Opinion of the European Economic and Social Committee on ‘Industrial change and State aid in the steel sector’
Date: 2004-10-27
Institutions: European Economic and Social Committee
Subjects: ESC opinion, OECD, State aid, competition law, control of State aid, enlargement of the Union, industrial restructuring, iron and steel industry

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Official Journal of the European Union

C 120/37

3.7
The EESC calls upon the Commission to draw up a
procedural guide for operators that would help both them and
the authorities in their supervisory role, and thus benefit this
new Community promotional policy as a whole.

3.8
The implementation of these regulations is recent, but
some basic requirements are beginning to emerge which must
be considered for the future. The Commission should take care
to coordinate actions in different markets so as to avoid over-

lapping or mixed messages, which only detract from the effec-
tiveness of promotion.

4. Conclusion

4.1
The Commission proposal should be adopted, bearing in
mind the above comments on the need for further simplifica-
tion.

Brussels, 27 October 2004.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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

1.4

This own-initiative opinion has been triggered by:

the opinion; definition of terms used

— the expiry of the ECSC Treaty in 2002;

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.

— the privatisation and restructuring of the steel industry in
the central and eastern European countries (CEEC), linked
to the EU accession process;

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.

— the OECD negotiations on an international steel subsidy

agreement (SSA);

— the latest edition of the EU's State Aid Scoreboard;

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 interna-
tional conditions.

— 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.

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Taking the steel
industry as an example, this own-initiative
opinion analyses how State aid can have on impact on neces-
sary structural change.

several decades of

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
the European steel
over
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 work-
forces 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. Essen-
tial adjustment processes are only hesitantly set in train.

restructuring,

in the

The proportional decline

1.9
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 work-
forces 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.

The increase in the social

into perspective in view of

importance of the service
1.10
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
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 indus-
trial consequences.

1.6
in the
Despite this, there is now general agreement,
world of politics, in the economy, and also within trade unions,
both on the unavoidability of industrial change and the need to
framework agree-
shape such change through international
ments (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 enter-
prises 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
that comparative cost structures have
become more favourable in non-EU states.

jobs is

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.

1.8
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) 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.

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 enter-
prises 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.

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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
in the context of structural
which State aid plays in general
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

the production of certain goods,

2.1
State aids are selective benefits which State bodies grant
to selected branches of manufacturing and, ultimately, to par-
ticular groups. In order to determine whether measures consti-
tute State aid, a distinction has to be drawn between measures
which are intended to provide support for certain undertakings
or
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).

It should, however, be borne in mind that in market
2.2
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.

State aid may jeopardise free competition on a lasting
2.3
basis, prevent the efficient allocation of resources and consti-
tute 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.

A further difficulty is

2.5
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 enter-
prises 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 subsi-
dies.

for a shift

following various meetings of

2.8 With a view to bringing about the necessary reduction
in the
in the overall volume of State aid, calls were made,
conclusions set out
the EU
in emphasis away from
Council of Ministers,
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.

The main horizontal objectives which the provision of

2.9
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 considera-
tions 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.

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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 guar-
antee 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 competi-
tive enterprises. Such measures can also trigger a spiral of inter-
vention.

Apart

2.12
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 (1).

In the European Union, considerable importance is
2.13
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 Commis-
sion 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 commit-
ments. Aid in respect of non-agricultural goods and products is
subject to the WTO Agreement on Subsidies and Counter-
vailing Measures.

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

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) prohib-
ited 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.

Following the establishment of the common market it
3.2
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.

Keeping the coal mining industry going,

3.3
in particular
the jobs associated with it, was one such aim. From then on,
aid which Member States paid out to their coal mining compa-
nies 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.

From 1978 onwards private steel companies, which had
3.5
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.

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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 compa-
nies 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.

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.

From the second half of

3.7
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 produc-
tion 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.

This strict legislation on steel aid, which the founding
3.9
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 author-
isation 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
the release of
around EUR 41 billion in State aid;

for

— between 1986 and 1995, a further EUR 17 billion were
granted, of which EUR 7 billion were awarded in 1994

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

In the 1960s and the first half of the 1970s, world
3.12
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 %.

