Europe’s Competition Program
What’s different between the EU and the USA? The View from the Top of the EU
On January 8, 2007, Neelie Kroes presented Europe's vision of competition law and regulation. This was no academic exercise. Two days later, her pronouncement of the European Commission's energy policy landed her on the front page of the Financial Times and other world newspapers. She is the European Commissioner for Competition, and thus the chief spokesperson for the European Union on competition law and practice. The audience was the European-American Press Club, an arm of the European-American Chamber of Commerce (France). I was there as President of the newly formed European-American Chamber of Commerce of Greater Cincinnati, the first US chapter of what will become a transatlantic network of EACC's.
Any American who thinks that European competition law is an arcane topic that does not affect the USA should talk with Jack Welch, whose grand merger plans in his finale performance were thwarted not by the US Justice Department, but by the European Competition Commissioner.
Commissioner Kroes' January 8 remarks provide Americans a summary of how Europe's integration affects business in ways different from the US approach. She began with recognition of the prominence of international, globalized companies as a challenge to competition authorities around the world. No longer can individual nations deal effectively in a unilateral manner with forces that transcend national boundaries. With many companies having revenues greater than the GDP of some countries, the power and capabilities of global business require coherent, multinational responses from competition authorities. With this basic point as a preface, Commissioner Kroes explained that the EU must adapt to this changed circumstance. But it is not only multinational forces that challenge the Commission. Deeply entrenched national forces remain the primary foe of the march of European integration. More below on that front.
Commissioner Kroes noted that the US and Europe share much. Both believe that open competition is the key to economic management and growth. Transatlantic competition law protects competition and not competitors. Competition advances the interests of consumers as its core principle-encouraging increasing quality at lowering prices. But beyond the fact that 490 million EU citizens enjoy better pricing from competition, the EU competition program has other important effects-sustainable growth and sustainable jobs. Markets alone are unlikely to deliver these benefits, but the EU program aims to achieve these objectives as well as classic free-market objectives.
European competition policy is shaped by the Lisbon Strategy of sustainable economic growth in a globalized economy. The impact on the marketplace is what is important to Commissioner Kroes, not philosophy. She presented herself and EU policy as pragmatic and flexible, not doctrinaire. For the remainder of her tenure, she has three principal targets: (a) attack state subsidies; (b) achieve greater enforcement in merger and antitrust; and (c) have a proactive competition program. What do these mean in practice?
State aid must be controlled as a key objective of the European Commission. In principle, state aid is banned - going back to the foundings of the EU fifty years ago. There are limited exceptions to this - primarily, the ability of a state to provide assistance in the event of market failure for a limited time. This is a basic difference from the US approach, where states in the USA compete mightily to attract and retain business, using an array of incentives and attraction schemes, which distort the workings of the free market. Seldoms are seldom good, said Commissioner Kroes. They take money from taxpayers and create unfair advantages for richer states. While there are some cases where the benefits of state aid outweigh the disadvantages, it is clear that the EU will continue to oppose state aid in principle.
The EU, like the US, believes it essential that rules affecting trade be transparent, predictable, and effective. One area where government aid to the economy will be boosted concerns research and development. While Europe spends about 1.9% of GDP on R&D, the USA spends about 2.5%, and Japan 3%. While the bulk of R&D expenditure must come from the private sector, the EU and European nations will do more, based on the November 2006 R&D/Innovation Program of the EU. The Competition Commissioner will propose new block exemptions for certain types of state aid in this area - including the potential for training and employment-based aid that is linked to efforts to boost R&D.
In the antitrust area, Commissioner Kroes began with crusading remarks against cartels. Here, she emphasized the need to act in tandem with the USA and the OECD. Given that cartels have the ability generally to raise prices by 50%, the Commission will increase its enforcement efforts in this area. It did so in 2006, with a record level of fines totaling 1.8 billion Euros against cartels, and the ability to threaten imprisonment. Commissioner Kroes stressed that fines alone are not the point - that the victims of unfair pricing should receive compensation. This, coupled with the EU's effort to broaden class action capability across the EU, means that companies involved in price-fixing disputes will face both the potential of criminal and civil action and the potential of public and private prosecutors of related court action. Too often consumer rights have existed on paper, with no real impact, said the Commissioner. She will work to compensate the victims of cartels for the damages that result from them.
In the merger field, she noted that 2006 was a record year - with 356 cross-border cases reviewed by the Commission. The primary purpose for review is to ensure that the consumer is not hurt by a merger. If a merger is consistent with that purpose, it will be approved, regardless of other factors such as national or parochial interest. She promised firm but fair enforcement.
The Commissioner spent less time being specific about what a proactive competition program might mean. Perhaps this was because two days later, she was a principal spokesperson for unveiling the Commission’s energy policy. This made headline news. The power of national integrated energy companies such as Eon and RWE of Germany and EdF of France is well known. These large enterprises control both production and transmission networks, functioning in ways similar to US energy monopolies that predated the 1980's effort in the US to open the sector to competition. Ms. Kroes announced a tough and controversial position that would require such enterprises to unbundled - meaning to divorce transmission from production. Taken to its logical conclusion, one would see RWE breaking at least in two - with the transmission division and production division becoming separately owned enterprises, with different management. With combined ownership and control, these enterprises pose insurmountable obstacles to energy competition, as they can favor themselves against competitors in production in particular. Given that EU energy policy is not simply about competition and prices, but also for the purpose of achieving large reductions in greenhouse gases (aiming for a 20% reduction by 2020 from 1990 levels), competition policy becomes a tool to achieve both economic and ecological objectives.
Whether the program to force unbundling will be adopted and put into practice is a highly debatable point. Both Germany and France reacted immediately to the Commission's announced program in a negative way. “Our system works” was the blunt response of Francois Loos, French industry minister. But there are alternatives to a breakup of the energy monopolies one sees in European states.
One alternative is for the EC to institute traditional antitrust enforcement against them. Another is to adopt increasing regulation, requiring fair pricing of transmission and other charges (consistent with the US approach in telecommunications and other areas). A third arises from the increasing demand of shareholders that companies focus on core programs. Transmission and production are two different activities, and perhaps the market itself over time will force a split of the two functions, with separate management and perhaps separate ownership. A fourth alternative was suggested on January 10 by José Manuel Barroso, Commission President - allowing common ownership to continue but requiring separate management by independent operators. Finally, Commissioner Kroes strengthened her hand in arguing for unbundling by reminding energy companies and state authorities that she has the power to break up companies that violate competition rules, a power granted in 2004 but not used to date. Given the bleak portrait of energy competition that underlies the program announced on January 10, this is no idle threat.
The continuing march of EU competition law towards a freer and more open market is striking and important. In an important sense, it is more insistent on free competition than the US system, especially as it aims to prevent individual states from distorting trade and investment flows. And it is proactive in encouraging coherent efforts by the USA and the EU to combat global cartels in a coordinated manner. No American business with an impact on Europe's economy can ignore the principles and program of the European Commissioner for Competition, who is a forceful and effective advocate for the interests of open trade and the interests of consumers. Likewise, US-based energy companies can foresee increased opportunities within Europe as that sector opens itself to greater competition, in whatever form eventually emerges from the challenges announced on January 10 by Europe's chief competition champion.
For further information, please contact Joseph J. Dehner at email@example.com.