Entrenching Emergency Soft Law

On the 23rd of March 2022 the European Commission adopted another Temporary Crisis Framework for State aid, this time in the context of Russia’s invasion of Ukraine (the Ukraine TF). The framework is meant to mitigate the economic impact of the war and EU sanctions by supporting severely affected businesses. This practice is not isolated, with the 2008 Temporary Framework issued in response of the financial crisis (the Financial Crisis TF), and the 2020 Temporary Framework issued in the context of the coronavirus outbreak (the Coronavirus TF), allowing already for trillions of Euros to be paid by the Member States to salvage their economies. These ‘frameworks’ belong to the loose category of ‘soft law’, as they have no legally binding force but may produce legal and practical effects. In areas of exclusive EU competence, such as State aid, such effects are far reaching, with research showing a general trend of compliance from national courts and administrations.

Yet, soft law, and especially emergency soft law, have feeble legitimacy credentials, whilst regulating matters of high political, social, or economic salience. Through its Ukraine TF, the Commission sets the criteria according to which public money should be spent to ease the enormous pressure of high energy prices or the spill over effects of economic sanctions. Even though it pertains to the security of energy supply, environmental protection, and geopolitical concerns, the Ukraine TF was not issued following public consultations (unlike ‘regular’ State aid soft law), and the discussions that the Commission had with the Member States on the topic were not published. The Ukraine TF was published only two years after the Coronavirus TF, raising the concern that such practices, of issuing temporary soft law, are becoming entrenched, further endangering the rule of law in the EU.

The Ukraine TF as emergency soft law

The recourse to soft law in crisis situations is unsurprising, allowing the European Commission to deal swiftly with a fast changing economic, political, or social environment. In point, the high energy prices in Europe, spiking by 200% per year since 2021, and due in great part to the crisis in Ukraine, have prompted the acceleration of reform in the energy markets. Already in October 2021, the Commission issued a toolbox to deal with this situation, and, at the beginning of March, it published a Communication called REPowerEU: Joint European Action for more affordable, secure and sustainable energy. The Communication mentions the necessity of a free-standing Temporary Crisis Framework in helping Member States to remedy the serious disturbances to the economy resulting from Russia’s military aggression against Ukraine. The Ukraine TF contains provisions aimed at compensating companies for additional costs incurred due to the high energy prices, but goes beyond this goal and provides support measures also to businesses otherwise affected by the crisis, such as for instance agriculture and the food industry, cut from important sources of supply.

Similarly to the Financial Crisis TF and the Coronavirus TF, the Ukraine TF was issued under Article 107 (3) (b) TFEU, a paragraph allowing the Commission the discretion to approve State aid ‘to remedy a serious disturbance to the economy of a Member State.’ Note that under Article 107 (2) (b) TFEU the compatibility of State aid with the internal market is presumed if it is granted in order to ‘make good the damage caused by natural disasters or exceptional occurrences.’ Attempts by the Commission to extend its discretion in the area of Article 107 (2) (b) have been sanctioned by the Court, as for example in the case of the ill-fated Communication on the repercussion of 9/11 terrorist attacks. As declared in Olimpiaki, if causality can be proved between an exceptional occurrence and a damage for undertakings, the Member States should be able to grant State aid in order to make good such damage, and the Commission cannot impose further conditionalities, such as for instance time limits, through soft law instruments.

Under Article 107 (3) (b) TFEU, the Commission enjoys a wide discretion, and, in the interest of transparency – and presumably also administrative efficiency – it published in the Ukraine TF the conditions under which it ‘may’ decide to declare State aid compatible with the internal market. Yet, transparency is not a one-way street, and, if understood in its wider meaning, that of openness, it should also allow engagement of the stakeholders or Member States with the decision maker. Adding to that, according to Article 108 (1) TFEU, the Commission is to cooperate with the Member States to keep State aid in check. As a result, the Commission soft law on State aid is generally issued following extensive consultations, involving several rounds of back and forth of questionnaires, issue papers, or drafts. All these consultations are duly published on the website of DG Comp, which allows for some degree of openness of decision making. With the rise of Temporary Frameworks, however, consultations are stripped to a minimum and rendered opaque, presumably in the interest of urgency. Emergency soft law thus oscillates between being the hero of the day, offering a fast response to a regulatory problem, and the absolute villain in terms of legitimacy.

