Report for the Hearing delivered in Case 248/84

I — Facts and procedure prior to action

1. Regional aid in the Federal Republic of Germany

Regional aid is as a general rule granted by the Länder. However, in 1969 Article 91a was inserted into the Grundgesetz (Basic Law) to ensure coordination of regional aid. That article provides that in certain cases the Bund (Federal State) should contribute to the improvement of the regional economic structure of the Länder. Pursuant to Article 91a a federal law on joint action for the improvement of the regional economic structure was adopted (Law of 6 October 1969, hereinafter referred to as the joint action programme).

The system set up by that law is as follows: a planning committee was set up composed of the Federal Ministers for Economic Affairs and for Finance and one Minister for each of the 11 Länder (the Federal State, however, had the same number of votes as all the Länder together). The committee divided the Federal Republic of Germany into 179 assisted areas (or labour market regions). It then selected a certain number of economic indicators (for example, the rate of unemployment) to enable the economic situation in each of the areas to be assessed. On the basis of the information obtained for each area a classification was made to determine the labour market regions where the situation was least favourable. For the assisted areas furthest below the federal average there was provision for aid programmes in the form of framework plans which have been regularly adopted since 1972. The aid so paid is financed by both the Federal State and the Länder.

The boundaries of the assisted areas covered by the joint action programme were amended in 1981. At the same time the planning committee adopted fresh economic indicators. At present there are five: rate of unemployment (average for 1976 to 1980), forecasts for the regional employment market, gross domestic product per capita, wages and salaries per employee and finally particulars of the infrastructure.

In addition to the federal programme the Land North Rhine-Westphalia decided to set up its own programme of investment aid for undertakings situated in its territory. The programme makes use of the boundaries of the assisted areas and the indicators chosen by the joint action programme. Classification of the various areas is thus the same as under the joint action programme. However, the Land decided to grant aid in areas not covered by the joint action programme. Thus the Borken-Bocholt and Siegen regions were included in the Land's aid programme even though the framework plans adopted on the basis of the joint action programme do not include those regions. Initially the maximum amount of aid which might be paid by the Land was 7.5% of the amount of the investments made by undertakings.

In 1982, North Rhine-Westphalia incorporated in its programme the changes which had been made in 1981 in the joint action programme concerning the boundaries of assisted areas and the indicators used for classifying those regions. Otherwise the system set up by the Land remained the same, apart from the fact that the aid ceiling was raised to 10% of the investments made by undertakings.

2. The procedure prior to action

The various framework plans adopted on the basis of the joint action programme were regularly notified to the Commission. The latter even opened the procedure laid down in Article 93 of the Treaty in respect of some of them. The notifications gave rise to a lengthy exchange of correspondence between the Federal Republic of Germany and the Commission. On those occasions the Commission always took the view that regional aid was per se contrary to Article 92 (1) of the Treaty.

The various regional aid programmes adopted by the Land North Rhine-Westphalia have also been regularly notified since 1975. They have not prompted any reaction on the part of the Commission.

The regional aid programme as amended in 1982 by the Land North Rhine-Westphalia was notified to the Commission on 21 July 1982.

By letter dated 17 December 1982 the Commission stated that it was opening the procedure laid down in Article 93 of the Treaty with regard to the regional aid programme of the Land North Rhine-Westphalia.

On 21 February 1983 the German Government submitted its comments on the procedure.

Since there was no further comment from the Commission after the opening of the procedure, North Rhine-Westphalia assumed that it could implement its regional aid programme. It seems, however, that during that period there was still some contact, at least by telephone, between the Land and the Commission.

3. The contested decision

In its decision of 23 July 1984 the Commission considered that the aid granted by the Land North Rhine-Westphalia distorts or threatens to distort competition within the meaning of Article 92 (1) of the Treaty by favouring certain undertakings or the production of certain goods and is likely to affect trade between Member States.

In the Commission's view the only possible exceptions permitting such aid are those provided for by Article 92 (3) (a) and (c). It points out that the exceptions are applicable only where the regions concerned are suffering from problems which are serious enough, on a Community-wide comparison, to warrant the grant of aid at the level proposed. Where this cannot be demonstrated, it is evident that the aid does not serve the objectives specified in the exception clauses, but does little more than further the private interests of the recipient.

