Report for the hearing in Case C-364/90

I — Facts and procedure

A — Facts

In November 1980 and February 1981, southern Italy was shaken by a number of earthquakes. To assist the reconstruction and development of the disaster areas, Italy adopted various extraordinary measures which were grouped together in Law No 219 of 14 May 1981 (GURI No 138 of 18 May 1981). Article 32 of that law made provision for the possibility of industrial undertakings situated in 20 zones identified for that purpose to obtain aid the intensity ceiling of which would be limited to 75% of the planned investment (Article 21). The deadline for the submission of applications for aid was 31 December 1982.

Subsequently the Italian authorities introduced a general scheme for extraordinary assistance to the Mezzogiorno in Law No 64 of 1 March 1986 (GURI No 61 of 14 March 1986). In accordance with the requirements of the Treaty, the scheme was submitted for the Commission's approval. Applying its customary criteria, which are set out in a communication on the method for the application of Article 92(3)(a) and (c) to regional aid (OJ 1988 C 212, p. 2), the Commission approved intensity ceilings varying from 28.07% to 73.78% for investments in the regions which are the subject of the present case (Article 9 of Law No 64/68).

In 1987, in Law No 120 of 27 March 1987 (GURI No 93 of 22 April 1987), the Italian authorities decided to extend the deadline for obtaining the aid referred to by Article 32 of Law No 219 of 14 May 1981 (Article 8 of Law No 120/87). In addition, the Italian authorities raised the original investment ceiling to LIT 50000 million (Article 8(2 bis) and (2 ter) of Law No 120/87) and extended the benefit of the aid to other zones (Article 8(7) of Law No 120/87 and Article 10(3) of Decree-Law No 474/87).

In the same law it was decided to raise to 75% the level of subsidies fixed by Article 9 of Law No 64/86 for investment projects located in the municipality of Senise, which suffered a landslide in 1986 (Article 3(5) of Law No 120/87) and for small and medium-sized undertakings in areas affected by earthquakes between 1980 and 1986 (Article 6(14 ter) of Law No 120/87). Those areas were not covered by Law No 219/81.

The law in question contained other provisions which are not in issue in these proceedings.

By letter dated 2 May 1988, the Commission asked the Italian Government for information concerning the extension of the deadline for the grant of aid laid down by Article 32 of Law No 219/81. By letter of 19 July 1988 the Italian authorities forwarded Law No 120/87 to the Commission. By letter dated 15 November 1988 the Commission informed the Italian Government that it had placed that law on the register of nonnotified aid, and requested additional information concerning the aid which it was introducing. The Italian authorities complied in a letter dated 6 January 1989.

Finding that the aid was additional to that provided for by general Law No 64/86, the Commission took the view that the abovementioned provisions of Law No 120/87 were prima facie incompatible with the common market within the meaning of Article 92 and decided to initiate the review procedure laid down by Article 93(2) of the Treaty. For this purpose, it requested the Italian Government by letter of 3 November 1989 to submit its observations.

In a letter dated 20 February 1990, the Italian Government replied that, although it had extended the deadline for obtaining the aid provided for by Law No 219/81, this was to permit the completion of the industrial development programme begun in 1981. With this in view it appeared necessary, in view of the structural nature of the economic depression in those regions and the worsening of their socioeconomic situation, to raise the investment ceiling in order to make the aid more attractive.

With regard to the increase in the subsidy level normally fixed by Article 9 of Law No 64/86 (Articles 3(5) and 6(14 quater) of Law No 120/87), the Italian Government observed that this would benefit regions which had suffered natural disasters: the landslide affecting the municipality of Senise in 1986 and the various earthquakes which had occurred between 1980 and 1986. It added that the new intensity ceiling of 75% had already been approved by the Commission for the aid laid down by Article 32 of Law No 219/81.

Finally, the Italian authorities informed the Commission generally that these measures had not yet been implemented.

In a decision of 25 July 1990 (Decision 91/175/EEC concerning aid provided for in Italian Law No 120/87 to assist certain areas of the Mezzogiorno affected by natural disasters (OJ 1991 L 86 p. 23), communicated to the Italian Government by letter dated 20 October 1990, the Commission found that the extension of the deadline for the aid laid down by Article 32 of Law No 219/81 was compatible with the Treaty, provided that it was limited to the twenty zones originally designated and that it did not exceed the ceiling of LIT 32000 million fixed by Article 9 of Law No 64/86.

