EN Official Journal of the European Union C 120/37

Opinion of the European Economic and Social Committee on ‘Industrial change and State aid in the steel sector’

(2005/C 120/09)

On 29 January 2004, the European Economic and Social Committee decided to draw up an opinion, under Rule 29(2) of its Rules of Procedure, on ‘Industrial change and State aid in the steel sector’.

The Consultative Commission on Industrial Change, which was responsible for the Committee's work on the subject, adopted its opinion on 9 September 2004. The rapporteur was Mr Lagerholm and the co-rapporteur was Mr Kormann.

At its 412th plenary session of 27 and 28 October 2004 (meeting of 27 October 2004), the European Economic and Social Committee adopted the following opinion by 154 votes to 3 with 11 abstentions:

1. Introduction to the opinion and the aims and scope of the opinion; definition of terms used

1.1 This own-initiative opinion focuses on the link between industrial change and State aid, as illustrated by the example of the steel sector.

1.2 The authors of this own-initiative opinion understand the term ‘industrial change’ to mean the normal and ongoing process, within an industrial sector, of reacting proactively to dynamic trends within a branch of the economy in order to remain competitive and to create opportunities for growth.

1.3 Europe cannot remain aloof from ongoing industrial change. In view of the fact that markets are, to an increasing extent, becoming global markets, economic structures have to be brought into line, sooner or later, with events taking place on the world market. In this context the European Union must endeavour to play an active role in defining the basic international conditions.

1.4 This own-initiative opinion has been triggered by: — the expiry of the ECSC Treaty in 2002; — the privatisation and restructuring of the steel industry in the central and eastern European countries (CEEC), linked to the EU accession process; — the OECD negotiations on an international steel subsidy agreement (SSA); — the latest edition of the EU's State Aid Scoreboard; — the communication from the European Commission entitled Fostering structural change: an industrial policy for an enlarged Europe (COM(2004) 274 final) of April 2004; and — the report from the Commission to the Council and the European Parliament entitled: First monitoring report on steel restructuring in the Czech Republic and Poland (COM(2004) 443 final) of 7 July 2004. Taking the steel industry as an example, this own-initiative opinion analyses how State aid can have on impact on necessary structural change.

1.5 Companies which do not receive State aid to safeguard their competitiveness are often disadvantaged compared to competitors which do; the adverse effects on the development of such companies can be serious, and they may even be forced out of the market. In spite of this experience gained over several decades of restructuring, the European steel industry case demonstrates that political decision-makers often find it hard to desist from authorising the payment of subsidies to major enterprises employing correspondingly large workforces which are threatened with closure. In general, this means that over-capacity and uneconomic activities are maintained beyond the withdrawal date determined by the market. Essential adjustment processes are only hesitantly set in train.

1.6 Despite this, there is now general agreement, in the world of politics, in the economy, and also within trade unions, both on the unavoidability of industrial change and the need to shape such change through international framework agreements (e.g. WTO, OECD, ILO, etc.). This understanding also derives from the decades of industrial change which the coal and steel industry has already experienced. Restructuring and consolidation together with the accompanying social dialogue are now generally recognised both as prerequisites and the context for ensuring the competitiveness of European enterprises on markets which are becoming increasingly integrated.

1.7 In the communication on industrial policy which it issued at the end of April 2004 (1) the European Commission drew attention to the fact that industrial change must not be equated with out-and-out de-industrialisation. The latter phenomenon is characterised by a simultaneous decline in employment, production and growth in productivity. Out-and-out de-industrialisation results in the loss of low-productivity jobs to developing countries and newly industrialised countries where labour costs are lower. The principal cause of this transfer of jobs is that comparative cost structures have become more favourable in non-EU states.

1.8 In its analysis of the industrial policy, the European Commission does, however, come to the conclusion that de-industrialisation is currently taking place in the mining industry and only a small number of other sectors (textiles, clothing, leather goods, shipbuilding, coking plants, oil-refining and the manufacture and processing of nuclear fuel and fertile material). Whilst structural change is undoubtedly painful for individual regions, it is, however, beneficial from an overall economic standpoint, provided that such change is properly foreseen, identified and backed up.

1.9 The proportional decline in the share of overall economic activity made up by industry reflects a long-term structural process. Whilst most sectors of industry, such as the iron and steel sector, have considerably reduced their workforces over the last few decades, they have, at the same time witnessed a clear increase in the added value of their products and their labour productivity.

1.10 The increase in the social importance of the service sector is often regarded by the public as proof of a process of structural change at the expense of industry. This shift does, however, need to be put into perspective in view of the increasing interlinking between these two sectors. Over the last few decades processing industries have outsourced various activities (transport, logistics, data processing, etc.) to external service-providers. Care and considerable caution therefore need to be exercised when interpreting statistics on industrial change. Incorrect conclusions, based on superficial analyses or politically-motivated half-truths can quickly trigger dire industrial consequences.

1.11 In a knowledge-based European Union added value produced by industry remains essential. Bearing in mind all the added value generated for industry in other sectors of the economy, it is clear that, since the beginning of the 1990s, industry has continued to be of major importance to the EU. In Germany, for example, taking account of this combined input, industry continues to account for a good 40 % of gross value added.

1.12 In the light of – sometimes very painful – experience, with privatisation and restructuring dating back almost 30 years, the European Commission now proposes that future structural measures (taken in the CEEC in the steel sector and other sectors) should be based on the experience acquired by the EU steel sector in applying adjustment measures.

1.13 In recent decades there have been considerable changes in the political, technical and economic environment in which the EU steel sector operates. The oil crises, the establishment of the EU's internal market, EU enlargement and also globalisation have had a deep impact on this commodity sector, which is important to other sectors of industry. Despite all the cyclical and structural fluctuations since the first crisis year of 1975, the level of steel production in the EU has, however, remained virtually stable. Steel is, still today, produced in virtually all the EU-15 Member States. Today, however, due to technological progress only approximately one third of the 1975 workforce is required to produce this steel. The percentage of steel enterprises in EU-15 in which the State has a dominant interest has fallen from 53 % in 1985 to less than 10 % today. Moreover, State-controlled and private steel enterprises are now exposed to similar economic conditions.

1.14 Against this background, the European Economic and Social Committee's Consultative Commission on Industrial Change (CCIC) is attracted by the task of examining the role which State aid plays in general in the context of structural change and the role which they have played, in particular, with regard to the European steel industry. For the purposes of this own-initiative opinion, the term ‘steel sector’ is taken to mean all industrial activities linked to the production and marketing of steel and the key role it plays with regard to the steel-using sectors in the EU.

2. State aids and their general impact

2.1 State aids are selective benefits which State bodies grant to selected branches of manufacturing and, ultimately, to particular groups. In order to determine whether measures constitute State aid, a distinction has to be drawn between measures which are intended to provide support for certain undertakings or the production of certain goods, in accordance with Article 87(1) of the EC Treaty, and general measures which are likewise applied in the Member States but which are intended to benefit the economy as a whole. Measures which fall into the latter category do not represent State aid in accordance with Article 87(1), but are general economic policy measures which are equally applicable to all companies (e.g. general tax incentives for investment allowances).

2.2 It should, however, be borne in mind that in market economies economic activities are determined by supply and demand and coordinated via the price mechanism. Any measures which jeopardise the role of the price factor in providing information, direction and stimulus therefore risk, in principle, being harmful.

2.3 State aid may jeopardise free competition on a lasting basis, prevent the efficient allocation of resources and constitute a threat to the EU internal market. The European Union therefore recognises that safeguarding free and undistorted competition is one of the basic principles of the Community.

2.4 Specific allocations of State aids (financial aid or tax concessions) can only be justified if the market is not fully operational and if there is a realistic chance that the granting of subsidies will provide a better economic outcome. In the event of a failure of the market, State intervention, in the form of the provision of financial aid, may help to avoid misallocations. The State, however, rarely possesses the knowledge which it needs to ensure that in cases of market failure, the right extent of public funding is injected. Enterprises which are fighting for State aid are not always a reliable source of information.

2.5 A further difficulty is that market conditions are constantly changing. A State aid which was originally justified may, over time, prove to be no longer economically necessary but it nonetheless remains in place because of the slowness of the political process or as a result of the influence exercised by regional or sectoral interest groups.

2.6 The granting of State aid also frequently brings about changes in patterns of behaviour on the part of market players. When they receive subsidies, this reduces their readiness to carry out adjustments which are required in order to retain or re-establish the competitiveness of enterprises; subsidized enterprises may also develop a ‘subsidy mentality’.

2.7 At least in the medium term, State aid may also increase the tax burden. Reductions in State aid are not only vital as a means of achieving lasting budgetary consolidation but are also necessary for economic and regulatory reasons. Structural change is held back if the wrong approach is adopted to subsidies.