The Coronavirus TF is a perfect example, with amendments being brought at an incredibly fast pace, following consultations with Member States only, vaguely mentioned in various press releases. The Ukraine TF is following the same path. The REPowerEU Communication announced that the Commission will be consulting Member States on a TF, and, two days later, the Commission published a statement to this effect. The statement does refer to the possibility for the Member States to grant temporary liquidity support and aid for additional costs due to exceptionally high gas and electricity prices. Yet, no details are provided as to the proposed aid intensities and ceilings, or issues such as the definition of energy intensive users, the possibility to impose greening conditionalities, or the necessity of different measures for sectors such as agriculture. The product of the consultation, the Ukraine TF, was published two weeks later, but the details of the dialogue between the Commission and the Member States remain hidden from the public.

Entrenched emergency soft law: a challenge for legitimacy?

This is the third time that extraordinary State aid emergency soft law is adopted through procedures that depart from the established public consultation routes. Whilst it is perhaps to be expected that in case of emergency it is difficult to comply with burdensome procedural requirements, the worry is that such modus operandi will become entrenched, creating a category of emergency soft law, published with even less legitimacy standards than regular soft law. Are such fears substantiated? The answer is nuanced.

First, legitimacy has various aspects, and input legitimacy, understood as participation through majoritarian institutions of electoral representation is just one of them. In any case, given the lack of Parliamentary participation in soft law making, throughput legitimacy might be a better lens to judge these instruments. Thus, anything rendering the governance process more transparent, inclusive, and open, might qualify as legitimate. Emergency soft law does its job on the transparency side, allowing authorities or businesses to understand what criteria will be applied by the Commission in its assessment. Yet, as shown above, it is limited from an inclusiveness or openness side. The last hope might be output legitimacy, a rather uneasy category for lawyers, measured in function of efficiency and outcomes.

Second, emergency soft law – soft law in general – is not static. Consider the Coronavirus TF, amended six times in two years. Such extraordinary flexibility and adaptation can also be an opportunity for creating a fast-track laboratory of good soft law making. In relation to the energy market measures proposed by the Commission through various soft law, the European Council advised for a form of ex-post consultation in its conclusions of the 25th of March. It advised that the Commission consults as a matter of urgency with energy stakeholders to determine whether its recent measures (including state aid) ‘would contribute to reducing the gas price and addressing its contagion effect on electricity markets, taking into account national circumstances.’ In other words, it is the stakeholders who will assess the standard of output legitimacy of soft law and, in case this standard is not up to the expectations, soft law can be changed. In addition, the Ukraine crisis generated other consultations, such as on targeted amendments to the ETS State aid guidelines, to expand the list of eligible sectors, while ensuring that they are subject to reinforced incentives to improve energy efficiency and/or decarbonise their production and limiting competition distortions among Member States.

Such feedback loop is an extraordinary opportunity for ex post accountability to improve the practical outcomes of soft law. Yet, in the case of the Coronavirus TF, literature and practice revealed imbalances on the internal market as potential consequences, although it is still too early for a full assessment, given that the TF is still applicable. What is more, soft law cannot be subject to direct judicial review, and the ECJ is likely to reject a case against the Ukraine TF before looking at the merits. Even if the Court accepted such judicial review, one may wonder how far its scrutiny could go. Indeed, the Commission enjoys vast discretion in the area of Article 107 (3) TFEU, and the Court’s review is limited to checking if rules of procedure and the duty to state reasons were respected, and that there is no manifest error in assessing facts, or error of law and no misuse of powers. The accountability of soft law thus cannot rest on courts, but on alternative channels such as permanent (and transparent) dialogue with the stakeholders.

An (imperfect) solution: streamline (a bit) emergency soft law making

At least in theory, emergency soft law might be saved by a constant evaluation of its output legitimacy by the stakeholders, enabling a transparent debate between the various (and potentially conflicting) interests of the public bodies, NGOs, or businesses. This is likely to enhance the throughput legitimacy of subsequent changes. However, emergency soft law can only achieve this potential if consultation materials are published, including Member States consultations, to ensure a wide participation. For instance, one may wonder what the different positions regarding the greening conditionalities were under the Ukraine TF. The TF only invites Member States to include sustainability requirements for granting aid for additional energy costs, but would the Commission have wished for stronger obligations in this regard, in accordance with their Green Deal? It will be recalled that similar soft commitments regarding environmental conditions were made in the COVID Framework, yet, recent evaluations show that a stronger conditionality should have been required. Furthermore, one should not forget that through granting aid to help with high energy prices, whilst continuing the reliance on Russian gas, means that the EU taxpayer is effectively funding Gazprom and the Russian economy, decreasing the effectiveness of other economic sanctions. Such issues of high political interest deserve to be openly put to public debate. This would create the opportunity of learning, or indeed solidarity: some of the Member States have already announced they will discontinue Russian gas importations. Finally, as shown by economic analysis, consumer grants might be better suited for helping with the current high energy prices, as they could be designed in such way as to incentivize energy savings by individuals.

