"Competition Policy in the European Union" Philip Lowe American Antitrust Institute, 1 July 2002
Ladies and gentlemen,
It is my pleasure to address this distinguished audience today on behalf of Commissioner Mario Monti on the subject of Competition Policy in the European Union. The subject is a broad one and having not yet officially taken over from Alex Schaub as Director General, I am not going to throw caution and job security completely to the winds by attempting to define or redefine the policy over this lunch! However, I would like to give you a feel for some of the key issues facing us over the coming months. As you may know, competition policy in the EU goes beyond the disciplines that are familiar to you here in the United States, that is, merger scrutiny and anti-trust enforcement. It also addresses the behaviour of governments through our rules on state aid, services of general economic interest and liberalisation.
The principles underlying the three strands of EU competition policy - mergers, anti-trust and state aid - are constant.
First, enforcement action aims at protecting competition. This fundamental goal is enshrined in the Treaties establishing the European Union, namely that we aim for "a system ensuring that competition in the Internal Market is not distorted". The interest of consumers in the broad sense - individuals and businesses - is the primary concern. The concerns of competitors are relevant to the extent, and only to the extent, that they provide evidence of actual or potential harm to competition and consumer interests.
Secondly, our assessment of a merger, an agreement or a grant of aid has to be based on sound economic analysis, not legal formalism. Law and economics are necessary companions in our day-to-day work. After all, competition law gives legal form to economic concepts. Striving to find the right balance between legal certainty and economic accuracy is the hallmark of any successful competition system. This challenge is a never-ending one. Not only because economists' positions on important points of principle have been known to change - as the evolution in US anti-trust enforcement also demonstrates. But also because the application of competition policy to any given situation depends on the particularities of the market in question. It is precisely this scope for policy evolution and the need to take account of market realities - and indeed likely realities in the future - that makes our work both challenging and stimulating. To get competition policy right, we need to be rigorous in our fact-finding, transparent and fair in our assessment and effective in our enforcement. Fortunately, given the visibility of our intervention in business life, there is no lack of comment and appraisal of our performance - as well as suggestions for change from all sides, whether we get it right or wrong!
Our third guiding principle is more specific to the European Union. In the particular constitutional set-up of the European Union, an efficient division of work between the European level - the Commission - and the enforcement agencies in the Member States is essential. Up to now, EU anti-trust law has been established alongside national laws and it has been primarily the Commission's task to ensure business agreements are not anti-competitive, on the basis of a notification system. In an Internal Market of more than 380 million people, with the imminent prospect of enlargement to more than 450 million, this way or working is no longer practical or effective.
That's why we are moving towards a new framework in which EU antitrust law can be enforced directly by the competition authority or court which is best placed to do it at the regional, national or EU level.
The Commission must concentrate on really serious breaches of the competition rules that affect the EU Internal Market as a whole. This means in most cases that it should be dealing with the effects of agreements or practices on competition which go beyond the territory of any one Member State. Enforcement procedures must also be efficient and coherent throughout the European Union with an acceptable level of legal certainty for business.
In fact, many of the issues facing us within the EU in terms of multiple jurisdiction are of particular relevance to on-going efforts to find solutions at the multilateral level to competition concerns. EU and US co-operation in this regard has, and will continue, to be crucial. More widely, the initiatives now being taken, for example in the International Competition Network, within OECD and in the Doha Development Round only serve to strengthen the growing and much needed convergence in the application of our respective multi-trust policies. The EU for its part is not only an active participant in networks of international competition authorities. The enlargement of the EU in 2004 brings with it a further countries who have agreed to introduce competition laws and to accept EU competition law.
For the EU and the US, active anti trust enforcement is an essential component of the good governance of a market-led economy. Similarly, the open and constructive acceptance of and cooperation in antitrust enforcement is an essential component of corporate governance. This is surely an area where the EU and the US in particular can show developing countries how the market can be effectively policed to promote a better deal for consumers and to avoid excess and abuse.
I am not going to try to spoil your lunch with a litany of all outstanding issues in EU competition policy. I want to concentrate on three areas which are high up on our competition agenda, all of which have relevance for US antitrust authorities and for US firms.
First, a few words about the critical and complementary role in EU competition policy which is played by control of aids provided by national governments. I will then address some of the most important challenges in our review EU merger law and practice and our wider reform of anti-trust enforcement.
EU Competition policy - beyond mergers and anti-trust
While EU antitrust rules address the behaviour of undertakings in ways that are familiar to you - cartels, abuses of dominant positions - the State aid rules focus on measures implemented by government. These two sets of rules are complementary in application and coherent with respect to their goal: that competition in the internal market is not distorted.