(19 %). The

However, one year later, in 1975 the oil price crisis
3.13
caused a sharp drop in steel production, and as a consequence,
within a year production in the EC had shrunk by 30 million
tons
slump in steel prices
outstripped the decline in production. At the same time ECSC
steel companies faced a market increase in imports, accompa-
nied 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.

corresponding

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.

Steel consumers'

3.15
investment activity has been drasti-
cally 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 consump-
tion in the highly developed industrialised countries is asso-
ciated with investment activity.

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the

Another key reason for

3.16
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 qualita-
tive 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 main-
tained 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
finally collapsed
industry,
association for the steel
when none of the major companies were participating any
longer.

‘Eurofer’,

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 Commis-
sion on a quarterly basis. The system provided for the possibi-
lity of sanctions in the event of non-compliance. Moreover,
special minimum prices were set for specific products. In addi-
tion, 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 regu-
lation, which was initially only supposed to be in force until
1981, had to be extended again and again for reasons of
competition.

the same time,

The Commission chose State aid prohibited under the
3.21
ECSC Treaty as a means of applying pressure and decided to
legalise the previously illegal practice with the subsidy code
introduced at
the
unavoidable capacity reduction; but it simultaneously called for
a licensing regime which it tied in with the reduction in capa-
city 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.

in order to implement

The gradual liberalisation of the market (from 1985)

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

In 1985, with the affirmation that the clear crisis had
3.23
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.

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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 pres-
sure on the market at that time.

In short:

A short-term increase in demand after 1987 in the end
3.25
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 regis-
tration 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. (1) 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 Commis-
sion intervention. Specifically, they called for quarterly produc-
tion and supply estimates for individual products, the simplifi-
cation 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 struc-
tural crisis cartel and a new production quota system; in 1993
indirect
it presented its own proposal consisting only of
measures. The measures provided for the pre-financing of capa-
city 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
transparency through information about production
market
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-finan-
cing, 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.

(1) 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.

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 restruc-
turing 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' elim-
ination 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 envi-
saged 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.

Nevertheless,

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

competitive by

international

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.

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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 coordi-
nated, joint efforts undertaken and results made available to all
concerned. Industrial innovation therefore quickly progressed
through constant improvements.

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 tech-
nological adaptation and more streamlined structures have
advanced to the position of leaders on the global market.

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.

3.38
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.

Only €7 million per year were initially allocated for
3.35
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 proce-
dures, 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 exclu-
sively 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.

3.39
The strong demand for steel on the internal market of
the EU underlines the major efforts made by EU steel produ-
cers, 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 produ-
cers 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
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.

the retention of

strict

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 consider-
able 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.

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 enlar-
gement, the steel industry in the EU is well equipped to meet
global competition. Over the last few years, the European steel

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.

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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 demon-
strate 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 frame-
work 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 confor-
mity with the agreed rigorous EU aid regime and also ensure
that, bearing in mind the actual
inefficient
production capacity really is reduced, as planned.

level of demand,

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 Adminis-
tration 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
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.

existence of

inefficient,

surplus

4.2
The EU Member States and the European Commission
give their backing to all endeavours to introduce greater disci-
pline with regard to the granting of aid to the steel industry
throughout the world. The start of the multinational negotia-
tions 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 sanc-
tions. 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 repre-
sentatives 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 develop-
ment 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 invest-
ments, so as to give companies an incentive to go signifi-
cantly beyond compliance with minimum EU environ-
mental 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
industry. Steel producers in
already a fully competitive steel
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 situa-
tion of the company and the country; use of funding must
be monitored, with the relevant objectives in mind;

— is subject to strict expiry dates;

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— is applied in the context of an approved restructuring plan
companies
long term viability of

the

ensuring the
concerned;

— results in a reduction of production capacity under normal
lead to increased capacity

circumstances and does not
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 conse-
quences of
this process
industrial change. The control of
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.

Another problem was that during the crisis years in the
5.3
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'

Brussels, 27 October 2004.

decisions and court rulings softened the line taken and made it
unpredictable. Steel producers felt the lack of security in plan-
ning 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.

The mistakes which were made in the EU-15 must not

5.5
be repeated.

Negotiations within the OECD (which are currently on
5.6
hold) are only worthwhile if they lead to a sustainable improve-
ment on the current situation, i.e.:

— no excessive concessions to developing, emerging and tran-

sition 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 environ-
mental 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.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND