Together We Trade, Divided We Aid

Executive Summary

Europe’s Single Market faces a quiet stress test. In “Together We Trade, Divided We Aid: The Flexible EU State Aid Regime and the Risk of Market Fragmentation,” we examine how national subsidies — once crisis tools — are reshaping competition across the Union. Since 2020, state-aid spending has more than doubled, reflecting governments’ efforts to shield industries from COVID-19, energy shocks, and global rivalry. Flexibility allowed rapid crisis responses but also handed fiscally stronger countries, especially Germany and France, a structural advantage.

Temporary exceptions have become the new normal. Frameworks such as the COVID-19 Temporary Framework and its successor, the Temporary Crisis and Transition Framework (TCTF), were meant to be short-lived. Their repeated extensions blur legal boundaries, weaken oversight, and entrench divergence among member states.

European instruments exist but remain underpowered. Important Projects of Common European Interest (IPCEIs) were designed to pool resources for strategic sectors like hydrogen, batteries, and semiconductors. Yet participation remains opaque, with uneven benefits and limited supranational coordination.

Europe needs a credible common industrial framework. Without stronger EU-level governance and shared financing, industrial policy risks devolving into a subsidy race that fragments markets instead of driving transformation. The next step is to embed flexibility within rule-based integration — matching national agility with European scale.

Policy Recommendations

1. Phase out temporary crisis frameworks by 2025. Instruments like the TCTF should be wound down and replaced with more stable, long-term tools that prevent institutionalised fragmentation.

2. Strengthen IPCEIs with more supranational oversight. A stronger role for the European Commission and transparent participation criteria are essential to ensure fairness and prevent capture by a few large Member States.

3. Move toward common EU funding mechanisms. A reformed EU budget or new financial vehicles are needed to avoid subsidy competition and enable all countries to participate in Europe’s industrial transformation