This combined scrutiny of the decisions of both corporations and States is unique to the EU vision of competition policy. It is based on the logic that efforts under the anti-trust rules to ensure that companies do not distort competition and trade within the Union would be to little avail if Member States were allowed to seek to outbid each other in offering subsidies to save firms in economic difficulties, or to attract investment, with negative consequences for the European Union as a whole.
Today, the control of state aids has proven to be a source of real strength for the European Union. First of all the risk of market distortions from state aids is even stronger today than it was in the past. As the European Internal Market has become a reality, a number of governmental trade barriers have been eliminated. This means that the more usual forms of protection of national markets and players by Member States are disappearing. If not properly controlled, state aid can often have the effect of maintaining the barriers to trade that we have tried to dismantle. State aids rules also allow us to address behaviour by States - often acting through the intermediary of publicly-owned companies - that directly affects competition in important markets.
One might of course, at least in theory, advocate a simple ban on State aid, in the interests of achieving maximum competition. However, this would neither be realistic or desirable: there are valid and legitimate reasons for governments to grant aid to companies, such as favouring regions particularly disadvantaged or suffering from low employment. Even in the US, government - at the local, state and federal levels - intervenes with subsidy measures, whether through the Small Business Administration, or via regional incentives, or again in favour of airlines in response to the events of 11 September.
The EC system provides a legal framework that allows for the anti-competitive effects of such measures to be independently assessed against clear criteria. In fact, our state aids discipline accounts for around half of the Commission's competition enforcement activity. There is no other jurisdiction where an independent authority is granted such strong powers to challenge decisions adopted by sovereign States in an area as politically sensitive as the grant of aid to particular companies.
Nor is there any other jurisdiction in which an enforcement agency can steer a process of economic liberalisation. Article 86 of the EC Treaty gives the Commission precisely those enforcement powers. And they have been used for example to good effect in combination with regulatory legislation in the telecommunications sector. In this context, the judgements handed down by the highest EU court in June of this year concerning the compatibility with EU law on free movement of capital of governments maintaining control mechanisms - so-called "golden shares" - in privatised companies deserve a mention as their implications are far-reaching. Article 86 also provides the basis for more timely intervention in order to ensure that national "services of general economic interest" - to use some EU speak for services that must be broadly available - really do operate for the common good rather than causing unjustified distortion of competition. If the concept is unfamiliar to you, all I can say is that the recent decision to provide further funding to Amtrak falls under the angle of our policy on services of general interest!
All of these issues - state aids, liberalisation and services of general economic interest - will of course be of particular importance in the years ahead in view of the imminent enlargement of the EU to include a number of countries whose transition from a command economy is very recent.
But our state aids policy should not be viewed separately from antitrust and merger enforcement. A striking recent example of the complementary functions of antitrust and State aid rules is to be found in the decisions recently adopted by the Commission concerning Deutsche Post - the German public postal operator - following complaints from the US firm, UPS.
The wider point at issue in these decisions is "cross-subsidisation" between activities covered by special or exclusive rights granted by a Member States to a company, such as a statutory monopoly, and activities open to competition. In Europe, this issue arises mainly in network industries, such as energy or postal services, in which liberalisation is not complete. In two recent decisions concerning Deutsche Post, the Commission tackled "cross-subsidisation" both as an antitrust abuse under Article 82 EC and also under the State aid rules - Article 88 EC:
On 20 March 2001, the Commission adopted a decision under Article 82 of the EC Treaty in which it condemned Deutsche Post for abusing its dominant position - held by virtue of its statutory monopoly over standard letter delivery. The abuse consisted in offering certain door-to-door parcel services - a market which is open to competition - at a price that did not cover the additional cost of maintaining the necessary network capacity. Prices below the additional or incremental cost of providing a competitive service were deemed predatory, if such a policy is sustained for a five year period.
For most companies, the competition law analysis would stop there, once the finding of predatory pricing had been made. Deutsche Post, however, was also in receipt of public monies, so the Commission had to look at whether this money had been misused by Deutsche Post to fund the predatory activity.
On June 18, 2002 the Commission concluded its State aid proceedings with respect to various forms of State aid granted to Deutsche Post. It found that the German postal incumbent had used € 572 million of the State funds it received to finance its monopoly public service missions to subsidise below-cost pricing in competitive door-to-door parcel services. Postal incumbents that receive State funding for the discharge of services of general interest may not use these State resources to subsidise below-cost prices in activities open to competition.
