The EC Treaty substantially reduces the freedom of EU Member States to provide direct economic assistance to enterprises. The main rationale for controlling the use of national state aid at the European level are the potentially negative repercussions of national subsidies on EU market integration. Expressed in per cent of GDP, overall state aid has indeed declined over the last 15 years and state aid to manufacturing, expressed as a percentage of value added, has also fallen. Furthermore, country-specific differences with regard to the use of state aid have been reduced. The econometric analysis conducted in this paper suggests that the increased need for fiscal discipline during most of the 1990s had a considerable impact on the reduction of manufacturing state aid. Were it not for this increased fiscal discipline, state aid to manufacturing might not have remained on a declining trend in the second half of the 1990s.
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