In the present case the Commission considers that only the exception provided for by Article 92 (3) (c) of the Treaty is capable of application. The Commission describes the steps which it took to determine whether the exception was applicable to the contested regional aid as follows :

After considering various aspects of the labour market region in question the Commission decided that the aid proposed by the Land North Rhine-Westphalia for those areas was incompatible with the common market. In the case of Borken-Bocholt the Commission did not reiterate the aforementioned criteria, but simply referred to the proportion of workers in the textile and clothing industry and the rate of unemployment. Only the rate of unemployment was mentioned in respect of Siegen. Since the aid programme had been applied during the course of the procedure, the Commission prohibited the grant of aid only from 30 June 1985, in order to allow the undertakings concerned time to adjust.

4. Community law and regional aid

Various provisions have been adopted by the Member States and the Community institutions in relation to regional aid.

Chronologically, the first document to mention regional aid is the third medium-term economic policy programme for the period 1971-75 adopted by the Member States and the Community institutions (Journal Officiel 1971, L 49, p. 1). That programme stresses the need to coordinate schemes of regional aid on a Community basis.

At the same time the Commission sent the Council a communication (Communication of 23 June 1971, Journal Officiel C 111, p. 7) in which it described the effect of regional aid on competition and trade between Member States. That communication led the representatives of the Member States, meeting within the Council, to adopt a resolution (Journal Officiel 1971, C 111, p. 1; Official Journal, English Special Edition, Second Series, Vol. IX, p. 57). It defined the first set of principles on the coordination of regional aid which the Member States undertook to comply with in respect of regional aid granted for any investment. One of the aspects of that coordination is the fixing of a single ceiling on the amount of aid which States may not exceed unless exemption is obtained under the procedure provided for in Article 93 of the Treaty. Initially the ceiling so fixed was 20% of the investment expressed as a net subsidy-equivalent (that term means that the States undertook not to grant aid the amount of which would exceed 20% of the investment made by the undertakings less tax paid by the undertakings).

That first set of coordination principles was reaffirmed by the Commission in communications to the Council in 1973 and 1975 and then slightly amended in a communication of 21 December 1978 (Official Journal 1979, C 31, p. 9). The preamble to that communication states that its object is to inform the Member States of the principles which the Commission intends to follow in relation to regional aid pursuant to the powers vested in it by Article 92 et seq. of the Treaty.

5. The proceedings before the Court

The application by the German Government was lodged at the Court Registry on 16 October 1984. On 8 May 1985 it also made an application for interim measures. That application was rejected by Order of the President of the Court on 13 June 1985 on the ground that the German Government had not been able to show that the matter was urgent.

II — Conclusions of the parties

The applicant claims that the Court should:

The defendant contends that the Court should:

III — Submissions and arguments of the parties

A — Preliminary observations

The German Government is concerned to stress various issues before discussing its submissions.

In the first place it considers that the regional aid granted by the Land North Rhine-Westphalia cannot have been taken into account by the Commission when it reviewed the framework plans under the joint action programme, for the two systems of aid are independent of one another. In consequence the methods, facts or criteria which played a part in procedures relating to the framework plans under the joint action programme are irrelevant in assessing the validity of the contested decision.

Secondly, the German Government states that it has never accepted the Commission's view that regional aid is per se contrary to Article 92 (1) of the Treaty. Moreover, in its observations relating to the framework plans under the joint action programme it clearly showed on several occasions that it considered the procedure and criteria adopted by the Commission to be quite inadequate to enable it to assess the regional aid programmes.

Thirdly, the German Government states that the Land's aid programme did not benefit export undertakings. In the. Federal Republic of Germany the view is taken that undertakings are particularly important for the development of a particular region (and accordingly deserve to be aided) if they sell their products or at least the greater part of them outside the vicinity of their region, but that does not mean that such sales take place beyond the national economic frontiers.

Fourthly, the German Government considers that the object of the regional aid programme of the Land North Rhine-Westphalia is not to benefit economically powerful undertakings but rather small and medium-sized undertakings.

Finally, the German Government considers that there is nothing in either the Resolution of the Representatives of the Member States of 20 October 1971 or the Commission's communication to the Council of 23 June 1971 to show that regional aid is in principle incompatible with the common market. They do not prohibit regional aid but coordinate it according to certain criteria, in particular by fixing maximum rates of aid. On the contrary, they provide that regional aid may be an important and essential instrument of regional development in the Member States.

The Commission states first of all that the decision of 23 July 1984 forms part of a continuing dialogue between the parties on regional policy. That is why the methods and indicators used for the Land North Rhine-Westphalia development programme were already examined in considering the framework plans under the joint action programme. Those methods and indicators are, moreover, almost identical to those used for the purposes of the joint action programme.