2.8 With a view to bringing about the necessary reduction in the overall volume of State aid, calls were made, in the conclusions set out following various meetings of the EU Council of Ministers, for a shift in emphasis away from providing support for individual enterprises or branches of the economy towards achieving horizontal goals of common interest, including cohesion objectives. State aid granted for the purposes of achieving horizontal objectives is usually intended to compensate for a failure on the part of the market and it normally brings about fewer distortions in competition than do sectoral aid and aid granted for specific purposes. The bulk of the latter form of aid is granted for the purposes of rescuing or restructuring enterprises which are in difficulties.

2.9 The main horizontal objectives which the provision of State funding seeks to pursue include the following: — research and development, — environmental conservation, — energy savings, — support for SMEs, — the creation of jobs, — the promotion of training.

State influence in the European steel industry

2.10 The State has traditionally exercised a considerable influence on the steel industry; military and security considerations have, not least, played a decisive role in this respect. In order to illustrate the extent of State influence, attention is drawn to the fact that in 1980 some 60 % of the world's steel output was still produced by enterprises which were under direct, or indirect State control.

2.11 When steel-producing enterprises are owned by the State this generally results in losses largely being written off by the State, thereby providing undertakings with a virtual guarantee of survival. From the standpoint of achieving efficient competition, such a situation is just as damaging as the granting of State aid to strengthen the competitive position of enterprises or the introduction of measures to prevent the impending closure of enterprises not directly owned by the State. Economic measures taken to prevent such closures are also backed up by political measures. As a result, the burden of carrying out adjustments may be transferred to more competitive enterprises. Such measures can also trigger a spiral of intervention.

2.12 Apart from aid granted to enterprises which cease operations, the only aid which can therefore still be granted to the European steel industry is horizontal aid. In view of the fact that the process of structural change proceeded at only a woefully slow pace until the late 1990s, the European steel industry finally accepted the need to shift from sectoral and ad hoc aid to horizontal aid. In its aid regime the European steel industry has now gone so far as to give up regional aid, too (2).

2.13 In the European Union, considerable importance is attached to the monitoring of all national expenditure. The European Commission must ensure that its EU aid policy is founded upon transparent monitoring and use of State aid, as is already the case in the steel sector.

2.14 The European Commission is currently continuing its review of the general guidelines and basic provisions governing State aid. These measures need to be drafted in a simpler and clearer way. Discrepancies should be removed. The Commission will give priority to the following measures: reviewing the provisions governing aid granted for the purposes of rescuing and restructuring enterprises which are in difficulties; the reform of the EU provisions governing regional aid following EU enlargement; the elaboration of new basic provisions governing the assessment of what constitutes relatively small sums of aid; and clarifications in respect of the field of services of general economic interest.

2.15 The forthcoming development of the general EU aid regime over the next few years needs to take account of the international context and, in particular, of multilateral commitments. Aid in respect of non-agricultural goods and products is subject to the WTO Agreement on Subsidies and Countervailing Measures.

3. EU aid policy and its importance for industrial change in the steel sector

The general ECSC ban on aid is circumvented

3.1 The 1952 European Coal and Steel Community Treaty contained clear rules on whether or not it was permissible for Member States to grant aid to companies in the coal and steel industry: ‘The following (is) recognised as incompatible with the common market for coal and steel and shall … (be) prohibited within the Community, as provided in this Treaty: … subsidies or aids granted by States … in any form whatsoever’. This ban on all support for companies from individual States, set out in Article 4c, was a logical consequence of the removal of all national protection measures within the Common Market.

3.2 Following the establishment of the common market it soon became apparent, however, that without State support it would not be possible to secure Europe's energy supplies or iron and steel production from internal sources of coal. The search for a solution that would not require changes to the ECSC Treaty led policy-makers to propose that certain kinds of State aid could be reinterpreted as Community aid, which was in principle permissible. Article 95, the provision adopted to cover unforeseen circumstances once the treaty had been signed, was used as the basis for this. It allowed for Community intervention where this was necessary to achieve one or more of the Treaty's aims.

3.3 Keeping the coal mining industry going, in particular the jobs associated with it, was one such aim. From then on, aid which Member States paid out to their coal mining companies in return for secure energy supplies and steel production was viewed as Community aid.

3.4 In the 1970s many Member States did not even bother to use this loop hole for the aid they gave to steel companies. Instead they paid out billions, largely without any objections being raised, initially to foster expansion in the steel sector, and later to keep these companies going, the majority of them being State owned. Even in the early 1980s, the then Director-General for Competition at the Commission openly referred to the ECSC Treaty's ban on aid as being obsolete.

3.5 From 1978 onwards private steel companies, which had suffered considerably from distortions in competition as a result of the ‘aid race’, met with increasing success in their attempts to bring the subsidy ban back into force.

3.6 The steel subsidy codes, based on Article 95, stipulated from 1980 onwards that aid to steel companies could only be granted under strictly defined circumstances. However, the types of aid still permitted initially included almost all the aid which Member States were already paying out to their companies anyway. Thus, for the most part, the first subsidy code only served to legalise existing practices. It was only gradually that the kinds of aid most damaging to competition, such as rescue, operating and investment aid, were banned completely.

3.7 From the second half of the 1980s onwards, only research and development, environmental and closure aid were still permitted under the subsidy code. Despite this, some State-owned steel companies still received State funds up to the mid 1990s for debt repayment and restructuring purposes, based on further derogations under Article 95.

3.8 Eventually, the granting of any further ‘Community aid’ was made contingent upon fundamental reductions in production capacity. At last a consensus was reached between EU Member States, according to which no further exceptions would be allowed to the ban on subsidies other than those permitted in the subsidy code.

3.9 This strict legislation on steel aid, which the founding fathers of the ECSC Treaty had already had in mind and responsibility for which the EU-Commission took over when the treaty expired in 2002, was not least achieved thanks to continued political efforts and legal actions brought by the steel industry. Even if the cases brought before the European Court of Justice did not always lead to a withdrawal of the aid authorisation which was being contested, they did, however, help ensure that the legal boundaries for exceptions to the steel aid ban were precisely defined and further restricted.

3.10 The total amount of money channelled to ECSC steel companies has been considerable: over EUR 70 billion from 1975 onwards! This can be broken down as follows: — between 1975 and 1980, when the aid code came into force, around EUR 12 billion in State aid were paid out in the EU; — between 1980 and 1985 – that is to say, in the period when subsidy payments were permitted with no major restrictions in return for capacity reduction the European Commission granted authorisations for the release of around EUR 41 billion in State aid; — between 1986 and 1995, a further EUR 17 billion were granted, of which EUR 7 billion were awarded in 1994 alone following a ‘first time, last time’ decision based on Article 95.

3.11 According to the most recent European Commission aid scoreboard, the steel industry's share of all EU aid today amounts to less than 2 thousandths of the total. This aid is almost entirely for environmental protection measures. Today's steel aid legislation and practices are clearly tougher than the EC aid arrangements in other industrial sectors.

How did the State aid mentality develop in the steel sector in the 1970s?

3.12 In the 1960s and the first half of the 1970s, world steel consumption showed strong, steady growth, averaging more than 5 % per year. In 1974 raw steel production in the then European Community of Nine reached record heights at almost 156 million tons with a capacity utilisation of 87 %.

3.13 However, one year later, in 1975 the oil price crisis caused a sharp drop in steel production, and as a consequence, within a year production in the EC had shrunk by 30 million tons (19 %). The corresponding slump in steel prices outstripped the decline in production. At the same time ECSC steel companies faced a market increase in imports, accompanied by an equally clear drop in their own exports. The decline in steel use in the single market was exacerbated by the fact that steel stocks were run down.

3.14 Initially it looked as though this was just a particularly acute cyclical downturn. All of the experts therefore believed that it would soon be followed by an upturn. The economic institutes questioned by the European Commission confirmed that the recovery would be particularly powerful and long lasting. The Commission's long-term forecast, General Objectives 1985, drawn up in conjunction with producers, consumers and traders, predicted that steel production would reach no less than 188 million tons in the nine EC countries in 1985. However, only 120 million tons were actually produced. Steel companies' medium- and long-term investment planning was therefore based on completely incorrect parameters; surplus capacity was generated and supply and demand drifted further and further apart.

3.15 Steel consumers' investment activity has been drastically cut back due to the worldwide slow-down in economic growth, and this has impacted particularly negatively on steel consumption, since approximately two thirds of steel consumption in the highly developed industrialised countries is associated with investment activity.

3.16 Another key reason for the stagnant worldwide demand for steel since 1975 lies in the fact that less steel is being used for specific purposes, because it is now being used more efficiently. The constant shift from quantitative to qualitative growth and the expansion of the tertiary sector have also led to a slump in the demand for steel in Europe.

