Opinion of Mr Advocate General Tesauro delivered on 24 October 1996. - Kingdom of Spain v Commission of the European Communities. - State aids - Aid for the construction of a steel foundry in the Province of Teruel, Spain. - Case C-169/95.



European Court reports 1997 Page I-00135



Opinion of the Advocate-General

1 By application brought under Article 173 of the EC Treaty, the Kingdom of Spain requests the Court to annul Commission Decision 95/438/EC of 14 March 1995 concerning investment aid granted by Spain to the company Piezas y Rodajes SA, a steel foundry located in Teruel province (Aragon), Spain (1) (hereinafter `the decision'). In the decision the Commission declared the aids in question unlawful and incompatible with the common market and ordered their recovery.

In support of its application, the Spanish Government pleads an infringement of Article 92(3)(a) of the EC Treaty and a manifest error vitiating the appraisal of the facts on which the Commission based its decision to declare the aids incompatible, together with breach of the principle of proportionality and of the principle of the protection of the legitimate expectations of the recipients, in relation to the imposition of recovery together with interest for late payment decided by the Commission.

Facts

2 The facts underlying this dispute date back to the beginning of the 1990s when the Spanish authorities granted the aids in question to Piezas y Rodajes SA (hereinafter `PYRSA') for an investment programme having a total value of PTA 2 788 300 000. Those aids, intended for the construction, in the province of Teruel, of a foundry to produce sprockets and GET parts (used in the construction of earth-moving and excavation equipment), consisted more particularly of:

(a) a grant of PTA 975 905 000 from the Spanish Government;

(b) grants and other aid from various local authorities, in particular:

- a grant of PTA 182 000 000 from the Autonomous Community of Aragon;

- a grant of PTA 2 300 000 from the municipality of Monreal del Campo;

- a guarantee on a bank loan of PTA 490 000 000 from the Autonomous Community of Aragon;

- interest-rate subsidies of 7% for five years on the abovementioned loans, from the Provincial authority of Teruel.

3 On 24 April 1991, following a complaint by William Cook plc, a major European undertaking in the foundry sector (hereinafter `Cook'), the Commission adopted Decision 91/C 178/04 (NN 12/91) `to raise no objections' to the aids granted to PYRSA by the Spanish authorities. (2)

The decision was challenged by Cook before the Court which annulled it by judgment of 19 May 1993. (3) Annulment was founded essentially on the fact that, although the Commission was faced with a situation calling for in-depth analysis and subsequent checks, it established that there was no overcapacity in the relevant sub-sector and decided to raise no objections to the aids, without initiating, as it should have done, the procedure under Article 93(2) of the Treaty.

4 On 28 July 1993, following the judgment by the Court, the Commission initiated the procedure laid down in the aforementioned Article 93(2), and concluded it by adopting the decision which forms the subject-matter of this action. As already mentioned, the decision declared the aids in question unlawful and incompatible with the common market and ordered their recovery, together with interest calculated from the date on which the aid was paid.

5 The decision is essentially based on an evaluation of the sectoral impact of the aids in question, which was carried out by the Commission on the basis of information and data supplied to it by interested third parties who had been invited to submit observations, (4) and on the study made by an independent expert. As is apparent from the reasoning of the decision, the conclusion of that evaluation may be summarized as follows:

- contrary to the position which the Commission had adopted previously, the reference sector for the evaluation of the effects of the contested aids is not the sub-sector for sprockets and GET parts but the steel foundry sector as a whole;

- this sector (and also, in any event, the sub-sector of sprockets and GET parts) was characterized, as regards the years to which the data collected by the Commission relate (1990 to 1993), by manifest and increasing overcapacity;

- even in the absence of precise information in that connection, on the basis of the table of data from the Committee of European Foundry Associations (CAEF), it may be presumed that already in 1988 (the year in which the Spanish Government approved the aids and started to pay them) the sector was characterized by levels of overcapacity equivalent to, if not higher than, those of the following years;

- the aids in question which are incompatible with the common market for the reasons given above cannot benefit from the exception provided for in Article 92(3)(a) of the Treaty since they contribute to exacerbating the situation of overcapacity in the sector; consequently, although they are aids granted to an undertaking located in a region where the standard of living is abnormally low and there is serious underemployment, (5) the criteria for the application of that exception, as laid down in the Court's recent case-law, are not met; (6)

- nor do the aids at issue come within the exception laid down in Article 92(3)(c) of the Treaty because, although they may facilitate the development of the region in which the beneficiary undertaking within the meaning of this provision is located, they are such as to adversely affect trading conditions to an extent contrary to the common interest.