Secondly, the Commission submits that the German Government has always taken the view that regional aid falls under the principle of incompatibility contained in Article 92 (1) of the EEC Treaty. Even in its observations after the procedure was opened the only point of disagreement was the fact that the Commission used the situation in the whole of the common market as the basis of comparison.

Thirdly, the Commission emphasizes that one of the conditions for receiving the aid in issue is that the undertaking should have sales outside the region. These are defined as sales beyond a radius of 50 kilometers from the undertaking's premises. Such an order of magnitude is sufficient to affect trade between Member States (especially since the Borken-Bocholt area is some 20 kilometers from the Netherlands frontier).

Fourthly, the Commission has to consider a regional aid programme which benefits a large number of unknown undertakings. For Article 92 (1) of the Treaty to apply, it is sufficient that the contested programme should benefit, inter alia, large exporting undertakings. In the present case the Commission considers that that is so, since an undertaking can receive aid from the Land only if it is likely that it will remain competitive (points 2.2 and 2.3 of the aid programme).

Finally, the Commission considers that the principles of coordination, based on Article 93 (1) of the Treaty, show that the Commission and the Member States took the view in 1971 that regional aid was fundamentally incompatible with the common market. That conclusion is corroborated by the structure of Article 92 of the Treaty. The power given by Article 92 (3) (a) to authorize aid in the poorest areas of the Community presupposes that as a general rule such aid distorts competition and affects trade. The Commission considers that the sole purpose of the aid ceilings laid down in the principles of coordination is to define the limits of what may be regarded as compatible with the common market. As is clear from the communication of 21 December 1978, that does not mean that aid the amount of which is lower than those ceilings is ipso facto compatible with the EEC Treaty.

B — Submissions of the German Government

The German Government makes four submissions in support of its application: infringement of Article 190 of the EEC Treaty, infringement of Article 92 of the EEC Treaty, misuse of power and, in the alternative, errors of fact in the decision.

1. The first submission: infringement of Article 190 of the EEC Treaty

The German Government points out that the obligation in Article 190 of the EEC Treaty to state the reasons on which measures are based has a three-fold purpose: to encourage the Community institution to review its own measures, to inform the person to whom the measure is addressed of the institution's reasoning and, finally, to make it possible for the Court of Justice to review the measure. It adds that in the present case the decision may be challenged by natural or legal persons pursuant to the second paragraph of Article 173 of the Treaty. Undertakings which have already made application for regional aid which can no longer be granted after 30 June 1985 are directly and individually concerned. Such undertakings must be able to find in the decision the reasons which led the Commission to adopt it.

In the present case the statement of reasons is defective because the decision contains no finding of fact on the substantive issues relating to the rule of law which it applies. The decision ought to have set out the facts which made it possible to determine whether the aid in question distorted or threatened to distort competition and whether it could affect trade to an extent contrary to the common interest. Although the decision does state that the Commission used certain indicators in its analysis, it does not state why, when the various indicators were considered, the limit on the legality of the aid was drawn in such a way as to preclude the receipt of further regional aid in the labour market regions of Borken-Bochdlt and Siegen.

Furthermore, the statement of reasons is inconsistent. Initially the Commission relies on a comparison of the regions at issue with the whole Community in order to determine whether the regional aid programme is compatible with Article 92 of the Treaty. However, in another part of its decision the Commission also takes account of the serious disparities between regions in a single country.

Finally, the statement of reasons is incomplete because it contains no clear definition of the criteria used by the Commission in determining the legality of the aid in issue.

The Commission (considers that the decision contains a sufficient statement of reasons for the purposes of the requirements of Article 190 of the Treaty.

In the first place it insists that it was not necessary to examine in detail whether the regional aid at issue satisfied the conditions set out in Article 92 (1) of the Treaty, since the Member States (including Germany) do not deny that that provision applies to aid of this kind. Furthermore, the contested decision cannot be of direct concern to undertakings within the meaning of Article 173 of the Treaty, for the'grant of the aid at issue depends on a discretionary measure of the Land. In those circumstances it was unnecessary to encumber the decision with statements which were self-evident to the only two parties concerned.

Secondly, the Commission considers that the various criteria for applying Article 92 (3) (c) of the Treaty are clearly set out in the decision.

Finally, the Commission insists that the present case cannot be compared with cases concerning the compatibility with the Treaty of sectoral aid granted to particular undertakings whose business relates to a specific market. Regional aid takes the form of a general programme of an abstract nature. The market concerned is thus a priori undefined and the effect on competition and trade can be considered only in a general and abstract way.

