Case C‑118/10

European Commission

v

Council of the European Union

‛Action for annulment — State aid — Article 108(1) and (2) TFEU — Aid granted by the Republic of Latvia for the purchase of agricultural land — Competence of the Council of the European Union — Existing aid scheme — Accession of the Republic of Latvia to the European Union — Aid granted before accession — Appropriate measures — Two indissolubly connected aid schemes — Change of circumstances — Exceptional circumstances — Economic crisis — Manifest error of assessment — Principle of proportionality’

Summary — Judgment of the Court (Grand Chamber), 4 December 2013

Agriculture — Competition rules — Aid — Authorisation of aid by way of derogation by the Council — Judicial review — Limits — Council decision authorising aid granted by the Latvian State in the light of the purchase of agricultural land belonging to it following an economic and financial crisis — No manifest error of assessment

State aid — Power of the Council to authorise aid by way of derogation in the light of exceptional circumstances — Conditions of exercise — Aid indissolubly linked to aid already found by the Commission to be incompatible with the internal market — Observance of the principle of legal certainty — Limits — Substantial change in economic and financial circumstances

State aid — Power of the Council to authorise aid by way of derogation in the light of exceptional circumstances — Conditions of exercise — Referral to the Council by the Member State concerned before the occurrence of the Commission decision declaring the aid incompatible with the common market and decision taken within a period of three months — Limit — Thwarting an earlier Commission decision

With regard to the central role which the TFEU reserves for the Commission in determining whether aid is incompatible with the internal market, the third subparagraph of Article 108(2) TFEU covers an exceptional and specific case, meaning that the power conferred upon the Council by that provision is clearly exceptional in character. This means that that provision must necessarily be interpreted strictly. Furthermore, with regard to the provisions in the third and fourth subparagraphs of Article 108(2) TFEU, whereby, on the one hand, an application to the Council by a Member State suspends the examination in progress at the Commission for a period of three months and, on the other, in the absence of a decision by the Council within that period, the Commission is to give a ruling, those provisions must be interpreted as meaning that, where that period has expired, the Council is no longer competent to adopt a decision under that third subparagraph in relation to the aid concerned. Therefore, if the Member State concerned has not made an application to the Council under the third subparagraph of Article 108(2) TFEU, the Council is no longer authorised to exercise the exceptional power conferred upon it by the third subparagraph of Article 108(2) TFEU in order to declare such aid compatible with the internal market before the Commission declares the aid in question incompatible with the internal market and thereby closes the procedure referred to in the first subparagraph of Article 108(2) TFEU. That interpretation makes it possible to avoid the taking of decisions the operative parts of which might prove contradictory and contributes accordingly, to legal certainty. The Council is not permitted to thwart the effectiveness of a Commission decision which declares aid to be unlawful by declaring compatible with the internal market, in accordance with the third subparagraph of Article 108(2) TFEU, aid designed to compensate the beneficiaries of the unlawful aid for the repayments they are required to make pursuant to that decision. (see paras 43-46, 49)

For the purposes of the application of Article 108(2) TFEU, the respective powers of the Council and the Commission are allocated in such a way that, first, the primary competence to act lies with the Commission, the Council having power to act only in exceptional circumstances. Second, the Council’s competence, which enables it to derogate, in its decision, from certain Treaty provisions on State aid, must be exercised within a specific time frame. Third, as soon as the Commission or the Council has adopted a final ruling on the compatibility of the aid in question, the other of those two institutions may no longer adopt a contrary decision. In that context, it does not matter whether the Council decision relates to existing aid or to new aid. The effectiveness of the Commission’s decision is undermined not only where the Council adopts a decision declaring compatible with the internal market aid on which the Commission has already ruled but also where the aid which is the subject of the Council decision aims to compensate the beneficiaries of the unlawful aid declared incompatible with the internal market for the repayments they are required to make pursuant to the decision of the Commission. In such circumstances, the second aid is so indissolubly linked to that previously found by the Commission to be incompatible with the internal market that it appears largely artificial to claim to make a distinction between those aids for the purposes of applying Article 108(2) TFEU. In those circumstances, where the Commission, in the exercise of the powers conferred on it by Articles 107 TFEU and 108 TFEU, adopts guidelines to indicate how it intends, under those articles, to exercise its discretion in regard to new or existing aid, and proposes to Member States any appropriate measures required by the progressive development or by the functioning of the common market and where those measures are accepted by a Member State, and accordingly they are binding upon that State, the obligations on a Member State following such an acceptance of those proposals relate only to existing aid schemes and do not apply to a new aid scheme which may correspondingly be regarded as compatible with the internal market by the Council. However, the Council cannot rely on the mere fact that the aid scheme is a new one in order to reassess a situation in respect of which the Commission has already made a final assessment, thereby contradicting that assessment. The Council does not therefore have the power to decide that a new aid scheme must be regarded as compatible with the internal market where it is so indissolubly linked to an existing aid scheme, which a Member State has undertaken to modify or abolish in the framework of Article 108 (1) TFEU, that it appears largely artificial to claim to make a distinction between those two schemes for the purposes of applying Article 108(2) TFEU. Nevertheless, the assessment by the Commission of that aid scheme cannot be considered as prejudicing the assessment which must be applied in economic circumstances radically different from those which the Commission took into account. That is the case in the event of a substantial change such as an economic and financial crisis. It follows that the compatibility with the internal market of the new aid scheme which was the subject of an application addressed to the Council by the Member State under the third subparagraph of Article 108(2) TFEU must be evaluated following an individual assessment distinct from that of the scheme which was evaluated by the Commission, which takes into consideration the relevant economic circumstances at the time when the aid was granted. (see paras 50, 52, 54, 55, 66, 67, 73, 80)

See the text of the decision. (see para. 87)

In the application of the third subparagraph of Article 108(2) TFEU, the Council enjoys wide discretion, the exercise of which involves complex economic and social assessments which must be made in a European Union context. In that regard, judicial review of the manner in which that discretion is exercised is confined to establishing that the rules of procedure and the rules relating to the duty to give reasons have been complied with and to verifying the accuracy of the facts relied on and ascertaining that there has been no error of law, manifest error in the assessment of the facts or misuse of powers. In the light of its unusual and unforeseeable character and the extent of the effects of the economic and financial crisis on Latvian agriculture, the Council cannot be regarded as having made a manifest error of assessment by considering that those effects constituted exceptional circumstances within the meaning of the third subparagraph of Article 108(2) TFEU. The fact that the economic and financial crisis also gave rise to considerable effects in other Member States is not decisive, in so far as that fact does not affect the exceptional character of the effects of that crisis on the development of the economic situation of Latvian farmers. (see paras 104-106)