to extend the range of aid under Article 92(3)(d), it acts by a qualified majority.29.What are the Commission's powers under that provision?30.As we know, in order to declare compatible with the common market aid falling within the categories listed in Article 92(3)(a), (b) and (c), the Commission has a discretion, the exercise of which involves economic and social assessments which must be made in a Community context.Judgment in Philip Moms, cited above, paragraph 24, emphasis added. See also the judgment in Case C-303/88 Italy v Commission [1991] I-1433, paragraph 34. The Court's case-law is consistent in that respect.
31.With respect to those categories of aid, the Court recognizes that the Commission's discretion is rather wide: thus, the use of the words abnormally and serious in the exemption contained in Article 92(3(a) shows that it concerns only areas where the economic situation is extremely unfavourable in relation to the Community as a whole. The exemption in Article 92(3)(c), on the other hand, is wider in scope inasmuch as it permits the development of certain areas without being restricted by the economic conditions laid down in Article 92(3)(a), provided such aid does not adversely affect trading conditions to an extent contrary to the common interest.Judgment in Case 284/84 Germany v Commission [1987] ECU 4013, paragraph 19.
32.Certain authors have even maintained that the Commission enjoys considerable scope for intervention in that field, precisely in order to compensate for the legislative lacuna resulting from the lack of Council rules, based on Articles 92(3)(d) and 94 of the Treaty:The Commission has been obliged, de facto, to take the place of the intergovernmental authority, exercising in its stead an unknown type of regulatory power.C. Blumann, Regime des aides d'Etat: jurisprudence récente de la Cour dc Justice, Revue (du Marché commun, 1992, p. 721.
33.Be that as it may, what is the extent of the Commission's discretion when the Council determines, on the basis of Article 92(3)(d), the categories of aid which may be considered to be compatible?34.The Court has already implicitly taken the view in its judgment in Belgium v Commission,Footnote 20.
cited above, that that discretion extended to those categories of aid. It stated:... Article 92(3)(d) allows the Council, acting by a qualified majority on a proposal from the Commission, to extend the range of aid which may be regarded as compatible with the common market, in addition to the categories indicated in subparagraphs (a), (b) and (C).Paragraph 26, emphasis added.
35.That power is apparent from the very wording of Article 4(7) of the seventh directive, which provides:It (aid related to shipbuilding and ship conversion granted as development assistance) may be deemed compatible with the common market, ....Emphasis added. See also Article 4(1).
36.Let us now examine the way in which that provision is applied.37.The situation in the shipbuilding sector is sui generis.38.Distortions of competition affect this sector in the world market and the Community shipbuilding industry could not protect itself against outside competition ... by tariff measures or other measures of commercial policy without causing harm to Community shipowners who carry on their activity in a market of an international nature.Third recital in the preamble to Council Directive 69/262/EEC of 28 July 1969 on aid to shipbuilding intended to correct distortions of Community on the international market [Journal offiael 1969 L 206, p. 25).
39.The successive Understandings concluded under the auspices of the OECD have made it possible to reduce those distortions by restricting and harmonizing export credit conditions for ships.See the sixth recital in the preamble to Council Directive 78/338/EEC of 4 April 1978 on aid to shipbuilding (OJ 1978 L 98, p. 19) and the fifth recital in the preamble to Council Directive 75/432/EEC of 10 July 1975 on aid to shipbuilding (OJ 1975 L 192, p. 27).
40.In an annex to the resolution of the Council of the OECD of 3 August 1981 concerning an amendment of the Understanding on export credits for ships, paragraph 6 states that a contracting party may, in a special case, accord more favourable conditions for genuine aid reasons.Annex 12 to the application.
That aid must, in particular, be notified with sufficient notice to the other partners.For this reason the aid granted by the Federal Republic of Germany was notified to the OECD.
41.By a document entitled Revision of the definitions and administrative procedures concerning the understanding on export credits for ships (C/WP6(84)3) of 18 January 1984,Annex 13 to the application.
Working Party No 6 of the Council on shipbuilding laid down the conditions for the implementation of the above-mentioned paragraph 6.42.The aid in question must be official development assistance. The actual owner must reside in the State receiving the aid and not be a non-operational subsidiary of a foreign company. Finally, it must undertake not to resell the ship without the approval of its government.43.In an addendum of 30 January 1985, the working party clarified the definition of public development aid:Annex 14 to the application.
Official development assistance is defined as those flows to developing countries and multilateral institutions provided by official agencies, including State and local governments, or by their executive agencies, each transaction of which meets the following tests:
- (a)It is administered with the promotion of the economic development and welfare of developing countries as its main objective;
and
- (b)It is concessional in character and conveys a grant element of at least 25% (calculated at a rate of discount of 10%)
Annex 14 to the application, point 18.
of the contract value.
