Judgment of the Court (Sixth Chamber) 24 February 1987

In Case 310/85

THE COURT (Sixth Chamber) composed of: C. Kakouris, President of the Chamber, T. F. O'Higgins, T. Koopmans, O. Due and K. Bahlmann, Judges, Advocate General: M. Darmon Registrar: D. Louterman, Administrator

having regard to the Report for the Hearing and further to the hearing on 24 September 1986,

after hearing the Opinion of the Advocate General delivered at the sitting on 10 December 1986,

gives the following

Judgment

The application of Article 92 (1)

The failure to apply Article 92 (3)

The protection of legitimate expectations

Costs

1. By an application lodged at the Court Registry on 14 October 1985, Deufil GmbH & Co. KG, whose registered office is at Bergkamen-Rünthe (Federal Republic of Germany), brought an action under the second paragraph of Article 173 of the EEC Treaty seeking to have declared void Commission Decision 85/471 of 10 July 1985 (Official Journal L 278, p. 26), in which the Commission decided that aid amounting to DM 2945000 granted to the applicant in 1983 under the German law relating to investment subsidies and the joint Federal Government/ Länder regional aid programme was illegal, since it was granted without prior notification to the Commission, and was incompatible with the common market within the meaning of Article 92 of the EEC Treaty, and should therefore be recovered from the recipient.

2. It is common ground that the amount at issue was granted by the German authorities on the basis of an application made by Deufil for an investment subsidy tor the purpose of replacing equipment capable of producing 3000 tonnes of polyamide yarn annually with new equipment with an annual capacity of 5000 tonnes of polyamide and polypropylene yarn. According to the application, it was intended, with the help of new production technology, partly to replace polyamide yarns with polypropylene yarns.

3. However, it can be seen from information provided by the applicant in reply to questions put by the Court that the capacity of the new equipment is 6000 tonnes and that the intended conversion had still not been carried out in 1985, with the result that 4191 tonnes of polyamide yarn and 1546 of polypropylene yarn were produced in that year.

4. It can also be seen from the file that:

5. In support of its application for annulment, the applicant puts forward, in essence, the following three submissions:

6. Reference is made to the Report for the Hearing for a more extensive statement of the tacts of the case, the Commission's policy concerning aid in the textiles sector and the arguments of the parties, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court.

7. In the first place, the applicant claims that the contested amount was granted in accordance with national rules laying down measures of conjunctural policy within the meaning of Article 103 of the Treaty, which contribute to general economic development and the improvement of structures. Such measures do not constitute aid within the meaning of Article 92 (1).

8. That argument cannot be upheld. As the Court emphasized in its judgment of 2 July 1974 (Case 173/73 Italy v Commission [1974] ECR 709), the aim of Article 92 is to prevent trade between Member States from being affected by benefits granted by the public authorities which, in various forms, distort or threaten to distort competition by favouring certain undertakings or the production of certain goods. That article does not therefore distinguish between the measures of State intervention concerned by reference to their causes or their aims but defines them in relation to their effects. In this case the amount granted reduced the investment costs to be borne by the applicant and therefore favoured it in comparison with other producers in the sector. The general objectives of the national rules forming the legal basis of the grant in aid are not in themselves sufficient to put it outside the scope of Article 92.

9. Secondly, the applicant claims that even if the amount in question constitutes aid, it cannot distort competition and it cannot affect intra-Community trade. In that regard, the applicant emphasizes that the major part of its production of polyamide yarns is sold outside the Community. The rest of that production is delivered, in particular, to other undertakings belonging to the same group which simultaneously reduced their own production, with the effect that the quantity ot such yarns arriving on the open market in the Community represents only a negligible part of that market. Moreover, the market in polyamide and polypropylene yarns is marked by a constant improvement in utilization rates and prices.

10. In the recitals in the preamble to the contested decision, the Commission gave as the reason for its application of Article 92 (1) in particular the existence of heavy competition among polyamide and polypropylene producers in the Community and the high volume of trade in those products. Although the capacity utilization rate for polyamide yarns has actually increased since the aid was granted, that development may be explained essentially by the fact that, although production output has remained unchanged, some Community production capacity has been scrapped. With regard to polypropylene yarn also, the capacity utilization rate has improved but, according to the Commission, the existing capacity in both products will be largely out of balance with demand for a considerable number of years and many Community producers will continue to lose money as prices which still do not exceed the 1974 levels are depressed.

11. With regard to the particular position of the applicant, the Commission also states in the preamble to the contested decision that its production capacity represents 3.2 and 5.6% of total Community capacity in polyamide and polypropylene respectively and that it ships 30% of its production output of polyamide and 70% of its polypropylene to other Member States.