2. The second submission: infringement of Article 92 of the EEC Treaty

(a) Infringement of Article 92 (1) of the Treaty

The German Government states that it is far from clear that all regional aid granted by a Land is contrary to the EEC Treaty.

It considers that the contested decision infringes Article 92 (1) of the Treaty for several reasons.

In the first place, the Commission has not clearly set out the conditions for applying Article 92 (1) of the Treaty but has simply quoted the wording of that paragraph.

Secondly, the decision does not set out the criteria used in order to determine whether the aid granted by the Land North Rhine-Westphalia is compatible with the EEC Treaty or the facts showing that the labour market regions at issue do not satisfy such criteria. Thus the decision contains no element of fact making it possible to assess the influence on trade of the regional aid granted by the Land North Rhine-Westphalia, or any particulars making it possible to compare the situation in the labour market regions at issue and that in other regions.

Finally, the Commission has not made any comparison between the situation in the labour market regions at issue and that in other regions. In particular it has not explained how a single distribution of aid of a relatively modest amount was likely to affect the market and harm the common interest.

The German Government points out that the Court has emphasized the need for the Commission, in applying Article 92 (1) of the Treaty, to make findings of fact and relate those findings to the rule set out in that article. In the present case it would have been quite possible to determine whether undertakings had received aid which gave them a competitive advantage and affected trade between Member States. The German Government also cites a report to the effect that financial aid is not a decisive factor in an undertaking's choice of where it will establish itself.

Finally, the German Government considers that in determining whether competition was affected to a significant extent the Commission ought to have taken account of the differences between sectoral aid and regional aid. Since the latter is intended to compensate for the disadvantages of establishment in a particular area, it is not possible to apply to it the criteria used in determining the validity of sectoral aid.

The Commission states that since no Member State denied that regional aid granted to undertakings distorts competition and affects trade between Member States it was unnecessary to discuss that issue at length in the contested decision.

In its observations the Commission nevertheless addresses the question why in the present case the regional aid satisfied the conditions for applying Article 92 (1) of the Treaty. It states first of all that such aid distorts competition because it determines the place where undertakings will establish themselves. It also has. an effect upon competition between products and services. Finally, it may lead to competition between Member States in the granting of aid. The Commission also insists that in assessing whether an aid programme is compatible with the common market it is necessary to rely simply on general forecasts of future distortion of competition (which does not prevent the application of Article 92 of the Treaty, since that article is applicable if there is a threat of distortion of competition). Finally, regional aid also affects trade between Member States, at the very least by benefiting undertakings whose products, are in circulation in the Community.

The Commission considers that the aid granted by North Rhine-Westphalia affects competition to a significant extent. In the first place, the Land's aid programme allows aid to be granted in excess of the amount at issue in the Philip Morris case (Case 730/79 Philip Morris v Commission [1980] ECR 2671). Secondly, regional aid alters the normal pattern of competition since it compensates for the natural disadvantages resulting from establishment in a particular area. Finally, such aid also distorts competition since its intention is to encourage undertakings to establish themselves in the area.

(b) Infringement of Article 92 (3) of the Treaty

The German Government states first of all that the Commission must in its decision set out the criteria which it has adopted in exercising the discretion given it by Article 92 (3) of the Treaty.

The decision contains no finding of fact showing why Article 92 (3) (a) of the Treaty does not apply in the present case.

The same objection may be made in relation to the application of Article 92 (3) (c) of the Treaty. There is nothing in the decision to show why the regional aid at issue does not qualify for that exception. Furthermore, among the facts mentioned in a general way in the decision those relating to 1980 were not even taken into account. Nor did the Commission take account of the worsening of the economic situation in the labour market regions at issue between the time when the procedure was initiated in 1982 and the final decision in 1984.

The Commission states that it has a discretion in relation to decisions on aid and that aid is not automatically entitled to the exemptions provided for in Article 92 (3) of the Treaty once the indicators for the area in question lie below certain threshold values.

With regard more particularly to the exception provided for in Article 92 (3) (a) of the Treaty, the Commission contends that the German Government agreed that that exception could not apply in the present case. At the time of the procedures initiated in relation to the various framework plans provided for under the joint action programme the German Government was informed that the exception provided for by Article 92 (3) (a) of the Treaty could not apply to the whole of the Federal Republic of Germany. Even if on those occasions there was no specific mention of North Rhine-Westphalia the German Government was well able to compare the situation of the Land North Rhine-Westphalia with that of the other Länder and conclude that Article 92 (3) (a) of the Treaty could in no way apply to it.