The first plea

6 In its first plea the Spanish Government, as indicated above, submits that the Commission has infringed Article 92(3)(a) of the Treaty. In particular, the applicant Government maintains that, when evaluating the compatibility with the common market of the aids granted to undertakings established in the regions which fall to be considered for the application of that article, the Commission should essentially take into account the likely positive effects of the aids themselves on the economic development of the region in question, rather than the possible negative consequences of those aids on trading conditions.

In other words, according to the Spanish Government, for the purposes of Article 92(3)(a) of the Treaty, the requirements of the protection of the common interest, which must none the less be taken into consideration, do not necessarily prevail when it is a question of evaluating the compatibility with the common market of aids which, as in the present case, may significantly contribute to the development of an underdeveloped region. That interpretation, it says, is corroborated by subparagraph (c) of the same article; that provision, which concerns both sectoral aids and regional aid (without, moreover, stipulating that they must be underdeveloped areas), makes those aids subject to the express condition that they do not adversely affect trading conditions `to an extent contrary to the common interest'; (7) that confirms, the Spanish Government says, that aid coming within the scope of subparagraph (a) of that article must be examined chiefly, if not exclusively, in the light of the benefits which they may bring for the development of the (underdeveloped) region in question.

A proper application of the provision in question implies, then, according to the Spanish Government, that where the aids in question were granted to an undertaking established in a region falling to be considered for the purposes of that provision, they were to benefit from the exception provided for by it.

7 I may say straight away that I do not agree with the interpretation of the provision in question proposed by the Spanish Government. In my opinion, the fact that Article 92(3)(a) does not expressly require the Commission to evaluate the effect of the aid on trading conditions and does not make compatibility of the aid subject thereto, does not allow the inference to be drawn that, in authorizing aid, the Commission may exempt itself from weighing adequately the Community interest. On the contrary I consider that even the permissibility of regional aid coming within the scope of Article 92(3)(a) must, in any event, be subject to an evaluation of the sectoral impact of the aid and its effects on trading conditions.

To accept the contrary view of the matter, as we are urged to do by the Spanish Government, would be tantamount to stating that aid having the characteristics set out in Article 92(3)(a) of the Treaty would be compatible with the common market irrespective of any evaluation of its sectoral impact or of its effects on trading conditions, which, quite evidently, is contrary to the logic underpinning the judgment in Cook v Commission, in which the Court annulled the Commission decision `not to raise objections' to the aids (although for regional purposes) granted to PYRSA, precisely because `it was not clear from the figures and statistics available ... whether or not there was overcapacity in the sprockets and GET parts sub-sector', `a complex analysis of the sub-sector in question' was therefore necessary and to that end, therefore, it should have initiated the procedure under Article 93(2) of the Treaty. (8)

8 In other words, as I already stated in my Opinion in the Cook v Commission case, I consider it essential that, even when applying the derogation provided for in Article 92(3)(a) of the Treaty, the Commission does not confine its attention only to the regional implications of a particular public measure, but must also determine the full extent of the sectoral repercussions which the measure itself is likely to have, in order to avert the possibility that, under cover of worthwhile regional objectives, artificial sectoral development can be brought into being which may produce harmful effects from the common interest point of view. (9)

Indeed it is clear that aid for regional purposes intended to finance productive investments in sectors characterized by structural overcapacity merely exacerbate the imbalances suffered by the markets in question, by bringing fresh pressures to bear on price levels and/or by transferring the sectoral economic difficulties, and the associated employment problems, to other regions of the Community and to the undertakings located there which are not in receipt of analogous aid. Consequently, such aids in no way appear to be consistent with the purpose of the regional aid scheme, which is to resolve effectively and on a permanent basis the development problems of the regions concerned, (10) and must therefore be declared incompatible with the common market.

