Since 1996, the EU has banned most special economic zones (SEZs) in Europe. This is because SEZs are considered to be state aid to industry, given that they offer uneven exceptions to regulations based on the locality of a business.
Now there are geopolitical and economic imperatives for the EU to reconsider this approach. As the world slowly transitions away from a fossil fuel-based economy, businesses are being wooed with incentives and subsidies, including the US’s $369bn Inflation Reduction Act.
Russia’s invasion of Ukraine, and the spotlight it shone on Europe’s reliance on Russian natural gas, show how quickly the EU can change course when necessary. Why not do the same with SEZs?
It would be prescient for the EU to enable localities to provide businesses with favourable conditions to help convince them to make their green investments in Europe, rather than elsewhere.
The EU has banned countries from providing state aid to industry under most circumstances. This ban on SEZs was later made explicit by the 2007 Treaty on the Functioning of the EU (TFEU).
Yet there have been many exceptions to the EU’s ban on SEZs.
First, export processing zones (EPZs) – small zones exempted from a country’s customs area – have always been allowed to facilitate manufacturing and trade. Most are ports, airports and other border areas. There are more than 100 EPZs in the EU, according to Open Zone Map, a searchable database of global SEZs my colleagues and I created at Adrianople Group.
Additionally, so-called “Economic Revitalisation Projects”, which provide tax breaks to distressed areas, have been allowed. Since 2014, France has been home to more than 150 “Zones Franches Urbaines” in distressed neighbourhoods.
Finally, many eastern European countries such as Poland and Croatia were allowed to grandfather-in pre-existing SEZs when they joined the EU. Since 2018, tax exemptions in Poland have been available for companies carrying out new investments across the entire country, not just within SEZs. Moreover, all binding permits already granted to investors in old SEZs will remain in force until the end of 2026.
Over the past five years, cracks have been beginning to show in the EU’s long-standing ban on SEZs. First, after Brexit, the UK announced the creation of “Supercharged Freeports”. The EU announced in 2020 that it would sue the UK if the government proceeded with the plans to create the freeports, delaying the project.
In mid-2020, Hungary announced that it would open SEZs to attract companies like Samsung. The Hungarian government is simply ignoring the 2007 EU ban, and refuses to submit itself to an approval procedure in compliance with more recent 2017 regulations. Additionally, lobbying efforts by ports, airports and business parks have also undermined the 2007 EU ban.
Since the 2007 TFEU, many facilities that could enjoy SEZ-like privileges have complained that the EU’s interpretation, that SEZs constitute state aid to industry, is too broad. As a result, the EU passed an amending regulation in 2017 which once again allowed for more regulatory exceptions to be granted on a geographical basis. This new rule set allows the EU to approve new SEZs on a case-by-case basis, provided member states comply with various requirements and give the EU 18 months’ advance notice.
The Italian government immediately seized upon the 2017 development, opening eight manufacturing-oriented SEZs in 2019 exempting businesses from corporate income taxes.
Geopolitical, economic, and lobbying pressure is mounting. The final death blow to the EU’s ban on SEZs is imminent. Whether the ban will be undone by a sudden shock like the Russian invasion of Ukraine or through a process of slow attrition remains to be seen.
Thibault Serlet is the director of research at the Adrianople Group, a business intelligence advisory firm.
Thibault's previous columns:
- What Tiananmen Square teaches us about SEZs in today’s fractious world
- When vertical integration fails: a cautionary tale from the Coega IDZ
- Digital nomads open door to new SEZ models
- How universities lead to successful SEZs
This article first appeared in the February/March 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.