Thus, the parallel application of antitrust and State aid rules allowed the Commission to tackle the "cross-subsidy" issue in a comprehensive manner ensuring:
First, that the incumbent is aware that in activities open to competition at least the additional costs of the service have to be covered by revenue; and
Secondly, that the competitive advantage resulting from the aid received by the door-to-door activities is neutralised because Deutsche Post has to give back the amount of € 572 million of State funds it used to subsidise below-cost pricing.
These cases also highlight the complementarity of antitrust and State aid remedies. As part of the antitrust proceedings, Deutsche Post, in January 2002, created a separate door-to-door parcel subsidiary. The Commission accepted this undertaking because it deemed that structural separation, together with a commercial relationship based on market prices between the two separate entities should in the future avoid both predatory pricing and the "spill-over" of State aid into competitive activities. In this way, our anti-trust rules were of help in avoiding potential future state aid problems.
A further area which we will undoubtedly be having to tackle over the coming months is the boundary between legitimate extension of advantages in the context of fiscal policy - for example tax incentives for environmentally-friendly energy sources or for strategic groups of consumers - and illegitimate discrimination which harms competition. Our concept of State Aid is therefore not just about block grants but about harmful financial advantages in general. I am sure you can see the connection here too with moves to ensure greater fiscal harmonisation across the EU's Member States. Obviously the stronger the framework of EU regulation of national taxation, the less need there is to ensure compatibility of national tax regimes through application of the State Aid rules.
Merger Control Policy
Since 1990, the Commission has been entrusted with the task of providing a "one stop shop" for the scrutiny of all large cross-border mergers in Europe within the framework of tight legal deadlines. The ability of a public administration to deliver economically sensible decisions within a timetable that corresponds to that of business has been widely appreciated. Today, we need to build on this record and ensure that the Regulation remains adapted to the economic realities. We also need to ensure that we work to high standards of transparency and fairness, with due regard to, and protection of, the rights of all those involved
With this aim in mind, the Commission adopted a Green Paper on the review of the Merger Regulation in December of last year. The scope of the issues raised by the Review process is impressive. All interested parties were invited to comment on the Green Paper by the end of March. And it will come as no surprise to you that many seized the opportunity - US law firms and companies amongst them. Those comments are now being analysed with a view to formulating proposals for the amendment of the Merger Regulation by the end of this year.
So now is not the time for definitive answers. Instead, I will concentrate on three of the more interesting issues. The question of the substantive test, efficiencies and due process.
The substantive test - dominance versus substantial lessening of competition
As you are aware, US and EU merger control laws are phrased in quite different language. In the EU, mergers must be declared unlawful where they "create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the common market or a substantial part of it". In the US, in the words of a statute dating from 1914, mergers can be enjoined if they result in "a substantial lessening of competition" or "tend to create a monopoly".
It doesn't require any great legal or economic insight to see that these are tests which could, in the hands of creative interpreters, result in widely differing outcomes. This has not happened, however, because the economic rationale underpinning merger control by enforcement authorities and courts in our jurisdictions is very similar. The body of precedent built up by the European Commission and the European Courts over a decade regarding the interpretation of the dominance test has shown a remarkable coincidence of analysis with the wealth of interpretative precedent that has been built up in the US over a much longer period with regard to the Clayton Act. A European practitioner who picks up the US Merger Guidelines, or who delves into one of the US Court's latest merger judgements, will - I think - be struck by the extent to which our seemingly different tests are used in similar ways.
But now that the Merger Regulation has been in force for more than a decade, the time is ripe to consider how effective the substantive test has been compared to that used in other jurisdictions, particularly the US but also in a significant number of EU Member States. As Commissioner Monti has recently stressed, we have a genuinely open mind on this issue. What counts is the effectiveness of the legal instrument in addressing genuine competition concerns.
What is clear from the comments we have received on the issue is that the pros and cons of change versus status quo are finely balanced. Some see advantages in the SLC test as being better suited to the kind of micro-economic analysis required in merger cases. They point to the potential difficulties of dealing satisfactorily with situations of collective dominance under the existing EU test or "stretching" the notion of dominance for purposes of Article 82 enforcement. I refer in particular to the issue of whether to cover, in addition to tacit collusion, the so-called unilateral effects of increased concentration on an oligopolistic market.
Those in favour of the status quo also have an array of arguments to hand. Notably, they highlight the point to which I have already referred: even today our different tests have led to broadly convergent results. The uncertainties caused by doing away with more than 10 years of case-law and jurisprudence were the test to be changed also figures highly.
One thing is certain: regardless of the decision ultimately taken by the Commission on the headline test, guidelines on how to assess market power in merger analysis are needed. The Commissioner has committed the Commission to produce such a text by the end of the year. In the final analysis, the extent to which legal interpretation allows us to achieve greater convergence in enforcement through issuing new guidelines without changing the law, must be carefully weighed up against the alternative of changing the law and then developing guidelines which make the transition from existing case law and jurisprudence a sensible and practical alternative.
And now to 'efficiencies. Article 2.1 (b) of the EU's merger regulation stipulates that the appraisal of a merger has to take into account 'the development of technical and economic progress provided that it is to consumers' advantage and does not form an obstacle to competition'. In disencrypted language, this could be read to mean we are prepared to take into account efficiencies in a positive sense if the benefits are likely to be passed on to the consumer. We are also guided by the fundamental test enshrined in the Merger Regulation which asks us to identify and remedy situations which 'significantly impede competition'.
Some commentators - even eminent US ones - have criticised the Commission's incapacity or unwillingness to offset efficiencies of a merger against its restrictive effects on competition. The guidelines on the assessment of market power in merger analysis to which I have already referred will state once and for all that efficiencies can be taken into account positively. However, my feeling from the recent consultation process is that few on our side of the Atlantic are in favour of giving an advantage to the merging parties where the post-merger competitive conditions make it extremely unlikely that consumers can benefit from the efficiencies. It is also important to balance short term benefits e.g. of price reductions against possible disadvantages in the longer term e.g. progressive withdrawal of the remaining competitors from the markets concerned. Can I nevertheless conclude these remarks on efficiencies by confirming quite categorically that there no 'efficiencies offence' in our merger policy.
Now I would like to turn to two aspects of what we could usefully call the application of the Sy Rogers test to EU merger control. Sy Rogers was, as you know, the composer of that well-known title of corporate seminars: "it ain't what you do it's the way that you do it". The first aspect is the process and the second is the issue of the quality of economic and market analysis.
As you know, the procedural differences between the EU and US merger control systems are significant. In contrast to the US, the Commission can approve or prohibit a transaction by taking an administrative decision duly motivated within strict deadlines. It need not prosecute a potentially problematic merger in court.
I should say here that administrative merger control systems like ours are certainly not unique to the Commission. Indeed, this is the model employed in most of the EU's Member States, and reflects to a large extent the specific legal traditions on our side of the Atlantic.
History, as always, plays its part in explaining this fundamentally different role of the respective enforcement agencies. In any event, very few respondents to the Green Paper favour a radical overhaul of the current system - the introduction of a US-style prosecutorial regime, for example, whereby the Commission would have to challenge a proposed merger before the European courts.
The fact that so few have called for a fundamental transformation of our system is certainly not attributable to the timidity of those who submitted comments, as clearly shown by their comments on other aspects! On the contrary, I think it is because many recognise the merits inherent in the EU system whereby the "first instance" decision is taken by an administrative body such as the Commission. Indeed, as US Assistant Attorney General for Antitrust Charles James mentioned in a recent speech(4), many companies have indicated a preference for what he termed the EU's "front-end" process (treatment of a case by the Commission in its role as competition agency) and at the same time for the US's "back-end" process (judicial involvement in the case). Our "front-end" process is prized by many for two main reasons: it guarantees a swift outcome (usually within one month, but never in more than five) and it is remarkably transparent: every notification results in a published and fully reasoned decision.
However, as in every system, there is scope for improvement. The consultation has brought to light certain misgivings about the effectiveness of the system's due process guarantees and concerning the possibilities for effective judicial review of the Commission's decisions in merger cases.
In terms of due process, criticism focuses on the fact that decisions in merger cases are taken by the same body (the Commission) that carries out the fact-finding investigation. In sum, critics tend to highlight what they perceive as weak rights of defence - do the investigators properly consider the views of the merging parties - and inadequate checks and balances.
While some respondents take the view that a radical overhaul of the system is needed, the majority feel that there are significant improvements to be made to the existing system without losing its current benefits. Careful thought will therefore be given to the numerous suggestions, even the most radical ones, as to how our administrative system might be improved. Some may involve amendments to the Merger Regulation, but many would not. Indeed, the Commission has already taken some steps recently to strengthen the mandate of the Hearing Officer whose task it is to enforce the parties' rights. However, the time is certainly ripe for a more fundamental look at the internal operation of the department in order to reinforce internal checks and balances. Under the authority of Mario Monti, that will be one of my priorities in my new role.