3.17 Despite stagnating steel consumption since 1975, steel capacity was again increased significantly. The nominal world raw steel capacity rose by 150 million tons between 1974 and 1983 alone, while the global demand for steel fell by 44 million tons during the same period. At the same time, capacity in the ‘new’ steel countries and Eastern Bloc countries rose particularly sharply. Compared to actual steel consumption, the nominal capacity surplus in 1974 amounted to 130 million tons worldwide, and almost tripled within ten years (343 million tons).

3.18 Since the collapse in demand at that time was still regarded as a purely cyclical phenomenon, capacity was maintained despite crisis measures. These measures did not succeed in holding back supply-side pressure, preventing price wars on the European steel market or lowing down the slump in prices. Companies with high production costs and little reserves faced increasing hardships. They called for State support and usually received this from their national governments. The problems faced by individual companies therefore became the problems of the whole sector. The system of voluntary restrictions adopted by the members of the newly founded European trade association for the steel industry, ‘Eurofer’, finally collapsed when none of the major companies were participating any longer.

Forced regulation of the market (1980-1985)

3.19 After the collapse of the voluntary system, in autumn 1980 the Commission was forced to declare that there was a clear crisis and introduce a mandatory system of production quotas (obligatory quota regulation) for all plants in the EC. Thereafter production quotas were laid down by the Commission on a quarterly basis. The system provided for the possibility of sanctions in the event of non-compliance. Moreover, special minimum prices were set for specific products. In addition, price stabilisation and socially and regionally bearable capacity reductions constituted focal points of the approach adopted. Production quotas and quotas for supplies to the common market were stipulated for each steel-producing company in the EC. Voluntary restraint agreements were also concluded with 15 importing countries. In view of the low world market prices for steel products it was important to avoid losses on exports that would have required additional subsidies from the EC under the terms of the crisis system. About 70 % of European steel production was subject to the quota system in the early 1980s.

3.20 However, the political aim of a gradual reduction in capacity was not initially achieved. The hopes of the companies involved for an upturn in demand and the elimination of competitors, as well as for State aid and controlled supply, hampered the reduction in capacity by the least competitive companies. The capacity reduction only gradually got under way with the second subsidy code, which stipulated that the implementation of a restructuring programme would be a condition for the granting of aid. The obligatory quota regulation, which was initially only supposed to be in force until 1981, had to be extended again and again for reasons of competition.

3.21 The Commission chose State aid prohibited under the ECSC Treaty as a means of applying pressure and decided to legalise the previously illegal practice with the subsidy code introduced at the same time, in order to implement the unavoidable capacity reduction; but it simultaneously called for a licensing regime which it tied in with the reduction in capacity requirements. This phase in steel policy lasted until the end of 1985. As a countermove to the State aid approval, capacity equivalent to about 44 million tons of raw steel and 32 million tons of hot rolled steel was dismantled under the inventory protection of the quota system.

The gradual liberalisation of the market (from 1985)

3.22 Between 1983 and 1985 alone, around EUR 15 billion was allocated in State aid for steel companies. Instead of harmonising competition rules, the political decision-makers made too little use of the opportunity to impose adequate capacity closedown on financially strong companies. As a result they delayed the adjustment of superfluous capacity long called for by the market.

3.23 In 1985, with the affirmation that the clear crisis had passed, the European Commission finally called for a radical reorientation of EC steel market policy. Shortly after the release of State aids amounting to EUR 15 billion. As part of moves to make the quota system more flexible and then totally liberalise the market, there should have been a market-driven cutback in surplus capacity, something that could obviously not be achieved with interventionist measures from Brussels. However, during its sudden change of direction, the Commission ignored the fact that the billions it had granted in aid up to the end of 1985 would contribute to competitiveness only in the following years. By the end of 1986 it had drastically cut back the share of regulated products.

3.24 Despite a capacity adjustment of around 40 million tons and the shedding of tens of thousands of jobs, an excess production potential of around 25 million tons still put pressure on the market at that time.

3.25 A short-term increase in demand after 1987 in the end supported the Commission's argument that the steel industry should no longer be deemed to be in crisis. Regulating measures such as production certificates and compulsory registration for supplies were abolished. The pressure on national governments and the Commission increased, so the third (1985), fourth (1989) and fifth (1992) subsidy codes were issued to put a permanent lid on the Community's subsidy barrel. Aid should in future only be granted in EU Member States for research and development, environmental protection and special closure aid. (3) Nearly all of this aid came from the ECSC Fund, financed by contributions from the coal and steel industry.

