State aid is in principle prohibited in the European Union, with a few exceptions provided for in the Treaty. Recently, a judgement by the European Court of Justice has weakened that prohibition by narrowing the concept of state aid. Criticism of this judgement so far has been based solely on legal grounds. This paper carries out an economic assessment of the judgement and argues that it is based on faulty economic premises. The author proposes an alternative method for dealing with compensatory measures so as to close the loophole opened up by the judgement.
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