As far as judicial review is concerned, it's important to stress that all of the Commission's administrative decisions may be appealed before the European courts. Their role in merger policy should not be underestimated. The recent judgment against the Commission in the Airtours case provides eloquent testimony of that fact. The real issue of course is not whether decisions are subject to judicial review but how quickly the judgment is delivered. If it is to have any relevance to an agreement which is still commercially viable, the judgement must be taken in weeks and months, and not months and years. I feel strongly that this is one of the essential issues that must be addressed. Evaluating the impact of the Court of First Instance's recent adoption of new rules of procedure for the accelerated treatment of certain cases is a first step. But I for one would not rule out giving the notifying parties to a merger formal rights to expedited appeal on prohibitions and remedies before the Community courts. 'Fast Track' is a term much abused by airport authorities and governments. However what we real need is a genuine fast track, and much faster than the present accelerated procedure. That would certainly have resource implications for the courts; increasing the numbers of judges would also require a change to the Union's founding Treaties. But at a time when changes to the Treaty are being discussed in any event, that need not be an insuperable barrier.
Economic and market analysis
A separate - if related - criticism of the Commission's enforcement of merger control concerns the quality of the economic and market analysis underlying decisions. So a focus on outcomes rather than process. In this context, some respondents have queried whether investigative staff in the department are sufficiently expert - and notably whether is a shortage of suitable economic expertise. The more general question of whether staff resources are adequate for the tasks entrusted has also been raised.
This said, efforts to strengthen the economic expertise of staff in the Competition department are on-going. As Commissioner Monti has said the recruitment of suitably qualified economists is a staff resources priority. We are also giving careful consideration to other measures to strengthen those capabilities further. Above all, this means reflection on the role of economic advisers in our decision-making process. I also put particular weight on the need to draw on sectoral expertise as prospective analysis of the likely development of markets is the core of merger control. We have not for example achieved state-of-the-art analysis of competition conditions in the evolving markets for air transport, media or telecommunications.
Reforms in the field of anti-trust are rather more advanced. This is hardly surprising when one considers that EU anti-trust rules have been in place for more than 40 years as compared to 12 for merger control. The last few years have seen an unprecedented wave of reform of both substance and procedures. Concentration on the most important cases at the EU level as judged by economic affect has been key. In turn, policy on vertical and horizontal agreements has been reformed. And work is nearing completion on the most ambitious aspect of the reform programme: the updating and modernisation of our antitrust procedural framework in order to increase the efficiency of enforcement.
In September 2000, the Commission put forward to the Council of the European Union a proposal to reform the main procedural Regulation for antitrust law enforcement (Regulation 17 of 1962) which, when approved, will lead to profound changes in our enforcement system. These changes will among other things bring the European enforcement system closer to the US model.
The administrative notification mechanism, for which there exists no equivalent in US law, will be removed. The rule that contains the conditions for an agreement to be declared legal, Article 81(3), will become directly applicable. This means that all courts and competition authorities throughout the European Union will be able to conduct a full assessment of agreements brought before them by assessing their anti-competitive as well as their pro-competitive effects. Should the legal conditions be fulfilled, they can rule that an agreement is legal and must be respected by the parties, just like courts in the US.
The new enforcement system is designed to strengthen the deterrent effect of the EC antitrust rules. It will permit the Commission to focus on serious infringements that do considerable harm to consumers and it will de-block the enforcement potential of the national competition authorities. In passing I should say that the emphasis on serious infringements is already underway. In recent times, the Commission has adopted a series of high-profile cartel decisions - in products ranging from vitamins and food additives to financial services and chemicals. And in 2001 alone, we imposed fines amounting to 1.8 billion Euros on nearly 60 European and foreign companies. These fines exceeded the total fines imposed between the creation of the EU and 2000.
The removal of the notification system should over time make it more attractive for private complainants to address themselves to civil courts if they are the victim of illegal behaviour under the competition rules. Through a gradual increase in private law-suits, the courts in Europe should make an ever greater contribution to the over-all enforcement of the rules, leading to a situation more similar to that already prevailing in the US.
In order to promote coherent application of the rules, we have also proposed to the Council to introduce the possibility for the competition authorities to appear before national courts as amicus curiae, on the model of the US enforcement agencies. Legal certainty would be enhanced by means of opinions from the Commission - reasoned and published statements on unresolved issues of fact or law, similar to the Business Review Letters adopted by the US agencies. I think that this ought to address the concerns of industry without reintroducing a kind of notification mechanism with all of its drawbacks.
We are confident that all these measures will be relatively quickly approved by the Council. That is crucial as they need to be in force before the next enlargement of the EU takes place.
With this brief overview, I hope to have convinced you that competition policy is now very much at the heart of the EU's policy agenda. There is certainly more than enough to keep both Mario Monti and a new Director General for competition in the Commission occupied in the months and years ahead. And of course in this brief speech I've done little more than scratch the surface. However, I confidently expect that by the date of your next conference, we will have provided you with many of our own answers to the questions I have raised here today.