12. Those considerations, which the applicant has been unable to refute, fully justify the conclusion drawn by the Commission in its decision according to which the aid at issue is liable to affect trade and distort or threaten to distort competition between the Member States.

13. Furthermore, with regard to the alleged reduction of production by other undertakings in the same group as the applicant, it is sufficient to point out that that statement, made for the first time during the proceedings before the Court, was not supported by any evidence. According to the statistics produced by the Commission, the other undertakings in the group still held 9.2% of the market in polyamide yarns in 1984.

14. The applicant's first submission must therefore be rejected.

15. The applicant claims that the contested aid promotes the economic development of the Bergkamen area, in which the standard of living is abnormally low and in which there is serious underemployment. Since the purpose of the investment was to limit and, ultimately, eliminate the production of polyamide yarns in favour of polypropylene yarns, the manufacture of which was not at that time subject to the aid code, the restructuring is in the general interest. The aid therefore fulfils the conditions for the exemption provided for in Article 92 (3) (a) and (c).

16. In the recitals in the preamble to its decision, the Commission emphasized that the machinery installed by virtue of the aid has significant economic advantages as compared to traditional manufacturing units. That machinery has been available on the market for a number of years, so that the investment in question is no more than a normal modernization in order to remain competitive and should have been carried out using the undertaking's own financial resources. Having regard to the surplus of capacity both in regard to polypropylene yarns and polyamide yarns, any artificial lowering of investment costs for manufacturers of those products would weaken the competitive position of other producers and would, if it led to increased capacity, have the effect of reducing capacity utilization and depressing prices. It cannot therefore be denied that the aid in question has an adverse effect on trading conditions to an extent contrary to the common interest within the meaning of Article 92 (3) (c).

17. With regard more particularly to subparagraph (a) of that provision, the Commission contests the proposition that the standard of living is abnormally low in the Bergkamen area and that there is serious underemployment there. As the polyamide and the polypropylene yarns sector stands at present and as it is likely to remain in the foreseeable future, the aid in question did not, in any event, bring to the area any lasting increase in income or reduction in unemployment and it is not therefore likely to promote the economic development of the area within the meaning of subparagraph (a).

18. As the Court pointed out in its judgment of 17 September 1980 (Case 730/79 Philip Morris v Commission [1980] ECR 2671), in the application of Article 92 (3), the Commission has a discretion the exercise of which involves economic and social assessments which must be made in a Community context. The Commission in no way exceeded the limits of its discretion by considering that the granting of aid for an investment which increases production capacity in a sector in which there is already considerable overproduction is contrary to the common interest and that aid of that sort is not of such a nature as to promote the economic development of the area at issue.

19. It follows that the second submission must be rejected.

20. In the alternative, the applicant claims that the Commission's order to the Federal Republic of Germany to recover the aid is incompatible with the principle of the protection of legitimate expectations. The applicant received that aid on the basis of definitive decisions and precise instructions and it used it to convert its production to a product not then subject to the aid code.

21. Essentially, that submission raises the question whether the fact that polypropylene yarns were not covered by the aid code might give rise to a legitimate expectation on the part of undertakings which had converted to the production of that product which could be relied on against an order issued by the Commission to the national authorities to recover aid granted for those purposes.

22. However, that is not the case. The aid code constitutes guidelines setting out the course of conduct which the Commission intends to follow and with which it asks the Member States to comply in regard to aid to the synthetic yarns and fibres sector. It does not derogate from the provisions of Articles 92 and 93 of the Treaty, nor could it do so.

23. Furthermore, it can be seen from the file that the market situation did not justify according treatment to polypropylene yarns other than that accorded to polyamide yarns and that the only reason why polypropylene yarn was not included in the aid code until 1985 was because it was a new product.

24. Since the contested amount undoubtedly constitutes aid within the meaning of Article 92 (1), the Commission should have been informed of the intention to grant it in accordance with Article 93 (3) and the aid should not have been granted before the end of the procedure initiated by the Commission. According to Article 93 (2), the Commission is to decide that the State concerned is to abolish or alter the aid if it finds that it is not compatible with the common market. Where, contrary to the provisions of Article 93 (3), the proposed aid has already been granted, that decision may take the form of an order to the national authorities to recover the aid.

25. It follows that the failure to include polypropylene yarns in the aid code cannot justify a legitimate expectation on the part of the applicant of such a nature as to prevent the Commission, in the decision in which it finds that the aid is incompatible with the common market, from ordering the German authorities to recover that aid.

26. The application must therefore be dismissed in its entirety.

27. Under Article 69 (2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs. Since the applicant has failed in its submissions, it must be ordered to pay the costs.

On those grounds, THE COURT (Sixth Chamber) hereby:

(1) Dismisses the application;

(2) Orders the applicant to pay the costs, including those relating to the application for interim measures.

1 Language of the Case: German.