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Speech by Mr. Mario Monti

European Commissioner for Competition Policy

Competition Policy and the Enlargement of the European Union

Friedrich Ebert Stiftung

Berlin, 27 September 2001

Let me start by thanking you for the opportunity to share some ideas with you on the accession process in the field of competition policy.

I think it is very appropriate that we can have this discussion here, in the heart of Berlin. I clearly remember those moving days that surrounded the fall of the Berlin Wall, more than 10 years ago now. I think that all of us realised we were witnessing historic events that would start the true unification of Europe - and not just of Western Europe. It is particularly appropriate that I get the occasion to talk here about the link between this grand adventure of peaceful European unification and competition policy. The inspiration that Europe still receives from German culture and tradition with respect to competition continues to be of paramount guidance, this in spite of some occasional controversies.

The timing of this speech is equally to the point. Indeed, these are very important months for the accession negotiations in the competition area. In the coming weeks, the European Union is expected to assess for each Candidate Country whether the conditions are met that could allow for the completion of the competition negotiations.

Before delving into the more technical aspects of this subject, I would first like to put the accession process in a broader context.

The transformation of Europe and the German model of economic stability

The enlargement of the European Union forms part of a tremendously challenging transformation process of Europe that started more than 50 years ago when the founding fathers launched the European Coal and Steel Community. The benefits of peace and prosperity that resulted from European integration are known to all of us, but have perhaps been too much taken for granted over the last decades.

When looking back on the economic side of the European transformation since the 1950s, I am especially struck by the many hurdles we had to overcome to very gradually establish our current economic model. Of course, from a German perspective, the components of today's economic system in Europe might look very obvious an open economy, a competitive market, an active enforcement of the competition rules, budgetary discipline, low inflation, and an independent central bank devoted to one essential objective, that of monetary stability. I can tell you that until at least the early Eighties, and for some elements even later, each and every one of the components of this model of economic stability were deliberately opposed in many European countries, including my own.

Today, most aspects of this initially German model have been extended - via the European Union - throughout Europe. Speaking now as an Italian, I feel profoundly indebted to European integration for having transformed my own country on the basis of those fundamental components ensuring economic stability. To me, European integration is fascinating, not only because it brings the Member States together in an unprecedented way, but much more because it transforms them in the process of integration. And this is exactly what is now also happening with the Candidate Countries of Central and Eastern Europe.

Competition Policy, competitiveness and globalisation

When looking at my own field of responsibility, most observers will now agree that an effective competition policy is an essential part of a functioning market economy. Requiring firms to compete with each other fosters innovation and increases economic efficiency. This is of benefit to the consumer, but also to downstream firms which are able to pass the improved efficiency on through their own production processes. The European liberalisation of network industries, for instance, has given a major boost to European industry through more efficient and less expensive telecommunications and energy services. This, consequently, has benefited the competitiveness of the European economy. And that is particularly important in today's globalizing world. It also makes clear why an active competition enforcement is of such importance to the emerging economies of the Candidate Countries.

Of course, the increasingly global markets do pose a challenge to national - or regional - competition enforcers. To remain effective, we must work together. In my view, a deeper, more intensive, co-operation among competition authorities, bilaterally and multilaterally, can provide a very good example of the kind of response that is needed in terms of governance of globalisation. Competition authorities constitute a strong public power, but are by definition market friendly. We are here to serve the market. Our first response to globalisation must be to give the consumers, public opinion and the emerging economies the proof that this process is not simply governed by the huge multinationals, but that there is a co-ordinated supervision by public powers. This is a piece of work which has just started, but where we have already made very concrete progress. I am happy to say that all Candidate Countries are playing a most constructive role in this regard. During the last couple of years, we have, indeed, been able to create an effective framework of contacts between the Commission and the competition offices of the Candidate Countries. This involves daily exchanges of view on topics and cases of mutual interest as well as more formal meetings such as the annual conference between the heads of the competition offices of the Candidate Countries and the Commission.

