Prospering in the European Community: state aids and financial reporting.

• Author: Mead, Richard D.W.
• Position: Corporate Reporting

In the first article of this two-pan series "Prospering in the European Community.- three EC initiatives to ensure it, " Financial Executive, September/October 1990), Richard D. W Mead discussed three EC initiatives to assist cross-border transactions. In this, the second of the two articles, Mr. Mead deals with two emerging issues of relevance to financial executives whose companies are seeking to take advantage of the new opportunities presented by the single European market.- state aids and the harmonization of financial reporting.

STATE AIDS IN THE EUROPEAN CO

With the single-market program gathering steam, the DirectoratesGeneral of the European Commission are being encouraged to apply their newly found muscle as the Commission develops its role as policy maker and watchdog for the 12 member states. Competition policy, clearly of importance to the Commission and the business community, is one of the areas to which the Commission has directed its attention. Earlier this year, the Commission gained member-state acceptance of its Community-wide merger control regulations.

These new regulations, now in effect, give the Competition Directorate-General wide powers to investigate the competitive effects of significant proposed mergers involving companies with operations in two or more member states. ber states. Depending upon the outcome of current discussions between' the Commission and the U.S. government over the question of jurisdiction, the Commission may take an interest in any merge involving companies based outside the Community but which have interests inside the Community.

One aspect of competition policy that has not received much attention outside the Commission is the impact of financial incentive provided by member states on the Community's competition policy and on successful competition within the single-market

During the 1980s, and in particular the last few years, there has been significant restructuring of industry in the European Community, much of it long overdue. Non-EC companies are playing their part in this process to protect-and hopefully to enhance their market positions. Japanese companies have shown growing interest in the Community and, like other non-EC companies, are being attracted to one location rather than another in large part by financial considerations.

It has even been suggested that much of the current Japanese expansion in the Community is financed by the Community's own funds or those of its member states. This suggests a certain irony not lost on member-state companies now facing increased competition from the Japanese from within their own borders. Nor is the message lost on U.S. companies seeking to expand in the Community, especially at a time when every bit of financial assistance is doubly appreciated.

EC surveys in state aids

The Commission has published two surveys of state aids in the EC, one covering the period 1981 to 1986, the other covering 1987 to 1988. The surveys distinguish two categories of state aids: specific and general. Specific aids favor certain undertakings or the production of certain goods, while general aids are applied uniformly across the country's whole economy. Fiscal policies and social security systems are two examples of general aids.

The Commission believes that the effect of most general aids on competition is likely to be diluted, counterbalanced, or neutralized by exchange-rate movements (as long as the Community has no single currency), and has stated that it does not seek to harmonize 12 very different economic and social frameworks through its competition policy. However, it believes that specific aids have a direct and immediate effect on competition, as they are intended to achieve certain objectives in a...