The EU and state aid: More room for manoeuvre than you might think
PhD research image: Antoine Schibler on Unsplash
Despite the EU’s general ban on state aid, public authorities can still support initiatives such as social housing and affordable NIPT screening. Ali Al Khatib’s PhD research examines the exceptions to the rule and concluded that there is room for manoeuvre.
The general rule is that public authorities cannot give money to an individual company, as that would give it an advantage over its competitors. That would constitute state aid, which is prohibited in the European Union. If each Member State were free to subsidise its own businesses, it would not be the best company that succeeded but the one backed by the wealthiest country. To prevent this, the European Commission monitors the use of public funds and can order unlawful state aid to be recovered.
The exception
However, not all services can be left to market forces. That is why the EU Treaties make an exception for a service of general economic interest (SGEI). ‘Put simply, activities that serve the public interest may be eligible for public support,’ Ali Al Khatib explains. ‘But if the market is already delivering those services effectively, there’s no need for government intervention.’
Social housing is one example. If the housing market is left entirely to its own devices, first-time buyers, lower-income households and larger families risk missing out. A bus service to a remote village may not be commercially viable, while the NIPT (a safe prenatal screening test) would be unaffordable for many without public funding. In such cases, where the market fails to deliver, governments are permitted to step in.
‘The fact that a measure may constitute state aid should not be the end of the discussion, but the starting point.’
When has the market failed?
It was the example of the NIPT screening that got Al Khatib asking himself: when can you say the market has failed? ‘Do you need economic reports as evidence, or can public policy goals also play a role?’ he wondered. In his view, both approaches are valid. Market failure is not only an economic concept, it can also occur in a political sense.
‘Even where there are multiple suppliers, governments may decide that a service is too expensive and should be made more accessible.’ While the EU Treaties generally give Member States considerable leeway, any support must have a clear and demonstrable impact. ‘Otherwise, you are simply giving money to a company.’
EU rules as an excuse
In practice, however, Al Khatib often sees the opposite: governments fail to make use of the room for manoeuvre available to them. State aid law is even used as a scapegoat. In the housing sector, for example, those who argued that governments could do more to support middle-income households were for years told that EU legislation made this difficult. ‘State aid is often used as an excuse for not taking action,’ says Al Khatib. ‘The fact that a measure may constitute state aid should not be the end of the discussion, but the starting point.’ He stresses that a public authority is perfectly entitled to decide not to intervene. ‘But be honest about it and say: we don’t want to do it.’
Since late last year, after discussions with the European Commission, state aid has been permitted for affordable housing aimed at middle-income households. However, nearly a year on, these possibilities are still not fully utilised. One reason is that the Housing Act (Woningwet) still needs to be amended, a process that is expected to continue until mid-2028.
‘A municipality that wants to support a swimming pool or a community repair café doesn't have a whole team of specialised state aid lawyers at its disposal.'
Where caution is needed
That is not to say that anything goes. For example, Dutch nature conservation organisations received public funds to purchase land and open it up as nature reserves, but the land was also used for sheep grazing and selling timber.
According to the European courts, the exception had therefore been applied too broadly. A substantial recovery order loomed, but the dispute was ultimately settled. Al Khatib was involved in the case as a lawyer at Stibbe law firm representing the complainants.
Recovery of unlawful aid can have severe consequences: the funds must be repaid with interest, sometimes after years of litigation. Municipalities are particularly vulnerable. ‘The central government has a whole team of highly specialised state aid lawyers at its disposal. A municipality that wants to support a swimming pool or a community repair café often does not.’
His advice is to ensure the safeguards are in place from the outset and, wherever possible, opt for an open tender procedure so that all eligible parties can compete. It is also important to remember that there are limits as to what qualifies as a service of general economic interest.
Ali Al Khatib will defend his dissertation ‘De Dienst van Algemeen Economisch Belang in Nederland’ (The Service of General Economic Interest in the Netherlands) on 13 October 2026 at 14.30 in the Academy Building. You can read the lay talk of the dissertation (in Dutch) here and follow the livestream of the defence ceremony here.