44.The Council conformed to those conditions by simply referring, in the first subparagraph of Article 4(7) of the seventh directive, to the provisions adopted by the abovementioned working party.45.Those conditions were set out in the Commission's notice to the Member States, SG(89)D/311 of 3 January 1989.Annex 11 to the application.
46.The Commission does not deny that those conditions have been observed in the present case.47.The second subparagraph of Article 4(7) requires it, before checking that the aid fulfils the conditions laid down by the OECD, to verify the particular development content.48.What does that verification involve? Is the mere fact that the aid can be classified as public development aid within the meaning of the OECD Understanding sufficient in that regard?49.In its Decision, the Commission maintains that, quite apart from its examination of the OECD criteria laid down in the first subparagraph of Article 4(7), it must establish whether the aid granted ... constitutes development aid.Contested Decision, VI, second paragraph.
50.It observes that COSCO is a flourishing company — it ranks fifth in the world amongst container operators — and has the financial capacity to undertake any renewal of its fleet for itself. COSCO intends buying the 2700 TEU container without aid. The aid is therefore incompatible since it is not necessary for the company receiving it. Moreover, the granting of unjustified aid carries the risk of creating a serious distortion of competition to an extent contrary to the common interest.Contested Decision, VI, third paragraph, subparagraph 2.
51.The Federal Republic of Germany contends, on the contrary, that the verification of the development component involves no more than establishing that the minimum rate of the grant element (25%) prescribed by the OECD is observed.Paragraph 5 of the reply.
Moreover, the criteria of the necessity of the aid, laid down in Philip Morris in entirely different circumstances, was not referred to in the Commission's letters of 3 January 1989 and 22 November 1991 and is inapplicable in the present case.52.The wording of the second subparagraph of Article 4(7) gives valuable guidance. Whilst the Commission must ensure that the aid is within the scope of the OECD Understanding, it must also verify its particular development component. It is therefore clear that whilst compatibility with the OECD criteria is a necessary condition for compatibility with the common market, fulfilment of that condition is not sufficient. If Article 4(7) laid down no other conditions than observance of the criteria laid down by the OECD, it would be drafted like Article 4(6) which, with regard to aid granted in the form of credit facilities, prescribes no other requirements than conformity with an OECD Council resolution. The particular development component does not therefore merge with the OECD criteria.53.In interpreting that concept, one consideration appears decisive: the contrast between the conditions laid down in general by the seventh directive for the grant of production aid — and in particular the fixing of a ceilingArticle 4(1). See 2 above.
— and th ose specifically prescribed for the grant of development aid linked with the construction and conversion of vessels, which fix a floor. Because of the development aim pursued, the aid under Article 4(7) is not subject to the same constraints as aid under Article 4(1) to (6).54.The seventh directive allows development aid to be linked to the construction of merchant vessels in the Community.55.Aid under Article 4(7) of the directive which did not pursue a genuine development objective might disguise indirect aid to Community shipyards — a subsidy to the shipbuilding industryContested decision, IV, second paragraph, subparagraph 1.
— which would thus not be subject to the conditions laid down in Article 4(1) to (6).56.The Commission found such an infringement in the procedure which gave rise to Decision 91/306/EEC of 12 December 1990 concerning two aid projects of the German Government in favour of a shipyard in financial difficulties,OJ 1991 L 158, p. 71.
in which it observed:The aim of Article 4(7) of [Directive 87/167/EEC] is to allow aid to reduce the prices of ships to certain developing countries in specific circumstances, and not to grant rescue aid to yards in the Community.Ibid., II, fourth paragraph.
57.This shows the importance of the task entrusted by the Council to the Commission: to inquire whether the aid is development aid or, in reality, indirect aid to the Community shipyards concerned. That is also the point which the Commission raised in its Notice 92/C22/07.Cited above, note 12; see in particular p. 5.
58.If checking the development component was limited, as contended by the German Government, to establishing that the aid ... was intended to help China to cover a greatly increased transport need and save hard currency by boosting exports and that the container ships would further the development of an integrated transport system ...,Contested decision, II.
the checks undertaken would not enable any misuse of the procedure to be brought to light.59.If, on the contrary, checking the particular development component consists in examining closely the matter of the proportionality (is the planned aid capable of attaining the stated development objective, and could that objective be attained by a measure more in conformity with the competition rules?And in particular, could the project not be financed by recourse to the market (cash flow)?
