By deciding to nationalise Northern Rock to keep it in business rather than to close it down, the Government was asking for trouble. That trouble is looming.

The European Commission is clearly right to question whether the Government's £27 billion loan could be repaid before the target date of 2010. It is clearly right to question whether the company should reduce its balance sheet and its share of the mortgage market more quickly than proposed.

This is a state-subsidised bank competing with private sector banks that have no such support. It is inevitably creating the sort of market distortions that this Government has railed against in other countries, and the sort of market distortions it has refused to countenance in other sectors.

By deciding to keep Northern Rock in business, the Government has also handed a gift to the company's shareholders who are demanding compensation in the courts. It will make it more difficult to argue that it was right to nationalise it and that the proposal for evaluating compensation, which is expected to judge the shares essentially worthless, is fair.

The Government and the shareholders have lined up what will be one of the most impressive displays of QCs ever seen for what will be one of the most expensive judicial reviews on record. The outcome is by no means certain.

Under the plan drawn up by Ron Sandler, Northern Rock's chief executive, the bank will reduce its market share of gross new mortgage lending from 8 per cent last year to about 1.5 to 2.5 per cent for the next four years. It will aim to limit its share of savings to 1.5 per cent.

But the Commission doubts whether this is low enough to avoid undue distortions of competition.

Of course, a faster shrinking of the business would threaten more job losses in Labour heartlands in the North East. It might also reduce the ultimate value of the business when it is released back into the private sector.

So far, complaints from rivals have been muted. It remains to be seen what comments the Commission gets by July 3. But Northern Rock's British competitors are unlikely to make too much of a fuss given their own wobbly state and the fact that they might just need a little help themselves one day.

There will inevitably be some squeals about Brussels cracking down on British state aid while turning a blind eye to more egregious cases in other countries.

But yesterday brought reports that the Commission has decided that the Italian Government made an illegal loan to keep the hopeless Alitalia alive.

The British Government would doubtless applaud that and should be willing to take the same medicine.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive