The Dynamics of Institution Building: State Aids, the European Commission, and the Court of Justice of the European Union

This work studies the interactions between European Union institutions and the Member States with regard to state aid control. The European Commission is mandated to maintain and reinforce economic integration and is thus inclined to punish Member States that might rely on state aids and other means that undermine achievement of the single market. Relying on an original database covering all state aids programs between 2000 and 2015, we show that the Commission tends to reject programs originating from countries that are resistant to EU integration, which is proxied by transposition deficit. On the other hand, we show that when firms or national governments appeal the decisions made by the Commission, the reversal of the Commission’s rejection decisions by the Court of Justice of the European Unio is positively correlated with transposition deficit. This is evidence that the Commission is actually biased against countries with greater resistance to integration, while the Court corrects this bias. We claim that these revealed policy preferences are consistent with the assumptions that these two bodies attempt to strengthen their legitimacy by making decisions in line with their mandates. In addition, the interaction between these two quests for legitimacy tend to reinforce the overall legitimacy of the Union. This suggests another driver of evolution in an equilibrium approach of institutions.