The reason given for the Commission's negative decision with regard to the extension of the scope of Article 32 of Law No 120/87 (Article 8(7) of Law No 120/87 and Article 10(3) of Decree-Law No 474/87) is that the problems of the areas affected by earthquakes of 1980 and 1981 which gave rise to Law No 219/81 no longer have the necessary seriousness, urgency or specificity

With regard to raising the investment ceiling to LIT 50000 million (Article 8(2 bis) and (2 ter) of Law No 120/87), the Commission stated that this was not justified in so far as Law No 120/81, which had been reinstated, already contained measures for the areas concerned which were far more favourable than those laid down by general Law No 64/86. Law No 120/81 in fact authorized an aid intensity ceiling of 75% for investments of LIT 32000 million.

In the same decision of 25 July 1990, the Commission also opposed increasing the level of aid laid down by Article 9 of Law No 64/86 for the areas affected by natural disasters between 1980 and 1986 (Articles 3(5) and 6(14 ter) of Law No 120/87). It took the view that the disasters in question were not sufficiently serious to justify an exception to the general rules laid down by Law No 64/86.

Therefore, the Commission required the Italian Government to obtain repayment of the aid found to be illegal and incompatible with the Treaty in so far as such aid exceeded the limits laid down by Law No 64/86.

B — The action

The Italian Government brought this action by application lodged at the Court Registry on 11 December 1990.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General, the Court decided to open the oral procedure without any preparatory inquiry. However, it decided to put various questions to the Italian Government and the Commission. The replies given to those questions are at out in Section IV of this report.

II — Forms of order sought

The Italian Republic claims that the Court should:

The Commission claims that the Court should:

III — Arguments of the parties

A — Increase to 75% of the level of aid provided for in Article 9 of Law No 64/86 (Articles 3(5) and 6(14 ter) of Law No 120/87)

The Italian Government maintains that the contested aid is regional aid within the meaning of Article 92(3)(a) of the Treaty. Under the rules generally approved by the Commission, such aid should therefore be able to be increased in the event that the regions for which it is intended are affected by serious natural disasters. Otherwise, economic operators would, other things being equal, turn towards other areas where they would not have to take account of the adverse effects caused by natural disasters on the local situation.

In its first plea, the Italian Government argues that the Commission did not apply those criteria correctly in this case.

First, it claims that the Commission contested the alleged magnitude of the disasters which occurred between 1980 and 1986 in general terms without stating reasons, although it was in possession of official documents which proved that the disasters were on the scale claimed. In this connection, the Italian Government states that on 6 January 1989 it forwarded a report on the socioeconomic situation in the aid zones covered by Article 32 of Law No 219/81, a forecast relating to Law No 120/87 and an information report relating to Article 8 of Law No 120/87. Those documents were annexed to the reply.

Secondly, the Italian Government complains that the Commission disregarded the fact that, with regard to Article 6(14 ter) of Law No 120/87, the proposed aid was intended for small and medium-sized undertakings which, according to the general guidelines drawn up by the Commission itself, must be given more favourable treatment. The Commission's defence on this point, to the effect that the aid granted pursuant to Article 9 of Law No 64/86 to small and medium-sized undertakings seemed to it to be sufficient, supports the Italian Government's opinion, since that provision relates to all undertakings in general.

Finally, the Italian Government argues that the increase to 75% in the level of aid laid down by the contested provisions was insignificant, given that the Commission had already accepted an aid intensity ceiling of 73.78% in its decision approving Law No 64/86.

Consequently, the Italian Government considers that the Commission infringed Article 92 of the Treaty, in particular Article 92(3), and the general principles of Community law relating to the exercise of the powers conferred by the Treaty upon the Commission in relation to the assessment of State aid and its compatibility. The Commission is also charged with lack of consistency between the general criteria for the assessment of aid and the way in which they were applied in the present case, failure to state reasons and misuse of powers.

In its second plea, the Italian Government maintains that the Commission should have carried out a thorough study of the matter to acquaint itself fully with the nature and seriousness of the disasters and the economic and social consequences in the areas affected. It argues that to that extent the Commission infringed the general principles of legal certainty and misused its powers.

In response to the Commission's reaction to the effect that it had already examined this question when it scrutinized Law No 64/86, the Italian Government stated that that inquiry had not had the aim of bringing out the special problems experienced by the disaster areas and that consequently that inquiry was not appropriate. The Italian Government adds that the employment figures in that inquiry may have been distorted in so far as construction work had been activated as a reaction to the disasters.

