CJEC, July 2, 1974, No 173-73

THE COURT,

1. By application of 9 October 1973 the Government of the Italian Republic asked, on the basis of Article 173 of the EEC Treaty, that the Court should annul the Commission Decision of 25 July 1973 on Article 20 of the Italian law no 1101 of 1 December 1971 on the restructuring, reorganization and conversion of the textile industry (OJ of 11 September 1973, No L 254, p. 14).

2. The action is based on three submissions described as 'preliminary', relating to the form and preliminary procedure of the decision, and three submissions described as 'subsidiary', relating to its substance.

Because of the connexion between the first three submissions and that between the three subsidiary submissions they should be examined under two separate headings.

As to the preliminary submissions

3. The applicant government objects first of all to the fact that it is declared in Article 1 of the contested decision that: 'the Italian Republic shall abolish the temporary and partial reduction of social charges pertaining to family allowances provided for in Article 20 of law no 1101..; it feels that the terms of this Article imply that the decision is intended to have a direct effect in Italy's domestic legal order.

Such an effect is alleged to be incompatible with Article 93 (2) of the Treaty which provides that if the Commission finds that a member state has infringed the rules under Article 92 it shall decide that the state concerned shall abolish or alter the aid in question within a period of time to be determined by the Commission.

4. By its second submission the applicant complains that the decision did not fix a period of time for compliance and submits that in the absence of this element, which is essential to the legality of the decision, the latter be considered void.

5. The third submission contends that the preliminary procedure under Article 93 (1) was not properly conducted.

6. It is accepted that though Article 20 of Italian law no 1101 created an innovation with regard to the previous legal position of the Italian textile industry and small crafts, there was no prior notification to the Commission of the adoption of this provision as prescribed by Article 93 (3).

After having sought the comments of the Italian authorities and of experts in the other Member States, the Commission, considering that the provision in issue constituted an aid within the meaning of Articles 92 and 93, adopted the contested decision.

7. In order to ensure the progressive development and functioning of the common market in accordance with the provisions of Article 92, Article 93 provides for constant review of aids granted or planned by the Member States, an operation which assumes constant cooperation between these states and the Commission.

Article 93 (2) envisages the case where during the course of such a review the Commission finds that aid granted by a member state is not compatible with the provisions of Article 92, and provides for the situation to be resolved by decision of the Commission subject to appeal to the Court of justice.

Because the Article is based on the idea of cooperation, the Commission must, in such a case, allow the state concerned a period of time within which to comply with the decision taken.

However, in the situation envisaged by Article 93 (3) where a proposed aid is considered incompatible with Article 92, the fixing of a time limit is unnecessary, as the aid in question cannot be put into effect.

8. The submissions amount to the assertion that a new aid granted by a member state in contravention of paragraph (3) must be treated in the same way as aids granted legally and, consequently, should be subject only to the procedure prescribed by Article 93 (2), including the compulsory fixing of a time limit.

This interpretation of Article 93 is however unacceptable because it would have the effect of depriving the provisions of Article 93 (3) of their binding force and even that of encouraging their non-observance.

9. Moreover, the spirit and general scheme of Article 93 imply that the Commission, when it establishes that an aid has been granted or altered in disregard of paragraph (3), must be able, in particular when it considers that this aid is not compatible with the common market having regard to Article 92, to decide that the state concerned must abolish or alter it, without being bound to fix a period of time for this purpose and with the possibility of referring the matter to the Court if the state in question does not comply with the required speed.

In such a case, the means of recourse open to the Commission are not restricted to the more complicated procedure under Article 169.

Consequently, the submission that the decision is intended to take direct effect in the internal legal order of the Italian Republic is unfounded, since Article 2 of the decision stipulates that: 'this decision is addressed to the Italian Republic'. From this wording it emerges clearly that the decision is intended to impose the obligation laid down in Article 1 on the state concerned.

10. Finally, the third submission relating to procedural irregularities has not been adequately developed and is thus inadmissible.

11. The above submissions must therefore be dismissed.

As to the subsidiary submissions

12. The applicant government maintains first that, by encroaching upon a field reserved by the Treaty to the sovereignty of Member States - that of the levying of internal taxation - the decision is vitiated by reason of abuse of powers.

Secondly, the applicant asserts that the reduction of social charges in issue must be regarded as a measure of a social nature and that accordingly it falls outside the scope of Articles 92 and 93.