), and assessing the necessity for the aid, having regard to the specific and precise conditions for its use, the Commission could then determine whether the aid in question was covered by Article 4(1) to (6).60.The check undertaken by the Commission was of the latter kind, following which it concluded that COSCO is not a company which needs development aid in order to contribute to China's development.Contested decision, VI, third paragraph, subparagraph 2 — emphasis added.
61.In doing so, did it improperly add a condition to those laid down by Article 4(7) of the seventh directive for the grant of development aid?62.Admittedly, a measure of general application cannot be implicitly amended by an individual decision.Judgment of 24 March 1993 in Case C-313/90 CIRFS and Others v Commission [1993] ECR I-1125, paragraph 44. See also paragraph 130 of the Opinion of Advocate General Lenz.
The Commission cannot therefore, by its Decision, add a condition, or even a criterion, to those set out in the directive for the grant of development aid.63.I consider that, whatever the awkwardness in the drafting of the Commission Decision (which refers, in the French, italian, Portuguese, Spanish and Dutch versions, to the criterionThat word docs not appear in the German, English or Greek versions.
of necessity), that did not happen.64.The Commission verified whether the envisaged aid pursued a specific development objective, which is precisely what it is asked to do by the Council. The German version of the second subparagraph of Article 4(7) of the seventh directive is unambiguous in that respect: Die Kommission prüft, welches besondere Entwicklungsz/e/mit der geplanten Beihilfe verfolgt wird .... The Italian version is even more explicit: (La) Commissione ... verifica la specifica finalità di sviluppo contenuta nell'aiuto prospettato ...Emphasis added.
65.Finding in particular that COSCO was in a position to provide its own financing and renew its fleet under normal market conditions, it concluded that the aid in question did not pursue such an objective and did not fall within Article 4(7):Contested decision, VI.
the same development aim could be attained without State aid (and therefore without the distortions of competition inevitably caused by it).66.By thus examining the matter of proportionality, the Commission established that the aid project did not fall within the scope of Article 4(7) (without thereby asserting that it came within other paragraphs of that article). Moreover, it observed the ratio legis of the directive, which seeks to limit aid granted in derogation from the rule of free competition. It also remained within the scope of the powers attributed to it for the purpose: moving from the general to the particular and checking whether there is really development aid where such is required.67.Must not the Commission's discretion specifically enable it to refuse to declare particular aid compatible on the ground that the intended recipient has no need for it and that it is not necessary in order to attain the objectives laid down in Article 92(3)(a), (b) or (c) or those of a Council directive?68.Let us recall the Opinion of Advocate General Caportorti in Philip Morris:Cited above, note 16.
there is no reason for derogating from the prohibition of State aids if a particular investment... may also take place irrespective of that benefit.At p. 2701.
69.In its judgment in that case, the Court considered that the Commission was right to take the view that an aid granted on the basis of Article 92(3) should be necessary in order to be declared compatible.Paragraphs 17 and 26.
70.The legality of such a requirement is upheld — albeit by implication in some instances — in the case-law of the Court.71.Thus, in its judgment in Italy v Commission,Cited above, note 26.
the Court approved Decision 89/43/EEC by which the Commission found that the aid granted to the ENI-Lanerossi group in the form of the injection of capital into its subsidiaries engaged in the manufacture of men's clothing was incompatible with the common market. The Court held that the Commission had been right to take the view, following an extremely detailed analysis, that the aid in question was not appropriate to attainment of the Community objectives relating to sectoral aid to the textile industry or to the guidelines governing rescue aid for undertakings and could not, therefore, qualify for any of the derogations provided for in Article 92(3).See paragraphs 30 to 39.
72.Mention should also be made of the decision on the investment subsidy granted to Deufil for the production of polyamide yarns, in which the Commission refused to apply Article 92(3). The Court approved it, observing that:The Commission in no way exceeded the limits of its discretion by considering that the granting of aid for an investment which increases production capacity in a sector in which there is already considerable overproduction is contrary to the common interest and that aid of that sort is not of such a nature as to promote the economic development of the area at issue.Judgment in Case 310/85 Deufil v Commission [1987] ECR 901, paragraph 18.
73.Of similar importance is the judgment of 21 March 1991 in Italy v Commission,Case C-305/89 [1991] ECR I-1603.
in which the Italian Republic contended that the aid granted to Alfa Romeo came within Article 92(3)(a) (because it was intended to promote economic development in the Mezzogiorno) or Article 92(3)(c) (because it was intended to develop certain activities or certain economic regions). The Court rejected that contention on the ground that:the disputed injections of capital constituted rescue aid which, in the absence of a genuine restructuring plan, could not bring about the lasting development of regions where there was serious underemployment or of specific economic activities or economic areas.Paragraph 36.