The Commission accepts the Italian Government's view that the contested aid is regional aid within the meaning of Article 92(3)(a) which must be capable of being increased in the event of natural disasters. Two conditions are required in such an event: the disasters must have caused a serious deterioration in the socioeconomic situation of the affected areas and the aid must be for a limited period. The Commission adds that those conditions must be strictly interpreted since they result in a derogation from the Treaty.

In reply to the Italian Government's first plea, the Commission states that it carried out a study of the effect of the disasters on the socioeconomic situation of the affected areas on the basis of information provided by the Italian Government and of the parameters set out in the abovementioned communication of 12 August 1988. As proof, it refers to various passages in the letter of 3 November 1989, in which it notified the Italian Government of its intention to initiate the procedure laid down by Article 92(3) of the Treaty.

However, on completion of this study it appeared that the magnitude of the 1980-1986 disasters did not justify making an exception to the normal system of aid introduced by Law No 64/86. In this connection, the Commission points out that, at the time when it vetted this legislation, it already had to verify the socioeconomic level of the areas covered by Law No 120/87 and had found that there was no economic factor such as to justify exceptional treatment.

Generally, the Commission criticizes the Italian Government for its failure to respond throughout the pre-litigation procedure. Not only did it not dispute the Commission's assessments of the question contained in the letter initiating the procedure, but, above all, it failed to provide statistics and concrete data designed to show that the socioeconomic situation of the areas concerned had deteriorated since 1980. Although, in the rejoinder, the Commission does not deny that it received the documents and reports annexed by the Italian Government to its reply, it considers them inappropriate and irrelevant.

First, the report on the economic situation of the assistance zones covered by Article 32 of Law No 219/81 includes little information on the period subsequent to 1981. Secondly, the review of action carried out pursuant to Article 32 of Law No 219/81 refers only to the 20 zones covered by that provision. Similarly, the forecasts relating to Law No 120/87 describe the detailed procedural rules, the sectors chosen and the undertakings with investment projects potentially qualifying for the aid in question, but do not take stock of the socioeconomic situation of the areas covered by the contested provisions. By the same token, the general information concerning Article 8 of Law No 120/87 consists in a presentation of the aid laid down by that provision. With regard to Annex 5, it evidences the want of cooperation shown by the Italian Government. It contains a telex from the Commission dated 22 November 1988, asking the Government to furnish it with a description of the socioeconomic situation in the zones to which the contested provisions apply, and a letter of 15 December 1988 in which the President of the Council of Ministers stated that he was unable to reply to the Commission's questions and requested the Ministry for the Mezzogiorno to do so. That request was not acted upon.

On the same question, the Commission adds that, contrary to that which the Italian Government's written submissions might suggest, assessment of the socioeconomic situation must be carried out at the regional level, that is to say, in relation to a political and geographical unit established by the Italian Constitution (NUTS level II) and not in relation to a zone affected by a local disaster.

The Commission also avers that it took account of the fact that the aid referred to in Article 6(14 ter) of Law No 120/87 was intended for small and medium-sized undertakings. It merely took the view that the aid received by such undertakings under Article 9 of Law No 64/86 was sufficient. In that connection, it observes that that article already provides for variation in the intensity of aid in such a way as to favour small and medium-sized undertakings. It refers in that regard to the table annexed to the defence.

Finally, the Commission observes that the increase in the intensity of the aid is not as insignificant as the Italian Government claims. The relevant ceiling, which was increased to 75% by Law No 120/87, varied between 28.07% and 73.78% under Law No 64/86. Consequently, the difference could vary from 1.22% to 46.93%.

The second plea, alleging that the Commission did not carry out an adequate study, is interpreted by the Commission as a request for a more thorough investigation. It states that that plea is consequently inadmissible in so far as it seeks to shift to the judicial level the review stage which, under Article 93(2), falls within the sole competence of the Commission.

The Commission also considers that the second plea betrays the want of cooperation shown by the Italian authorities during the administrative review and contradicts the case-law of the Court of Justice, which permits the Commission to conclude the procedure laid down by Article 93(2) of the Treaty solely on the basis of the information provided by the States in the course of the procedure. In that regard, the Commission refers to the judgments of 15 January 1986 in Case 52/84 Commission v Belgium [1986] ECR 89, of 10 July 1986 in Case 234/84 Belgium v Commission [1986] ECR 2263 and in Case 40/85 Belgium v Commission [1986] ECR 2321 and of 14 February 1990 in Case C-301/87 France v Commission [1990] ECR I-307.