3.26 After a short-lived high in 1990, steel demand sank again; steel prices also fell back by about 20 %. In 1992 there were renewed, increasingly frequent calls for further Commission intervention. Specifically, they called for quarterly production and supply estimates for individual products, the simplification of mergers, import protection in relation to Eastern Europe and restructuring aid. In order to reduce overcapacity they proposed a structural crisis cartel, a system for sharing the burden between companies and a 20 % definitive reduction in capacity by the end of 1996, laying off 50 000 employees.

3.27 However the Commission rejected the idea of a structural crisis cartel and a new production quota system; in 1993 it presented its own proposal consisting only of indirect measures. The measures provided for the pre-financing of capacity shut-down by the Commission, the promotion of mergers and production cooperation, temporary protection for the steel market against imports from Eastern Europe, an increase in market transparency through information about production and supply to the EU and accompanying social measures as an incentive to cut back capacity. A restructuring process was introduced, during which production capacity was reduced by a further 19 million tons and about 100 000 people were laid off in the EC iron and steel industry. The model for pre-financing, which had already been approved by the Council of Ministers, was not used.

3.28 In December 1993, despite the fifth subsidy code, the EU Council of Ministers unanimously approved further State aids amounting to nearly EUR 7 billion for various European steel producers, following a proposal by the Commission, in exchange for a reduction in capacity. At the same time, it was made clear that this aid was only to be granted on a one-off basis.

In short:

3.29 The ECSC Treaty introduced a strict ban on State aid in its Article 4c. However, only to a limited extent did the ban on aid keep the EC Member States from supporting their steel industries, with full approval at the highest European level. Over EUR 70 billion of tax-payers' money, paid out until the ECSC Treaty expired, delayed the necessary adjustments to industrial change, but could not prevent them from being made in the end. The European Commission also kept up the tried and tested basic approach of State aid approvals in exchange for capacity reduction in the 1990s, also for restructuring the CEEC steel industries as part of preparations for EU accession.

3.30 In 1982 the EU Member States – circumventing the market principle - reached a political agreement on sharing the necessary capacity reduction equally. This was in contravention of Article 2 of the ECSC Treaty, according to which steel should be manufactured wherever production costs are most favourable. Instead of promoting uneconomic companies' elimination from the market while acting to cushion the social consequences, and thus enabling equilibrium between supply and demand to be restored quickly, the EU Member States and the European Commission made use of the instruments envisaged by the ECSC Treaty for crisis situations, which was not necessarily advantageous for the steel industry as a whole. For reasons of social, regional and distribution policy, unprofitable capacity was supported, while profitable capacity - usually in the private sector - was lost, together with jobs which should have been comparatively safe.

3.31 Nevertheless, it cannot be denied that the EU steel industry was, after a fashion, able to survive the crisis period. Ultimately, steel producers succeeded in making themselves sufficiently competitive by international standards. This process, which could only be brought to a conclusion through intensive dialogue between the two sides of industry, was extremely costly, with over 550 000 lay-offs, even though on the whole unacceptable social consequences were avoided.

Research and development aid promote competitiveness

3.32 Many of the technical innovations that transformed the European steel industry were launched or developed in much greater depth under the ECSC research programme, which was self-financed through contributions from the coal and steel industry. The ECSC Treaty intended to make research resources available for Community research in order to promote the competitiveness of industry in general and improve job security.

3.33 The first ECSC research programme started as early as 1955. From that time on, researchers and engineers at the cutting edge of technological innovation geared their work more and more to a European approach based on cooperation. The steel industry, and with it European society, benefited from this type of cooperative research, where endeavours are coordinated, joint efforts undertaken and results made available to all concerned. Industrial innovation therefore quickly progressed through constant improvements.

3.34 ECSC research was also able to obtain significant results in the field of the environment, which is so important for society. Sulphur dioxide emissions were cut by 70 % and soot emissions by 60 %. Carbon dioxide output was halved compared with the beginning of the 1980s. European steel manufacturers today use 40 % less energy per ton of steel produced than 20 years ago.

3.35 Only €7 million per year were initially allocated for Community research under the 1955 ECSC budget. In the 1990s in the EU15, this figure climbed to approximately €50 million a year. The ECSC research programme supported research activities in its Community projects to improve procedures, materials and the environment by 60 %. As of 1983, an additional 40 % research aid was allocated to pilot and research projects.