Another aspect that needs careful balancing is how emergency soft law interacts with pre-exiting or future hard and soft law. To that effect, the second amendment of the Covid TF stated it ‘complements rather than replaces existing possibilities under EU State aid rules for Member States to provide support’ according to the Risk Finance Guidelines or the (then upcoming) Climate, Energy and Environmental Aid Guidelines (CEEAG). The Ukraine TF reflects, probably more than the other TFs, the interlinkages between various policies and instruments. The REPowerEU Communication already mentioned that the new ETS State aid guidelines might also tackle the conundrum between security of supply, greening, and competition. Similarly, the Commission has announced it will prioritise its assessment of the notifications for the first Important Projects of Common European Interest on hydrogen, self-imposing a deadline of six weeks from the submission by the participating Member States of a complete notification. Since energy market design is not an instant matter, the EU has been grappling with this issue for years, designing three energy packages, a Clean Energy for All Europeans ‘package’, as well as a Green Deal. Out of the measures suggested in the Commission Toolbox on Energy Prices, State aid appears to be a quick fix, part of a bigger framework. The goal is to achieve short term measures to help the consumers, whilst at the same time creating a long-term vision for the electricity market. The only worry might be that the quick fix might undermine long term goals, which in turn increases the need for openness and proper consultations.

Finally, the question is whether emergency soft law is needed in the first place. Whilst ex-post feedback loops are important, and the ex-post publication of consultation materials would be a good step forward to legitimize emergency soft law, such procedures cannot replace ex ante, transparent stakeholder consultations, as has become the tradition for State aid. Thus, temporary frameworks need to be used with caution. The question is what qualifies as emergency, and what is the necessary urgency threshold that needs to be employed for consultations with the Member States to be carried outside of the public domain. Different degrees of urgency can be noticed already between the Coronavirus TF and the Ukraine TF. In the case of the former, the unprecedented health crisis and lockdown measures called for intervention to keep jobs and salvage entire economic sectors. In the case of the later, we notice that the Commission advised already in October 2021 to use the state aid tool in order to deal with the extraordinary increase in energy prices. The seriousness of the crisis in Ukraine and the overspill on European markets cannot be contested, but one may wonder whether, in the future, a draught in the South of Europe will not also trigger the issuing of a Temporary Framework on the basis of Article 107 (3) (b) effectively putting in abeyance established rules and practices.

Political scientists might be better placed than a lawyer to assess whether the Ukraine invasion was predictable, and consequently so were the overspills on the food and agricultural sectors. Yet, whilst it is a matter of fact that economic sanctions can backfire on the EU’s internal market, the question is whether it was necessary to adopt general rules to deal with State aid granted by the Member States to address such collateral damage. For instance, the Framework rightly states that aid cannot be granted to undertakings under sanctions adopted by the EU (para 33 of the Ukraine TF). Apart from the obvious scenario where aid cannot be granted to entities specifically named on the sanction list, aid cannot be granted to undertakings controlled by such entities, raising the question of what the threshold of ‘control’ is. Furthermore, aid cannot be granted to ‘undertakings active in industries targeted by sanctions adopted by the EU, insofar as the aid would undermine the objectives of the relevant sanctions.’ Yet, this would imply in and of itself that a case-by-case analysis will be necessary in such scenarios defeating the purpose of soft law measures, aimed at providing transparent, reasonably general criteria for the assessment of aid. Such case-by-case analysis is likely to be complex, given the evolving, sophisticated character of economic sanctions: just two weeks after the TF, another package of sanctions was adopted including a deferred ban on coal importation and the exclusion of Russian businesses from accessing European public procurement or EU money.

All in all, whilst soft law should not be put in the straitjacket of procedures, post-Covid, and post-Ukraine, certain guiding principles should be developed for the issuing of emergency EU soft law, at least broadly establishing the when, the why, and the how. Further, as a minimum standard, ex-post publication of consultations should be ensured, and the possibility for stakeholders to participate in the making of future amendments of emergency soft law should be guaranteed.