B — Extension of the scope of the aid provided for by Article 32 of Law No 219 of 14 May 1981 (Article 8(7) of Law No 120/87 and Article 10(3) of Decree No 474/87)

According to the Italian Government, that extension is completely justified: it is necessary to give additional aid to zones whose socioeconomic situation has deteriorated on account of natural disasters, including the landslide in the municipality of Senise in 1986. This was not taken into account by the Commission.

The Italian Government further considers that the Commission could not have assessed the scale of the extension solely on the basis of Law No 120/87 and that, consequently, it ought to have reserved its decision until such time as the Italian authorities had adopted the implementation measures which it called for. That method, which is frequently used by the Commission, did not entail a risk to the Community interest because the aid would have been checked before disbursement, as the measures implementing the aid would not yet have been adopted.

Consequently, the Commission infringed Article 92 of the Treaty from the point of view of the principle of proportionality, and was guilty of a misuse of power.

On this question, the Commission explains that it considered that the extension of the scope of Law No 120/87 was incompatible with the common market because, although the new zones involved had been affected by natural disasters, their situation was not characterized by such seriousness, urgency or specificity as to justify the adoption of exceptional measures of the kind adopted in 1981. The Commission adds that this reasoning, which was set out in the letter of 3 November 1989 giving notice of the initiation of the procedure provided for Article 93(2), was not contested by the Italian Government during the review stage (see the letter of 3 November 1989).

In reply to the Italian Government, which contends that the Commission ought to have postponed its assessment of the contested provisions until implementing measures had been adopted, the Commission observes that, at the date of the rejoinder, that is, more than four years after the appearance of Law No 120/87, the Italian authorities had still not defined the additional zones. The Commission considers that, in accordance with the Court's case-law, after two years in examining the matter, it was obliged to conclude the procedure under Article 93(2) as soon as possible on the basis only of the information in its possession.

The Commission adds that, if the Italian Government's position were accepted, there would be an inevitable trend towards a system of ex post facto review of aid, which would be contrary to the Treaty. In that connection, it also points out that, in view of the exceptional nature of the derogation requested, it was up to the Italian Government to furnish it with all the concrete information likely to facilitate the Commission's assessment.

Finally, the Commission notes that the regions covered by the contested extension are already receiving other aid provided for by Law No 64/86 and Article 4(4) of Law No 120/87.

C — The raising of the investment ceiling to LIT 50000 million under Article 8(2 bis) and (2 ter) of Law No 120/87

On this point, the Italian Government considers that the Commission infringed Article 92 of the Treaty and applied the criteria for assessing the compatibility of the aid with the Treaty erroneously and improperly.

In real terms, the increase in the investment ceiling from LIT 32000 million to LIT 50000 million is nil. The purpose of the change was merely to compensate for the devaluation of the Italian lira between 1982 and 1987. To prove this, the Italian Government annexed to its application a letter from the Istituto Nazionale di Statistica (National Statistical Institute) certifying that the index to be used for converting the sum of LIT 32000 million is 1.5677.

The applicant Government also considers that this is not a new argument, as the Commission claims. This is proved by the fact that the contested decision itself refers to the Italian authorities' intention of adapting (aggiornare) the investment ceiling. With regard to the letter from the Istituto Nazionale di Statistica, the information it contains is also well-known to the Commission.

The Commission contends, first, that this argument was not raised during the pre-litigation stage and, as it is new, it may not be raised before the Court. On this point, it observes that the letter annexed to the application is dated 10 December 1990 and hence dates from after the Commission's decision (of 25 July 1990).

Secondly, the Commission has doubts about the substantive weight to be given to this argument: if LIT 32000 million in 1982 is equivalent to LIT 50000 million in 1987, this means that in five years the Italian currency was devalued by 56%, which the Commission regards as improbable.

Thirdly, the Commission states that the reason why it did not approve the increase in the investment ceiling was that Law No 120/87 also provided for an increase in the aid intensity ceiling (75%) in relation to the maxima authorized by Law No 64/86.

Lastly, the Commission observes that, according to the figures set out in Annex 3 to the reply, with a ceiling of LIT 32000 million, 141 of the 185 applications submitted could be granted. Of the remaining 44 undertakings, 35 could obtain the same amount under one or the other of the two schemes. In the end, only nine undertakings would be affected by the decision in question.

D — Obligation to repay the contested aid

The Italian Government considers that the demand for repayment is groundless since the provisions contested by the Commission have not yet been implemented.

For its part, the Commission takes the view that it was necessary to mention this exception in the contested decision. The reasons adduced for this are as follows.