74.The Commission's approach may be summarized as follows:... aid will only be declared compatible where it contributes to the attainment of one of the development objectives referred to in Article 92(3) and where it is proved that, without the intervention of the public authorities, the free interplay of market forces would not alone be capable of attaining the objectives in question. On the other hand, the Community authority will not authorize aid which is neither necessary nor proportionate to the attainment of those objectives.G. M. Roberti, Le contrôle de la Commission des Communautés européennes sur les aides nationales, AJDA, 20 June 1993, p. 397, at 407 — emphasis added.
75.The concept of necessity is inherent in that of aid. Thus, prior to considering the issue of proportionality under Article 92(3), where it is necessary to classify State aid for public undertakings, the Court has, in several of its decisions, used as a yardstick the approach of the private investor in a market economy:For example, in Italy v Commission, cited above, note 61, paragraph 23.
the participation of the public authorities in the capital of an undertaking is not aid for the purposes of Article 92(1) of the Treaty where, in similar circumstances, a private investor, guided by the prospects of a return on capital, would have invested to the same extent. Does that not mean that State aid is provided only where there is no alternative financing by a private investor, and thus in case of need?76.There is another reason for which the need for aid must be examined. The directive does not merely refer to Article 92(3). It is also based on Article 113 of the Treaty.77.As was pointed out by the Commission, the commercial policy of the Community, which includes the conditions applicable to aid for exports to non-member countries,Opinion of 11 November 1975 (1/75, [1975] ECR 1355, at 1362.
falls exclusively within the powers of the Community. Accordingly, a Member State must not be able to frustrate that policy by means of generous State aid outside the strict framework defined by the Council directive or by evading the conditions laid down by the latter.78.As the Court emphasized in Opinion 1/75:any unilateral action on the part of Member States would lead to disparities in the conditions for the grant of export credits, calculated to distort competition between undertakings of the various Member States in external markets. Such distortion can be eliminated only by means of a strict uniformity of credit conditions granted to undertakings in the Community, whatever their nationality.Ibid., at p. 1364.
79.It is therefore for the Commission, as guardian of the Treaty, to ensure that the Member States remain within the limits of the derogation and apply Article 4(7) only in those cases where they grant genuine development aid. By granting aid that is not necessary, a Member State would circumvent the Community rules and exercise a sort of parallel power, which is precluded by Article 113.80.Finally, it will be noted that the Commission has set itself the objective of eliminating all aid to the shipbuilding sectorSee the seventh recital in the preamble to the seventh directive.
and that the issue here is a derogation from the general rule that aid is not permissible. Provisions under which aid may be declared compatible must therefore be interpreted strictly.81.It follows, in my opinion, that in such circumstances the Commission is fully entitled to appraise the concept of development aid, as provided for in Article 4(7) of the directive, and that it will not exceed its powers by examining whether the aid is necessary.82.When finding that the aid granted was not needed by the recipient undertaking and that it did not therefore pursue the development aid objective set by the Council, the Commission possessed sufficient information to say that the aid did not fall within the scope of Article 4(7) of the seventh directive and could not therefore qualify for the derogation allowed by the provision.83.If we apply here the principle laid down in the Court's judgment in Belgium v Com- mission,Cited above, note 20, paragraphs 32 and 33.
failure to comply with the essential condition for aid based on Article 4(7) to be compatible with the common market (it must contribute to development) means that the aid concerned is ipso facto incompatible.84.The Commission nevertheless took its reasoning further and observed that the grant of aid at issue was liable to bring about a twofold distortion of competition: by adversely affecting the Community shipyards other than those to which construction of the vessels was entrusted and also the Community shipping companies that would have to compete with COSCO.85.Let us consider these two points.86.It is clear that once it is established that the planned aid for the three container ships for COSCO cannot be regarded as genuine development aid within the meaning of Article 4(7), the distortion of competition which it necessarily produces in the common market for the benefit of the shipyards concerned can no longer be justified. It is symptomatic, in that connection, that the initial complaint made against the COSCO project emanated from a Community shipyard.87.Should the Commission also have found a risk of serious distortion of competition in the sea freight sector, on the ground that the vessels bought by COSCO will strengthen the latter's position on routes on which Community shipping companies operate?88.I do not think that such an objection is appropriate.89.By definition, the directive takes account of such a risk, it being inherent in any development aid, which can always have a rebound effect to the detriment of Community operators. For that reason, it does not require that vessels bought with the benefit of development aid should be used on routes where there is no competition with Community shipping companies. Even if the aid were development aid actually needed by COSCO, a risk of that kind would have existed.90.However, I do not see in that finding by the Commission any reason for the annulment of its Decision. It may go beyond what was required, but it does not detract from the principal grounds of the Decision: the absence of genuine development aid.