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Shipwreck in Brussels

The EC’s order to recover tax breaks obliges Spain’s shipyards to review their market strategies

The tax breaks granted to the financers of Spain’s shipyards are illegal. Such aid, conceded between 2007 and 2011 — and not from 2005, as Joaquín Almunia had indicated at the start of the dispute — must be returned to the state.

The European Commission’s ruling punishes the Spanish shipbuilding sector, which is reliant on subsidies and tax relief to maintain jobs. It meets the demands of the European authorities, which imposed the theoretical idea that state aid is not acceptable and saved the credibility of EC vice president and its commissioner for competition, Spaniard Joaquín Almunia. It is obvious that when a commissioner has to resolve a serious conflict within his home country, he must show rigor so as not to be accused of favoritism.

This principle has been respected but the future remains unclear. To start with, it is unclear why the French shipbuilding sector did not have to return tax breaks deemed to be illegal, while the Spanish shipbuilding sector does. Almunia’s rationale is based on the fact that the Spanish tax lease system was not submitted to the Commission for evaluation. The crux of the question remains immune to that argument because such a query from Spain would have only accelerated European demands for the tax breaks to be returned. In no case would the Commission have validated the tax lease regime before 2011. Even though France fulfilled the obligation to consult the Commission, it should also have been required to return the tax breaks it conceded.

The thorniest part of the conflict lies in its legal aspect, or more precisely the question of legal security; and it is likely that the investors affected will avail themselves of this to appeal the ruling in court. Investors have the right to legal security if the investment in question complies with the laws imposed by a government. Investors should not be the victims of a conflict between national and European rules. In the end run, there are arguments in favor of financers, should they decide to pursue the government for its lack of foresight.

But Almunia raised another issue on which, in principle, he is correct. The Spanish response to the issue of assistance to the domestic shipbuilding sector was political when it should have been strictly focused on the legal aspects of the conflict. This political approach was misguided because it was based on regional support for the national government against Brussels, and because, surprisingly, it turned shipyard workers into protectors of the financial institutions that benefited from the tax breaks.

Alarmist scenarios

All of the above issues fail to focus on evaluating the impact on the Spanish shipbuilding sector of having to return the tax relief afforded to it. In this respect, the analysis has been confined to alarmist scenarios (the Spanish shipbuilding sector will disappear if the tax breaks have to be returned) when what is required is a strategic plan for the sector.

The serious threat to the domestic shipbuilding sector is a lack of innovation and competitiveness, and as a consequence the precarious nature of its share of the market. The survival of the sector depends on its ability to compete for contracts with South Korea and China. To mobilize against Brussels before drawing up a coherent plan on how to compete lacks sense.

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