E — Illegality of the aid

The Italian Government considers that, by finding that the contested aid was at one and the same time illegal and incompatible with the Treaty, the Commission confused — and, in its written submissions, continues to confuse — two questions which the Court drew a clear distinction between in the judgments in Case 22/80 Boussac [1980] ECR 3427 and in Case C-142/87 Tubemeuse [1990] ECR I-959: the compatibility of the aid with the Treaty in relation to the procedural rules, on the one hand, and in relation to the substantive rules, on the other.

The Commission considers, for its part, that those two aspects of the aid were always dealt with separately and that therefore the case-law cited above has been followed.

IV — Replies to the questions put by the Court

By letters dated 14 October 1992, the Court put three questions to the Italian Government and three questions to the Commission.

A — Questions put to the Italian Government

In it first question, the Court asked the Italian Government to give the date and location of the natural disasters which gave rise to the extension of the scope of the aid provided for by Article 32 of Law No 219 of 14 May 1981 (Article 8(7) of Law No 120/87 and Article 10(3) of Decree-Law No 474/87) and to indicate the regions which, in the final analysis, were concerned by those measures.

The Italian Government replied that the purpose of Article 8(7) of Law No 120/87 was not to determine the socioeconomic zones affected by the natural disasters, but to extend the industrial zone of Calaggio through the inclusion of the adjoining territory of the region of Apulia on grounds of geographical homogeneity.

In any case, the zone of Apulia concerned belongs to a sector of the country which was affected by the 1980 earthquake to which Law No 219/81 refers. In that zone of the province of Foggia fourteen municipalities were in fact affected. Consequently the extension into Apulia was also justified on grounds of fairness.

As far as Article 10(3) of Decree-Law No 474/87 is concerned, that provision lays down precise, mandatory criteria by reference to which the regions of Campania and Basilicata were to extend aided industrial locations to cover the disaster zones. This stage of concrete identification of the zones in question could not have taken place before the procedure was initiated by the Commission. This delay was due, inter alia, to the fact that the need to identify other locations for additional projects was not rendered urgent by applications to that effect from interested traders.

In its second question, the Court asked the Italian Government to specify the date and location of the natural disasters which gave rise to the increase in the level of aid laid down by Article 9 of Law No 64/86 (Articles 3(5) and 6(14 ter) of Law No 120/87).

The Italian Government replied that Article 3(5) of Law No 120/87 related to plant in the industrial zone of the municipality of Senise, where an exceptionally large landslide occurred on 26 July 1986.

As for Article 6(14 ter) of Law No 120/87, this was intended to deal with the following earthquakes:

In its written submissions, the Italian Government states that, in the documents which it annexed to the reply, it proved that the natural disasters in question brought about a deterioration in the socioeconomic situation of the regions concerned. In its third question, the Court asked the Italian Government to indicate which parts of the documents it considered to be the most informative in this respect.

The Italian Government replied as follows:

B — Questions to the Commission

According to the written submissions, Article 8(2 his) and (2 ter) of Law No 120/87 provide for an increase in the investment ceiling from LIT 32000 million to LIT 50000 million. In its first question, the Court asked the Commission to explain the exact origin of the figure of LIT 32000 million, citing legislation.

The Commission replied that the ceiling of LIT 32000 million for allowable industrial investments [had] its origin in Article 32 of Law No 219/81 of 14 May 1981. The original figure was LIT 20000 million. Subsequendy, that is to say, after slightly less than one year, this figure was increased to LIT 32000 million by Law No 187/82 of 29 April 1982. That alteration, which entailed an increase of more than 50% in the original ceiling, was not notified under Article 93(3) of the Treaty and was therefore never authorized by the Commission.

In its rejoinder, the Commission claims that the reason why it did not consent to the increase in the investment ceiling from LIT 32000 million to LIT 50000 million was that Law No 120/87 also provided for an increase in the intensity ceiling (75%) by comparison with the ceilings authorized under Law No 64/86. According to the figures set out in Annex 3 to the reply, the ceiling of LIT 32000 million would enable as much as 141 of the 185 applications submitted to be granted. The Commission adds that, of the remaining 44 undertakings, 35 could obtain the same amount under one or the other of the two aid schemes, that is to say, LIT 24000 million.

In its second question, the Court requested the Commission to explain the figure of LIT 24000 million.

The Commission replied as follows:

In its third question, the Court asked the Commission to explain the criteria on the basis of which Table III annexed to the defence was compiled. In particular, the Commission was asked which provisions fixed the intensity ceiling at between 28.07% and 73.78%.

The Commission furnished the Court with the necessary explanatory information relating to the table and the figures.

1 Language of the case: Italian.