9 As regards, in particular, the difference in wording between subparagraphs (a) and (c) of Article 92(3) of the Treaty, which is relied on by the Spanish Government in support of its proposition, it does not in my view call for any further remarks than those which I have already made. The reasons for this difference in wording (of provisions whose scope is in part the same) must in fact be sought purely and simply in the greater flexibility to be demonstrated by the Commission when evaluating the compatibility of aids whose prime purpose is to contribute to the economic development of the underdeveloped regions. Nevertheless, it goes without saying that, for the reasons I have just given, the requirements associated with protection of the common interest must be observed in order to prevent the positive effects of the aid on the beneficiary undertaking or on the region in which it is located from having negative repercussions on competitor undertakings or, worse still, on the economy of other regions of the Community which may in themselves also be underdeveloped. (11)

As regards the present case, I consider therefore that the Commission was entitled, on noting that the aids at issue could have contributed to worsening the situation in a sector already characterized by a high level of overcapacity, not to apply the derogation provided for in Article 92(3)(a) of the Treaty.

The first plea is therefore unfounded.

The second plea

10 In its second plea, I would remind the Court, the Spanish Government disputes the evaluation of the factual and legal circumstances on which the Commission based the contested decision. In particular, the applicant Government maintains that the statistical data and information used by the Commission are not representative because they were supplied by an insufficient number of undertakings which are moreover competitors of PYRSA. Also they refer to years (from 1990 on) later than those (1988 and 1989) when the decisions to grant the aids at issue were made and the aids paid.

11 In truth, these arguments appear to me to be unfounded as well. In the first place, as is clear from the decision itself, the Commission had regard not only to the data and information obtained from interested third parties but also to information provided by PYRSA itself, and by CAEF, which is a body sufficiently representative of the sector.

Furthermore, it should be remembered - and this seems to me to be the decisive fact - that the Commission also based itself on the results of a study commissioned from an independent expert, specifically in order to obtain objective information and assessments on certain questions of a technical nature. I consider therefore that the impartiality of the reconstruction of the facts by the Commission cannot be open to doubt.

12 As regards, specifically, the allegation going to the data taken into account by the Commission in order to evaluate the effects of the aids on the sector concerned, it is in my view also totally without foundation or relevance. In fact, on the one hand, it seems to me that the Commission's reasoning was correct when it inferred from the statistics of production capacity for 1990 and subsequent years, supplied by CAEF, that capacity in the two preceding years had been equivalent. The supposition that the level of overcapacity in the sector was in those years at least equal to what it was in the ensuing period is therefore entirely reasonable.

Moreover, it should be remembered, in any event, that the aids at issue did not consist of a single grant, but rather of grants of various kinds, certain of which were paid well after 1988. I am thinking for example of the grant of PTA 182 millions by the Autonomous Community of Aragon which, as is apparent from a letter sent to the Commission by the Spanish authorities themselves, was paid between 1990 and 1992. (12) Besides, some of those grants, irrespective of the date on which they were approved, by their very nature, were intended to be long-term, for example the loan guarantee in the amount of PTA 490 millions for a period of eleven years.

The second plea is therefore also without foundation.

The third plea

13 In its third plea the Spanish Government challenges the obligation to recover the aids at issue imposed on it by Article 3 of the decision. In particular, the applicant Government maintains that the aids at issue, even if deemed unlawful and incompatible with the common market, should not in any event be reimbursed because Commission Decision NN 12/91 `to raise no objections' to the grant thereof aroused in the beneficiary undertaking a legitimate expectation in the lawfulness of those aids which must be protected.

In view of that fact, the obligation to recover the aids at issue would in the present case be contrary to the principle of proportionality and the principle of the protection of legitimate expectations, which both form part of the Community legal order.