Because the system for financing family allowances which was previously in force placed sectors employing a high proportion of female labour in a disadvantageous position, the measure in issue is said simply to make up for a handicap suffered by the Italian textile industry.

Furthermore, this industry is alleged to be at a disadvantage as compared with the textile industries of the other Member States by reason of the fact that the social charges devolving upon employers are appreciably higher in Italy than in the other Member States.

Finally, the partial reduction in social charges is stated not to be such as to affect intra- community trade or distort competition within the common market.

13. 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.

Accordingly, Article 92 does not distinguish between the measures of state intervention concerned by reference to their causes or aims but defines them in relation to their effects.

Consequently, the alleged fiscal nature or social aim of the measure in issue cannot suffice to shield it from the application of Article 92.

14. As to the argument that the contested measure has no purpose other than to rectify the amount of charges payable by the textile industry to the state insurance scheme, in this case relating to family allowances, it is clear that the Italian family allowance scheme is intended, as is the case with all similar schemes, to ensure that the worker obtains a salary which meets the needs of his family.

Since in a system of this kind employers' contributions are assessed in accordance with the wage costs of each undertaking, the fact that a relatively small number of the employees of an undertaking can, on the basis of their position as heads of household, claim actual payment of these allowances, cannot constitute either an advantage or a specific disadvantage for the undertaking in question as compared with other undertakings where a higher proportion of employees receive these allowances; the burden of payment of these allowances is rendered exactly the same for all undertakings.

15. The above observations in respect of charges under the family allowance scheme payable out of the profits of an undertaking applies, on the same basis, to the relationship between the different branches of industry.

Consequently, the figures submitted by the applicant government showing that during 1971 the sum of 65.7 thousand million lire was paid in contributions by the textile sector, whereas the social security benefits pertaining to family allowances in this sector only amounted to 42.4 thousand million lire, cannot prove that, in respect of its production costs, the textile sector was placed in a disadvantageous position in relation to other sectors of industry.

It must be concluded that the partial reduction of social charges pertaining to family allowances devolving upon employers in the textile sector is a measure intended partially to exempt undertakings of a particular industrial sector from the financial charges arising from the normal application of the general social security system, without there being any justification for this exemption on the basis of the nature or general scheme of this system.

16. The argument that the contested reduction is not a 'state aid', because the loss of revenue resulting from it is made good through funds accruing from contributions paid to the unemployment insurance fund, cannot be accepted.

As the funds in question are financed through compulsory contributions imposed by state legislation and as, as this case shows, they are managed and apportioned in accordance with the provisions of that legislation, they must be regarded as state resources within the meaning of Article 92, even if they are administered by institutions distinct from the public authorities.

17. As to the argument that the social charges devolving upon employers in the textile sector are higher in Italy than in the other Member States, it should be observed that, in the application of Article 92 (1), the point of departure must necessarily be the competitive position existing within the common market before the adoption of the measure in issue.

This position is the result of numerous factors having varying effects on production costs in the different Member States.

Moreover, Articles 92 to 102 of the Treaty provide for detailed rules for the abolition of generic distortions resulting from differences between the tax and social security systems of the different Member States whilst taking account of structural difficulties in certain sectors of industry.

On the other hand, the unilateral modification of a particular factor of the cost of production in a given sector of the economy of a member state may have the effect of disturbing the existing equilibrium.

Consequently, there is no point in comparing the relative proportions of total production costs which a particular category of costs represents, since the decisive factor is the reduction itself and not the category of costs to which it relates.

18. In addition, the social charges payable by employers are part of the more general category of labour costs.

It emerges from the file that labour costs in the Italian textile sector are, in relation to those in the textile sector in the other Member States, relatively low.

It is clear that the reduction in social charges provided for by Article 20 of law no 1101 has the effect of reducing labour costs in the Italian textile sector.

19. The Italian textile industry is in competition with textile undertakings in the other Member States, as is shown by the substantial and growing volume of Italian textile exports to other Member States of the common market.

The modification of production costs in the Italian textile industry by the reduction of the social charges in question necessarily affects trade between the Member States.

20. Accordingly, the subsidiary submissions must also be dismissed.

21. In pursuance of Article 69 (2) of the rules of procedure of the Court of justice the unsuccessful party shall be ordered to pay the costs.

The applicant has failed in its submissions.

On those grounds,

THE COURT,

Hereby:

1. Dismisses the action;

2. Orders the applicant to bear the costs.