3.36 In this way, each and every euro invested in ECSC research yielded on average EUR 13. Against this background, it is therefore not surprising that with the expiry of the ECSC Treaty, the EU Member States unanimously agreed to use the remaining resources, raised from coal and steel companies' contributions, exclusively to continue sectoral research in the coal and steel industry. The guidelines adopted aim to use the annual post-ECSC interest of approximately €60 million exclusively for coal and steel research, and in particular for the following areas (in the case of steel): — New and further development of production and processing methods, — Material development and use, — Improving the use of resources, — Environmental protection and, — Health and safety in the workplace.

The achievement of a competitive steel industry at the beginning of the 21st century

3.37 At this point in time, in the context of European enlargement, the steel industry in the EU is well equipped to meet global competition. Over the last few years, the European steel industry has strengthened its position, not only in technical and economic terms, but also in environmental terms. Some former State companies have made targeted use of the financial support which they have received, and, with the help of technological adaptation and more streamlined structures have advanced to the position of leaders on the global market.

3.38 The steel industry has succeeded in bringing itself into line with globalisation and sustainable development demands. Clearly the European steel industry has learnt its lessons from the steel crises of the 1970s, the 1980s and the 1990s. The steel sector is now so competitive that even in economically difficult times it is mainly able to remain in the black.

3.39 The strong demand for steel on the internal market of the EU underlines the major efforts made by EU steel producers, who are endeavouring to be cost-effective whilst, at the same time, improving the quality of their products and forging close links with customers. By means of mergers and takeovers and by increasing efficiency and cutting costs, EU steel producers have laid the foundations for a competitive steel industry in the 21st century. The terms ‘rescue and restructuring aid’ have disappeared from the vocabulary of steel producers. In making their clear plea for the retention of strict rules governing State aid, even after the expiry of the ECSC Treaty, steel-producing enterprises in the EU have underlined the fact that they want the era of the subsidy mentality and distortions in competition to be regarded as definitively over.

3.40 The processes of consolidation and industrial change are, however, not yet by any means, over. Some enterprises are already seeking to achieve trans-continental mergers. The rise of China as an industrial player is currently having a considerable impact on the competitiveness of enterprises. The rapidly growing demand for steel in China is exacerbating the situation as regards demand on the international commodity markets. Chinese imports of, for example, iron ore and scrap metal are causing shortages on world markets and resulting in exploding prices for raw materials and freight rates.

3.41 The pace of structural change in the steel industries of the new Member States is currently also being stepped up. The challenges facing these States over the restructuring of their steel industries are more or less comparable to the situation experienced in western Europe 25 years ago, even though the markets have become considerably more globalised since then. This being the case, it is essential that partners in eastern and central Europe also benefit from the experience of restructuring the steel industry in western Europe and of the role played by social dialogue in this process.

3.42 In return for receiving special aid (during the grace period), the CEEC were required by the Europe Agreements of the early 1990s to carry out effective restructuring measures and an extensive reduction in excess capacity and to demonstrate that the enterprises receiving aid had become more viable. In order to ensure free and fair competition in the market for steel in the EU also after EU enlargement, the new Member States are obliged, under the accession treaties, to observe the existing EU provisions (e.g. Directives and framework Decisions in the fields of competition and State aid, taxes, the environment, social policy, etc.). The European Commission must strictly monitor the situation to ensure that the State aid provided by the national governments of the CEEC is in conformity with the agreed rigorous EU aid regime and also ensure that, bearing in mind the actual level of demand, inefficient production capacity really is reduced, as planned.

4. The current EU aid regime for the steel sector – a model for international aid agreements?

4.1 The consequences in the United States of the difficult situation on the world market for steel caused the US Administration to introduce temporary import duties in March 2002, under Article 201 of the US Trade Act, to protect the domestic steel market, thereby contravening WTO provisions. Against the background of a highly volatile trade in steel, brought about by the existence of inefficient, surplus capacity throughout the world, the Bush Administration also announced that it was ready to support international negotiations on the removal of inefficient production capacities and the worldwide curbing of State aid to the steel industry.

4.2 The EU Member States and the European Commission give their backing to all endeavours to introduce greater discipline with regard to the granting of aid to the steel industry throughout the world. The start of the multinational negotiations under the aegis of the OECD in Paris in December 2002 provided the EU with the opportunity to propose that its tried and tested aid regime for the steel industry serve as the basis for an international Steel Subsidy Agreement (SSA).