The accession conditions in the competition field

Let me now turn more concretely to the state of our accession negotiations with the Candidate Countries in the competition field.

As you know, the accession process was given new impetus by the recent European Council of Göteborg. The heads of state and government clarified that - provided that progress towards meeting the accession criteria continues at an unabated pace - it should be "possible to complete negotiations by the end of 2002 for those countries that are ready. The objective is that they should participate in the European Parliament elections of 2004 as members."

As regards the competition negotiations, the Commission has committed itself to present an assessment on the competition situation in each Candidate Country during the second half of this year. The Commission has to evaluate in particular whether the conditions are met that would allow for the provisional closure of the competition negotiations. Ultimately, it is for the Member States to decide with which candidates the competition chapter can be closed.

As to the specific requirements that must be met by the Candidate Countries in the competition field, the EU has consistently taken the view that they can be regarded to be ready for accession only if their companies and public authorities have become accustomed to a competition discipline similar to that of the Community well before the date of accession. This is necessary to ensure that the economic actors in the Candidate Countries are able to withstand the competitive pressures of the internal market resulting from the full and direct application of the acquis upon accession.

It would, of course, be impossible for any of the Candidate Countries to adapt to the application of this acquis from one day to the next. In short, our insistence on adaptation well before accession flows not only from our willingness to preserve the internal market discipline after enlargement. We also want to avoid an abrupt application of the competition rules that - in the absence of a solid pre-accession preparation - would be difficult to withstand for the companies in the Candidate Countries.

More concretely, three elements must be in place before the competition negotiations can be closed:

  • the necessary legislative framework with respect to antitrust and State aid;

  • an adequate administrative capacity; and

  • a credible enforcement record of the acquis in all areas of competition policy.

These three conditions are now being assessed. We are, for instance, taking a detailed look at the cases that have been dealt with by the competition offices of the Candidate Countries, both in the state aid and antitrust area. This will enable us to assess the degree to which the competition discipline has actually already been enforced in the Candidate Countries.

Of course, the accession requirements in the competition field are not new. Indeed, in the area of competition policy, the bilateral Europe Agreements that have been concluded between the EU and each of the ten Candidate Countries from Central and Eastern Europe, have already provided us with a solid legal basis in preparation for accession. A basic principle in each of the Europe Agreements is that (i) restrictive agreements between undertakings, (ii) abuse of dominance by undertakings, and (iii) any State aid which threatens to distort competition is incompatible with the Agreements in so far as these practices may affect trade between the Community and the associated country.

Practices contrary to this principle are to be assessed on the basis of criteria arising from the application of the competition rules that are applicable in the Community. Furthermore, the Europe Agreements also contain a provision for the approximation of the competition legislation of the associated countries along the model of the Community. The Agreements thus constitute an essential pre-accession instrument in the competition field.

Lessons to be drawn from the East German experience

In preparation for the accession of the Central and Eastern European countries, we are often asked if there are any lessons to be drawn from the experience with competition policy in the New Länder following German unification. I think it is useful to reflect on this question. Comparing German unification on the one hand and the current situation of the Candidate Countries on the other obviously brings out many differences. But it also leads to some lessons that we better continue to remember in today's accession process.

Let me start by underlining the differences. As you know, upon the German unification, the Commission immediately became responsible for the enforcement of the Community's competition rules in the New Länder. In contrast, until the day that our Central and Eastern European neighbours become members of the EU, the task of enforcing competition policy is left to their respective national authorities.

Another fundamental difference between German unification and the current enlargement situation relates to the transition process. For the New Länder, the transition from a planned economy to a market system took place while they were already part of the EU. I think that, in retrospect, it is fair to say that the Commission - while applying the State aid rules to East Germany - has demonstrated that it was willing to take account of the unique economic conditions prevailing in that area at the time. Thereby, the immediate "after-shock" of the first years of transition could be mitigated. In relation to the Central and Eastern European Candidate Countries, we are facing a very different scenario. More than 10 years of transition are already behind us. In the framework of the Europe Agreements, market structures have been actively developed as part of the pre-accession strategy. In this sense, it is justified to insist that - at this stage - the competition rules should be fully respected in the Candidate Countries, as they should be in the New Länder too.

