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Neelie Kroes

Member of the European Commission

Competition must drive European competitiveness in a global economy

Villa d’Este Forum
Cernobbia, Italy, 3 September 2005

We all recognise that the European economy badly needs a considerable and effective boost, putting it back on the right track for sustainable growth.

Under the leadership of President Barroso the Commission has put European competitiveness right at the top of its agenda.

I would like to make some general comments about why protectionism is not the right response to economic reform challenges, and then address how the right policies can contribute to an environment for competition which strengthens European competitiveness, in order to sustain quality of life and social model.

Protectionism is not the right response to economic reform challenges

European competitiveness is right at the top of our agenda. Not because we want to fence off global competition. Globalisation as such is no “threat to our societies”, although like any new environment it requires us to adapt to new realities. “Defensive action” – protectionism – would cut Europe off from the very global market place we need to engage to ensure economic growth and to ensure the sustainability of our social models. To reach a high level of competitiveness we need not only to focus on global competition, but also on competition inside the European Union and at national level.

So, tempting though it often proves to politicians, I do not agree that it would be better to shelter European industries from international (or even internal European) pressure. When sheltered from competition you may gain the illusion that you are in a more comfortable position, in particular if you can pass on the “bill” to consumers. It is also nice to receive public subsidies to cushion the consequences of lacking competitive edge. Moreover, Member States are sometimes tempted to seek to protect their industrial or financial crown jewels from takeovers by companies from other countries. We have seen such signals from France just recently, which is all the more ironic when one considers that, according to the latest issue of The Economist, from January to August this year the country of origin of companies responsible for the largest value of takeover deals in Europe as a whole was – France.

All such measures, be they “economic patriotism”, illegal state subsidies to keep companies artificially afloat or placing companies off-limits to foreign takeovers, risk taking Europe into a 1930s-style downward spiral of tit-for-tat protectionism. In the medium term, none of these “solutions” do anything to help the European economy fully exploit the most powerful tool for growth we have – market forces.

Earlier this year, all European leaders reaffirmed their commitment to the Lisbon Strategy of making Europe more competitive, notably by working together and exploiting the potential of the Single Market to the full.

It is not through protectionism, but through competition that firms innovate, strive to get the best from their people, make the most effective use of their resources, push up quality and push down prices.

All European leaders must therefore respect in practice the principles they sign up to at the European Council, which are after all rooted in the very same principles of free movement and fair competition that have been at the heart of the European Union since its inception in the 1950s.

This brings me to my next point:

Competition ensures that market forces operate effectively

Economists disagree on many things – almost everything in fact. But there is one thing they broadly agree on, and that is that it is markets and not politicians who generate growth. And markets operate best when there is a free and simple environment for competition between businesses.

Practical experience has shown the economists are right. Why have prices come down on flights in Europe? Because we have opened up the skies to competition. Why have prices on mobile telephony come down dramatically over the last decade? Because we have adapted the regulatory framework to make sure it promotes competition.

When we open up markets and promote competition in the right way, we can observe growth in productivity and consumers get better products at cheaper prices. This is where the challenge lies for both politicians and regulators: designing smart public policies which make sure that increased competition in the market place delivers the expected results.

Smart public policies

What do I mean by “smart policies”? First and foremost, flexibility and careful targeting towards the needs of the individual market or sector. There is no such thing as a “one-size-fits-all” approach. Take the example of privatisation. Sometimes private markets may not result in greater competitiveness and there may be good reasons to maintain public activities. We need to keep an open mind about “the right mix” between public and private sector activities. Some activities may be better placed in the hands of public entities (e.g. education, health care). The same is true for certain R&D activities. We have to find the right balance.

Second, smart rules are those which focus on what is needed to revive Europe’s competitive strengths, such as for example innovation. We are currently working on ideas for smart state aid rules to facilitate aid where it boosts innovation, risk capital, research and development. This is part of a wider reform process through which we want to deliver more focused state aid rules and more predictability, better economic results and governance, ultimately safer jobs and better use of taxpayers’ money.

Third, smart rules are those which create an atmosphere which is more conducive to entrepreneurial activities. Better regulation cannot be just the latest fashionable trend. It has to become an integral part of how policy makers and legislators at all levels do their daily work.

In the Commission we have recently strengthened the assessment of economic impacts of new EC legislation. Competition impacts are given special attention. Other legitimate policy objectives may well require solutions which restrict or limit competition. Our aim is to ensure that these are proportionate and the overall balance of interests, including the administrative costs on business, is properly weighed.

In the same vein, we are undertaking in-depth sectoral inquiries in two markets which are key to the overall welfare of the European economy: energy and financial services. We fear that in these sectors competition may not be functioning as well as it could, and the purpose of our investigations is to identify the sources of any problems, and propose possible solutions. Initial results will become available towards the end of this year.

Such smart public policies deliver the framework needed to create optimal conditions for the market to deliver the expected results. A recent OECD study (Title: “The Benefits of Liberalising Product Markets”[1]), suggests that aligning the different European national economic policies with the most competition friendly regimes would result in huge benefits for the European economy overall: a 2 to 3,5 % growth in GDP per capita. This corresponds to two years of economic growth.

There is significant hidden potential in the European economy. The challenge is releasing it. Needless to say, such an ambitious project requires the joint efforts of both the Commission and national competition authorities but also the cooperation of regulatory authorities, local governments, national governments and international institutions.

Having made a case against protectionism, a case for competition and the necessity of smart public funding, I would lastly want to touch upon:

The social dimension

The potential benefits of releasing Europe’s full economic potential sound very enticing indeed. More competition in the long run will make Europe wealthier as a whole. But we must not forget that markets themselves will not distribute those gains equitably across our societies.

The biggest challenge we face is to ensure that those parts of our society, who are most vulnerable, are not left behind. This is where the European social model must prove its worth. A strong European social model must provide security to citizens even when the economy is undergoing transformation. To those who lose their jobs it must provide training and alternatives.

When I hear people say globalisation is threatening our social model, I disagree. I believe that a strong European social model is an absolutely essential part of managing economic reform to get the most out of globalisation. But I believe equally firmly that without economic reform, there is simply no sustainable future for our social model. The two go hand in hand. And at a time of quite widespread insecurity amongst our citizens – reflected in the recent brake put on future institutional reform (the Constitution) as well as in declining levels of political participation and confidence in politicians, we have to put this message across clearly and credibly at all levels.

[1] Full title of the study: «The Benefits of Liberalising Product Markets and Reducing Barriers to International Trade and Investment: The Case of the US and the EU»; dated 26 May 2005; ECO/WKP(2005)19

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