14 As is well known, the Court has on several occasions had the opportunity of ruling on the obligation imposed on beneficiary undertakings to reimburse unlawful aids in order to restore the status quo ante. In particular, it has held that recovery of such aids cannot in principle be regarded as disproportionate in relation to the objectives pursued by the Treaty provisions on State aids. (13)

As regards, specifically, the limits of the protection of legitimate expectations of beneficiaries in the lawfulness of aids already received and subsequently declared incompatible with the common market by the Commission, the Court has held that, whilst the principle of the protection of legitimate expectations forms part of the Community legal order, it can be applicable only if the aid in question was granted in compliance with the procedure provided for in that connection, on the ground that a prudent economic operator must normally be in a position to ensure that that procedure was in fact observed. (14)

Again as regards legitimate expectations in the lawfulness of illegal aids, the Court has drawn an important distinction between the situation of the undertaking in receipt of the aid and that of the Member State which has paid it. On the one hand, it held that `a recipient of illegally granted aid is not precluded from relying on exceptional circumstances on the basis of which it had legitimately assumed the aid to be lawful and thus declining to refund that aid'. (15) On the other hand, it has consistently prohibited a Member State which has granted aid in contravention of the applicable rules of procedure from relying `on the legitimate expectations of recipients in order to justify failure to comply with the obligation to take the steps necessary to implement a Commission decision instructing it to recover the aid'. (16)

15 It is evident that, in the present case, the aids were decided upon and also paid in contravention of the provisions of Article 93 of the Treaty and must therefore be considered unlawful. Accordingly, a straightforward application of the principles laid down by the Court should entail rejection as unfounded of the allegation made by the Spanish Government.

Notwithstanding that fact, the applicant Government points to the hopes aroused by Decision NN 12/91 in which the Commission essentially approved the aids at issue, and considers that in the present case there are exceptional circumstances, within the meaning of the case-law already cited, to give rise in the case of the beneficiary undertaking to a legitimate expectation in the legality of the aids at issue, whose protection must ultimately imply a bar on their recovery.

16 I acknowledge that the argument of the Spanish Government would in principle merit a certain attention. In fact, it is not possible in my view to rule out ab initio that, in view of the circumstances of the case, the beneficiary undertaking did in fact reasonably count on the legality of aids which, though granted illegally, were subsequently (though erroneously) approved by the Commission which adopted a formal decision in that connection. (17)

However, I do not believe that the context of the present procedure enables the Court to give its attention to the merits of the problem raised and to take it into consideration.

17 In fact, the Spanish Government is relying expressly (and solely) on the legitimate expectation of the undertaking in receipt of the aids in the legality thereof, in order to oppose their recovery. In other words, the applicant Government is contesting the obligation imposed on it by the decision to recover the aids at issue, by invoking a legal situation which is not its own, but that of another, the beneficiary undertaking, which is not a party to these proceedings, even as an intervener; it is doing that at best in the absence of any specific provision of law conferring on it any such rights of subrogation.

That fact militates, in my view decisively, in favour of rejection of the plea relied on by the Spanish Government.

18 The conclusion which I have just formulated seems to me, moreover, consistent with the principles laid down by the Court in this regard, even if this aspect of the problem has never been specifically reflected upon.

Indeed, it is not by chance that, as I have stated, the Court expressly precluded the possibility of a Member State's relying on the legitimate expectation of the beneficiary undertaking as a bar to recovery of that aid, although it has given that possibility to the beneficiary undertaking, albeit in exceptional circumstances. (18) Although it is implied, it is of course clear that the beneficiary undertaking can avail itself of this possibility only in the appropriate procedural context. (19)

Finally, then, I consider that that the third plea is equally without foundation and that the obligation to recover the aids granted to PYRSA imposed on the Spanish Government by the decision must be observed.

The fourth plea

19 In light of the conclusions which I have reached on the previous pleas, in particular on the third plea, I do not consider it necessary to form a view on the fourth, in which the Spanish Government challenges the calculation by the Commission of interest for late payment on the amounts to be recovered on the ground that the recovery obligation relates solely to aid granted after adoption of the decision challenged in these proceedings.

Clearly this plea would only become relevant if the Court were to uphold, at least in part, the third plea and if it were therefore necessary to make a fresh calculation of the amounts in question.

Conclusion

20 In light of the foregoing considerations I therefore propose that the Court should:

(1) dismiss the application;

(2) order the applicant Government to pay the costs.

(1) - OJ 1995 L 257, p. 45.

(2) - OJ 1991 C 178, p. 4. In fact, the decision concerned solely the grants made by the local authorities since the grant of PTA 975 905 000 made by the Spanish Government was considered to form part of a general regional aid scheme already notified to and approved by the Commission and, consequently, the compatibility of that grant with the common market was not at issue. Cook had, moreover, been advised of that finding by letter of 13 March 1991.

(3) - Case C-198/91 Cook v Commission [1993] ECR I-2487.

(4) - In addition to PYRSA itself and the Committee of European Foundry Associations which provided a table of data concerning steel foundry capacity in different European countries, these are competitor undertakings of PYRSA established in Spain, France, Italy, Germany and the United Kingdom.

(5) - The province of Teruel is in fact amongst the regions which may be considered for the application of Article 92(3)(a) which are expressly mentioned in a Commission communication on this point (OJ 1988 C 212, p. 2, in particular Point I(4) and Annex I).

(6) - The decision refers to the judgment in Joined Cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994] ECR I-4103 in order to assert that in that judgment the Court held that `an ad hoc decision may be regarded as regional aid compatible with Article 92(3)(a) if it does contribute to the long-term development of the region without adversely affecting the common interest and competitive conditions in the Community.' In fact this quotation is inaccurate, inasmuch as it reflects the Commission's orientation (paragraph 50). On this specific point the Court does not take a view until further on, when it recalls its settled case-law that, for the purposes of Article 92(3) of the Treaty, the Commission enjoys `a wide discretion, the exercise of which involves assessments of an economic and social nature which must be made within a Community context' (paragraph 51).

(7) - Article 92(3) of the Treaty is worded as follows: `The following may be considered to be compatible with the common market: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment; (...) (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.'

(8) - Judgment in Cook v Commission (cited at footnote 3), paragraphs 37 and 38.

(9) - Opinion delivered on 31 March 1993 in the Cook v Commission case, cited above, paragraph 53. That requirement, which was already expressly stipulated by the Commission in the First Report on Competition Policy (point 142), was reaffirmed in the communication on the method for applying Article 92(3)(a) and (c) to regional aid (cited above at footnote 5) where the Commission stated that, in order to come within the exception provided for in Article 92(3)(a) of the Treaty, the aid may not lead at Community level to excessive sectoral capacity such that the sectoral problem created at Community level becomes more serious than the initial regional problem.

(10) - Opinion cited above, paragraph 53.

(11) - This reasoning seems to me, moreover, to be entirely consistent not only with the viewpoints expressed on several occasions by the Commission (for example in the abovementioned communication of 1988) but also with the position adopted by Advocate General Jacobs in his Opinion in the Spain v Commission case (cited above at footnote 6; paragraphs 43 to 45), which the Spanish Government none the less relied on in support of its arguments.

(12) - See point V, fourth paragraph, of the decision.

(13) - See, for example, judgment in Case C-142/87 Belgium v Commission [1990] ECR I-959, paragraph 66.

(14) - Judgment in Case C-5/89 Commission v Germany [1990] ECR I-3437, paragraph 14.

(15) - In such a case it is for any national court before which the case comes to assess the circumstances of the case; Commission v Germany, cited above, paragraph 16.

(16) - Commission v Germany, cited above, paragraph 17; see also more recently the judgment in Spain v Commission, cited above, paragraph 76.

(17) - I would recall in this regard that in the only case in which the Court has acknowledged that the legitimate expectation of the undertaking in receipt of aid was entitled to judicial protection, it attached decisive importance specifically to the conduct of the Commission in the circumstances of the case. I refer to the judgment in Case 223/85 (RSV v Commission [1987] ECR 4617, paragraphs 16 and 17) in which the Court held that the delay (of more than 26 months) before the Commission had adopted a decision under Article 93(2) `could in the case in point establish a legitimate expectation on the applicant's part so as to prevent the Commission from requiring the Netherlands authorities to order the refund of the aid', even though it was clear that the aid had been paid prior to its notification.

(18) - Commission v Germany, cited above.

(19) - In practice, by an action under Article 173 of the Treaty, but brought by the undertaking itself before the Court of First Instance or, if appropriate, before the national court against the claim for recovery made by the State in implementation of the Commission decision. I would recall in that connection that the judgment in RSV v Commission (cited above at footnote 17) was precisely on an action for annulment brought (at the time before the Court) by the undertaking pleading legitimate expectation.