There is another important difference that I would like to mention. The governments of the Candidate Countries do not have at their disposal the same financial resources that were made available to the New German Länder. As a matter of fact, the amounts of State aid disbursed over the last years in Eastern Germany are still substantially higher than the corresponding amounts spent in all 10 Central and Eastern European Candidate Countries taken together.

Despite these major differences, I do nonetheless believe that there are three important lessons that we can draw from our practice in the New Länder and that are relevant for the current accession process.

First of all, our experience in Eastern Germany makes us better understand that even large amounts of subsidies are not in themselves a sufficient recipe to generate sustainable growth. Rather, we should be attentive that State aid in the Candidate Countries is not used to delay the necessary structural changes of ailing industries.

Second, the example of Eastern Germany is also teaching us that the combination of privatisation and industrial restructuring can pose very intricate ongoing State aid problems. Despite the progress already made, complex State aid cases in the Candidate Countries will, no doubt, continue to require particular attention from the Commission.

Third, the Eastern German experience has taught us that competition policy is sometimes felt to carry a very tough message, in particular in countries undergoing such immense processes of structural change. We have also experienced, however, that without a strict competition discipline, the market economy is unlikely to deliver the advantages it promises. Market discipline is not born by itself, but it has to be created and actively enforced.

Community action for the border regions

Let me now move briefly to a different topic related to the accession process. I am aware that there are certain worries about the effects of the enlargement process on the border regions within the Union. I would first of all like to underline that enlargement will certainly provide the border regions with important new opportunities for increased integration, economic activity and growth. But we recognise that some specific problems also need to be addressed. That is precisely why the Commission has, on 25 July, adopted an action plan for these border regions.

The action plan involves twenty-three regions in Austria, Finland, Germany and Greece. In particular, the plan encourages regions on opposite sides of the border to grow closer together as part of the accession process. Assistance is targeted, for example, at transport infrastructure, improved information exchange between small and medium-sized firms and the promotion of youth exchanges. Existing financial instruments will also be better co-ordinated and more effectively geared towards border regions' requirements. For the monitoring of the implementation of the action programme, a special Commission working group has been set up.

With regard to the specific State aid aspects of the border regions, I would like to underline that the vast majority of the regions which border Candidate Countries are eligible for State aid for regional purposes, and mostly at a high level. State aid for regional purposes enables Member States to provide special assistance to help businesses in the border regions to cope with the particular problems of the enlargement process.

Furthermore, aid for regional purposes is by no means the only State aid instrument available to support the development of enterprises in border regions. I am thinking in particular of aid possibilities for SMEs, aid towards training of company staff, aid towards creation of employment, aid to encourage research and development activities, aid towards environmental investment, and de minimis aid under which aid up to € 100,000 can be granted to any company over a three year period.

Let us also not forget that the budgetary means to actually grant these forms of State aid tend to be much more available in the richer Member States than in the relatively poorer Candidate Countries.

The enforcement of competition in the Candidate Countries

The high level of co-operation already achieved between the Commission and the competition authorities of the Candidate Countries should be an additional reassuring factor for those who fear the economic consequences of the accession process. In this light, I think it is useful to very briefly examine the actual competition policy practice in the Candidate Countries.

    State aid in the Candidate Countries

Not surprisingly, for most Candidate Countries, State aid has been the more sensitive sector. The development of a proper control system has generally been slower in the State aid field than in antitrust. Still, there is positive news. I can now note with satisfaction that the gap between progress in antitrust and State aid seems to be narrowing. Indeed, in many Candidate Countries, an effective State aid discipline seems to be emerging. This is not surprising. Many in the Candidate Countries fully understand that State aid control is not just a straightjacket imposed by Brussels. Indeed, a solid State aid control system actually offers protection for smaller and perhaps less wealthy future Member States against the abundant State support that could be offered by the richer Member States if there were no solid control system.