The circumstances under which Article 92 (3) (c) of the Treaty apply are in fact set out in the contested decision. They are those referred to in paragraphs 16 and 17 of the aforementioned judgment in the Philip Morris case. The contested decision thus contains a sufficient statement of reasons in that respect. The decision also mentions the arguments which were put forward after the procedure was initiated and before the decision was adopted. Finally, the Commission states that the exception in Article 92 (3) (c) can apply only after the situation in the area in question has been compared with that in the Community as a whole, as was done in the present case. The Commission even went further since it considered it worthwhile to examine whether there were any disparities between German areas. In that two-stage examination it relied essentially on the indicators provided for defining the labour market regions in the joint action programme.

The Comission considers that the situation of the labour market regions in question is more favourable than that of other regions of the Community and, contrary to what the German Government maintains, has improved since 1983.

3. Third submission: misuse of power

(a) Breach of the principle of proportionality amounting to misuse of power

The German Government considers that there is a breach of the principle of proportionality inasmuch as the amount of aid granted by North Rhine-Westphalia is relatively limited and the two regions satisfy or are close to satisfying the requisite criteria for receiving greater amounts of aid. The Siegen region could receive the aid provided to areas affected by the restructuring of the steel industry, while the Borken-Bocholt region satisfies three of the four criteria required by the Community for aid to areas affected by the restructuring of the textile industry. Those aid programmes are provided for, respectively, by Council Regulation No 216/84 of 18 January 1984 on a specific Community measure for certain steel-making zones (Official Journal 1984, L 27, p. 9) and Council Regulation No 219/84 of 18 January 1984 on a specific Community measure for zones adversely affected by restructuring of the textile and clothing industry (Official Journal 1984, L 27, p. 22).

The Commission states that the German Government has made no request for special aid for the Siegen region. In any event any such request would have been unsuccessful because the Siegen region does not satisfy one of the criteria required by the aforementioned Regulation No 216/84. Nor does the Borken-Bocholt region satisfy the conditions laid down for the receipt of aid under Regulation No 219/84.

(b) Absence of findings of fact amounting to misuse of power

The German Government considers that a decision which contains no findings of fact, assessment of the facts or criteria of assessment cannot be reviewed and thus amounts to a misuse of power. It cannot be ruled out that the absence of any findings of fact may be intended to make it more difficult for the parties concerned to inform themselves and the decision to be reviewed.

The Commission is surprised that the German Government should make such an unusual submission since the copious exchange of correspondence between the Commission and the Government relating to the definition of the assisted areas under the joint action programme leaves no doubt whatsoever as to the salient facts.

4. Fourth submission: substantive errors in the contested decision

The German Government submits that the contested decision contains a number of errors.

In the first place, it is surprised that it was not until 1984 that the regional aid granted by the Land North Rhine-Westphalia was prohibited, that aid having been tolerated since 1975. It is true that the programme was amended in 1982 but it was only a question of increasing by 2.5% the maximum amount of aid which might be granted. The German Government does not consider that such an increase constitutes a significant alteration of the aid scheme which could affect competition.

Secondly, the German Government emphasizes that no Member State or competing undertaking has objected to the aid granted by North Rhine-Westphalia.

Thirdly, it states that the aid provided by the Land has been granted only to small and medium-sized undertakings.

Fourthly, it states that the aid at issue is appreciably less than what the Community allows Member States to grant to certain areas under the aforementioned resolution of 20 October 1971, since according to that resolution regional aid may amount to 20% of investments, expressed as a net subsidy-equivalent.

Finally, the German Government produces statistics which show that the situation in the labour market regions of Borken-Bocholt and Siegen worsened in 1983 and 1984.

The Commission states first of all that the contested decision prohibits the entire North Rhine-Westphalia regional aid programme, and not only the increase in the maximum amount of aid pursuant to the 1982 amendment.

Secondly, as has been mentioned already, the Commission considers that the North Rhine-Westphalia regional aid programme is directed at economically strong export undertakings.

Thirdly, the Commission states that the fixing of aid ceilings under the 1971 Council Resolution does not mean that all aid lower than those ceilings must be regarded as compatible with the common market.

Finally, the Commission produces its own figures on the situation in the labour market regions of Borken-Bocholt and Siegen. They show that the situation appreciably improved in both areas in 1983 and 1984.

1 Language of the Case: German.