The dynamics of institution building: State aids, the European commission, and the court of justice of the European Union

• Published in: Journal of Comparative Economics 2021-09, Vol.49 (3), p.836-859
• Main Authors: Alves, Amanda M., Brousseau, Eric, Yeung, Timothy Yu-Cheong
• Format: Article
• Language: English
• Subjects: Checks and Balances; European Union; Institution Building; State Aids JEL Codes: F55, K33
• ISSN: 0147-5967; 1095-7227
• DOI: 10.1016/j.jce.2021.02.001

•We study how decisions are made by key decision makers in the European Union regarding “state aids”, i.e., public supports to corporations by local or national governments in the framework of their policies.•State aids, challenge the establishment of a level playing field necessary to achieve the single market; a key dimension of the European project and decisions on the matter are an essential dimension of the EU competition policy•State aids are the consequences of the principle of subsidiarity enshrined in the founding treaties of the EU, which recognizes the legitimacy of sovereign states in promoting specific socio-political preferences.•The European Commission has the power to accept or reject the state aids programs put forth by member states, depending on their impact on the openness of markets and on the fairness of competition.•Based on all the cases, submitted to the European Commission between 2000 and 2017, we highlight that it tends to be more likely to reject programs from countries that are less compliant with EU mandates, which is in accordance with its mission to foster EU integration.•Appeals to these decisions are submitted to the Court of Justice of the European Union, which correct the bias of the European Commission and accept (eligible) state aids even from countries that are less compliant with EU regulations; in line with the Court's mission to guarantee the rule of law.•The revealed policy choices of both the executive and judiciary branches of the European Union can be interpreted as the result of their will to reinforce their respective legitimacy (toward Member States and the citizens) by complying with their mandate.•This results into an interaction allowing both branches to mutually reinforce their legitimacy and independence, triggering an institutional reinforcement over time and providing a case study of how institutions can be self-reinforcing (to use Greif's terminology).•This case study is central to the understanding of how an adequate institutional dynamic could solve the puzzle of the clash of logics between sovereignty and integration, which characterize any process of economic and policy integration among sovereign states. This paper studies the interactions between European Union institutions and the Member States with regard to state aid control. The mandate of the European Commission includes the maintenance and strengthening of economic integration, and as such it may discipline any Member States that undermi