By now, almost all Candidate Countries control aid in line with criteria similar to those of the European Union. The results of this emerging enforcement activity are generally very encouraging.

However, as you may have presumed, there is still a caveat. I would mention two issues that remain to be fully resolved. First, some Candidate Countries continue to operate incompatible fiscal aid regimes. I am thinking of incompatible tax breaks, tax holidays, and tax credits that are used to attract foreign investments or to keep non-viable businesses alive.

The European Commission is taking a very close look at these schemes. We obviously want to preserve the integrity of the internal market after enlargement. Therefore, investment incentives or any other government support that would be classified as incompatible State aid cannot remain valid after the accession. We have been insisting for years now that incompatible benefits are to be converted and modified into permissible aid arrangements before accession. My services are, of course, actively helping the Candidate Countries in this exercise.

A second important issue concerns the aid regimes used to prop up ailing industries. These aids, mainly consisting of tax arrears or loan guarantees, risk jeopardising the proper economic restructuring of several key sectors of the Candidate Countries' economies. As such, these aids also delay the preparation of the Candidate Countries for their full integration in the internal market. In this respect, effective State aid control is a necessity to get the badly needed economic restructuring properly up and running.

Of course, I do not want to be misunderstood. I am not saying that the Candidate Countries cannot grant any State aid to attract investors or to help restructure their economies. Essential is, however, that State aid is explicitly recognised as such, and that the proper attention is paid to the compatibility of the aid with the rules of the Community acquis. Our Community State aid "tool box" is sufficiently flexible to cater for the specific needs of the Candidate Countries. Just like East Germany, most of the Candidate Countries qualify as areas where high maximum aid ceilings apply since their "standard of living is abnormally low or there is serious underemployment" - in the meaning of the provisions on regional aid of the EC Treaty.

To allow for the correct application of the regional aid possibilities in the Candidate Countries, the Commission is currently working with them on the drawing up of regional aid maps that are fully in line with the Community's regional aid guidelines. As such, equal treatment is ensured between the Candidate Countries and the Member States.

    Antitrust and the creation of a competition culture in the Candidate Countries

Turning then to the antitrust area, most Candidate Countries have developed a satisfactory enforcement record relating to restrictive agreements, abuse cases and mergers, often also resulting in prohibition decisions with fines.

Along with this public enforcement by the competition authorities, we are also trying to encourage the development of a competition culture in the Candidate Countries whereby companies and private individuals help to enforce the rules by bringing forward cases and complaints. I am sure that such a private enforcement practice could contribute in a significant manner to ensure healthy competition on the markets, thereby helping the transition of the applicant countries to well functioning market economies.

As you know, the Commission's modernisation proposals in the antitrust area are exactly geared to help foster such a competition culture, also within the Union. Through the direct applicability of all elements of our antitrust rules by national courts and authorities, our reform is aimed at making antitrust enforcement even more effective. The reform will notably involve a maximum level of decentralisation and the further deepening of the network connecting the European Commission and the national competition authorities.

The essential role that the national antitrust authorities already have today, will, in this more decentralised system of the future, become even more significant. This is, of course, also of great relevance from the perspective of the Candidate Countries. As soon as they become Member States, the antitrust authorities of the Candidate Countries will, indeed, become an integral part of the more decentralised, more active antitrust enforcement network.

From this perspective, the current pre-accession phase is particularly important. In view of the progress already made and the regular contacts that have been established between the Commission and the competition offices of the Candidate Countries, I believe that we can be confident about their readiness to participate fully in the future development of European competition policy.

In looking at the enlargement process from a historical perspective, I must conclude that tremendous progress has been achieved in legislative approximation and in the creation of market systems in all Candidate Countries. As I explained, there are certainly some remaining problem areas, notably in the field of State aid. However, at the same time, I also noticed a real desire and determination to find solutions to these lingering problems. I am therefore confident that we are on the right track in this truly challenging and fascinating enterprise.

Thank you.

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