4.3 The European Economic and Social Committee supports the action of the European Commission despite the fact that the EU steel industry seems to have considerable doubts as to the serious intent of other States and regions when it comes to cutting steel subsidies and consequently adding their signatures to an effective SSA involving compulsory notification and sanctions. The Committee is also concerned that the issues of aid and capacity are not being discussed at the same time as the issue of trade defence instruments, which are often used with no justification, resulting in distortions of competition.

4.4 EU steel producers go further than most national representatives at the OECD on the issue of the scope of a possible SSA. At the OECD negotiations, EU steel producers are united in calling for all State aids which help to bring about an increase in capacity or to maintain uneconomic capacity to be banned under the SSA. This demand, therefore, does not only cover specific aid restricted to selected steel producers but also applies to non-specific or generic aid.

4.5 The European Economic and Social Committee shares the view of EU steel producers that State aid should only be authorised as long as it does not have a harmful influence on the development of production capacity, fair competition and trade flows. This being the case, the Committee gives its backing to the following exemptions in the negotiations at the OECD: — Aid for definitive closures. This includes aid for dismantling, land rehabilitation, and the softening of the social impact of closures. — Limited and closely-defined aid for research and development and for environmental protection including energy/ecotax rebates. With regard to aid for environmental protection, it needs to be made clear that State aid to conform with mandatory environmental standards is not to be allowed; nor does the EU steel industry require such aid. However, limited aid can be granted for voluntary investments, so as to give companies an incentive to go significantly beyond compliance with minimum EU environmental standards in their business activities.

4.6 In connection with a subsidy agreement, it should also be recognised that at least some developing economies have already a fully competitive steel industry. Steel producers in developing or emerging countries benefit from competitive advantages such as low labour costs, access to raw materials, lower environmental standards, and the protection of high import duties. Therefore, State aid for steel enterprises in these economies can only be envisaged on condition that the relevant State aid: — is granted on a case-by-case basis, depending on the situation of the company and the country; use of funding must be monitored, with the relevant objectives in mind; — is subject to strict expiry dates; — is applied in the context of an approved restructuring plan ensuring the long term viability of the companies concerned; — results in a reduction of production capacity under normal circumstances and does not lead to increased capacity under any circumstances.

5. Conclusions

5.1 Past experience with the restructuring of the European steel industry shows that State aid to companies is a two-edged sword: it only benefits particular companies and results in misallocation, as uneconomic production capacity is kept in business over the medium term. However, if it is part of a negotiated restructuring programme, State aid can alleviate social hardship and thus promote the acceptability and consequences of industrial change. The control of this process through social dialogue has been vindicated.

5.2 The question also arises of whether no better use could be found, e.g. in training or research for the enormous sums of taxpayers' money spent.

5.3 Another problem was that during the crisis years in the steel industry, although the legal position (Article 4c, ECSC Treaty) with regard to State aid seemed clear (all State aids were prohibited), various subsidies codes, Council of Ministers' decisions and court rulings softened the line taken and made it unpredictable. Steel producers felt the lack of security in planning and general terms of reference.

5.4 In the context of the accession of ten or twelve new Member States, it is all the more important to insist on strict compliance with the clear rules on aid for the steel industry, with action in response to all infringements, as in the case of USS Kosice.

5.5 The mistakes which were made in the EU-15 must not be repeated.

5.6 Negotiations within the OECD (which are currently on hold) are only worthwhile if they lead to a sustainable improvement on the current situation, i.e.: — no excessive concessions to developing, emerging and transition countries such as China, — no ban within the EU on necessary regulation on research and development, on environmental measures (e.g. ceilings on compliance costs of companies to prevent environmental measures from leading to distortion of competition) and on the closure of uneconomic capacity, and — no countervailing duties on steel exports due to such dispensations.

Brussels, 27 October 2004. The President of the European Economic and Social Committee Anne-Marie SIGMUND

(1) COM(2004) 274: this communication is currently being analysed in opinion CCMI 017, rapporteur: Mr van Iersel, and in the own-initiative opinion CCMI 014 on company relocations, rapporteur: Mr Rodriguez Garcia-Caro.

(2) The last derogation from the general ban on State aid was for regional investment subsidies for Greek steel manufacturers, which expired in 2000.

(3) Apart from these, there were also a few isolated cases of regional investment aid, confined to Portugal, Greece, and the territory of the former GDR.