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SPEECH/06/499











Neelie Kroes

Member of the European Commission in charge of Competition Policy




Industrial policy and competition law & policy






















Fordham University School of Law
New York City, 14th September 2006

Ladies and gentlemen,

Thank you for inviting me to address you today. It is – as usual – an honour and a pleasure to be here. And the theme of today's debate – the relations between industrial policy and competition law and policy – could not be more topical!

I am sorry that I could not join you earlier in this session. I am faced now with the difficult task of concluding what I know has been a very stimulating afternoon with a few thoughts.

Industrial policy and competition policy! For Europeans just putting these two notions in one sentence still tends to conjure up a great ideological divide. A divide between Colbertian “dirigistes” and economic libertarians. On the one hand, a faith in the ability of governments to successfully build, direct, and protect the supply side of the economy. On the other hand, a belief that markets should be subject only to rules to guarantee a level playing field, but that they are otherwise best left to their own devices. This ideological divide has always been something of a caricature, but it has lasted because there is some truth underlying it. And as a result, to put it bluntly, “industrial policy” has been rather bad-mouthed by the advocates of competition policy.

This afternoon I would like us to try to rethink industrial policy! I think it makes no sense to speak of industrial policy and competition policy as distinct one from the other, let alone as antagonistic policies. I would rather define industrial policy as one which frames the structural conditions necessary to ensure economic success in a globalising economy. And I therefore have no qualms in saying that competition policy forms – or should form – a central plank in any industrial policy.

As a member of the European Commission, I will focus my comments on the inter-connection between industrial and competition policy in the EU. But these issues are not just relevant for Europe: our challenges are not so different from those facing other economies in today’s world.

I will first explain why embracing open markets – and renouncing protectionism or what might be characterised as “old-fashioned” industrial policy – is not only desirable but imperative. I will then go on to set out some essential ingredients of a modern industrial policy, and explain why competition policy (in the widest sense) should play a central role in shaping this.

Embracing open markets and renouncing protectionism

The proliferation and integration of markets worldwide provides unparalleled opportunity for economic development and prosperity. Removing barriers to trade and competition opens up new markets for the goods and services we all produce. It also provides new opportunities for investing capital overseas and for attracting investment into our own economies.

Economic growth is no “zero-sum-game”. The creation of jobs in one part of the world does not imply long-term job losses elsewhere. Economic growth both inside and outside domestic or regional markets stimulates the demand for the products and services we produce, thereby generating a “virtuous circle” of growth and investment.

The good news is that European industry has clearly understood the opportunities that are out there. In a way “globalisation” is nothing new for Europe. The EU is – in historical terms – a radical experiment in the creation of open markets, and its record in generating wealth and a better standard of living in Europe speaks for itself. The removal of barriers to the free movement of goods, services, capital, and labour has required many economic adjustments over the past few decades, but few now question that this has been worthwhile. The Single Market is a unique success story, and very much a reality for business.

In this context I'm not at all surprised by the growth in the number of cross-border mergers. If anything, I'm pleased! It shows that industries in our Internal Market are able to re-structure as they see fit, including by changes in corporate ownership, to meet global challenges.

In Europe, the merger wave is particularly marked in sectors which have recently been opened to competition or which are going through the process of liberalisation. Previously “national” companies are becoming in reality “European” or even “global” ones. In 1997, over 50% of the revenues of Europe’s largest companies were generated within their home markets – that is to say in the countries where they were head-quartered. By 2005, that figure had fallen to less than 40% . This development is all the more welcome given that cross-border mergers - and notably in sectors previously characterised by the presence of large national incumbents - tend to be more likely to enhance competition than mergers between national players in the same sectors.

Most of these cross-border mergers have gone ahead without any interference from national governments. But in some recent cases direct or indirect steps have been taken by national European governments or authorities to frustrate the takeover of important industrial concerns based in those Member States.

Last year, there were two widely-publicised cases in which the Bank of Italy sought to limit the ambitions of non-Italian banks to take over their Italian counterparts. Since then, we have seen a number of other examples of more or less direct interference. I've heard a lot about the strategic importance of the yoghurt sector, but I won't 'milk' that point!

More recently, we have had to express our concern about the conditions imposed by the Spanish Energy Regulator in relation to German energy company E.ON's bid for Spanish giant Endesa.

The rhetoric is always the same : “economic patriotism” or the need to retain national ownership of “strategic assets”. But this is outdated – the language and the mindset are those of yesterday's people, not of these who have the guts to look forward with ambitious realism.

I would not over-state the significance of the developments I've just described. But I am concerned. As an economist I'm concerned that these actions will prove ill-judged in the long term. As European Commissioner I'm concerned that they are contrary to the spirit and the letter of the laws underpinning the European Union.

That is why the European Commission has taken action where needed. First, under the single market rules contained in the Treaty of Rome (which safeguard the free movement of capital and the “right of establishment”). And second, under a provision in the EC Merger Regulation which only allows national governments to intervene against mergers approved by the Commission if such intervention is compatible with Community law. I can assure you that we will not hesitate to enforce these rules objectively wherever that is appropriate, under the control of our Community Courts.

Why? Well, because a failure to embrace market integration within Europe or economic globalisation - “fortress Europe”, if you like - is not sustainable over the longer term. The bitter experience of history has demonstrated that engineering the creation or protection of national “champions” - yielding to the temptation for governments to “pick winners” - is not the way to succeed in the global economy.

There may be some short-term benefits to shareholders or employees who are given a stay of execution. But experience has also shown that even some of the short-term benefits from protecting industry can be illusory: firms not facing competitive pressures may have an incentive to reduce output and cut jobs. Consumers and tax-payers are likely to pay the price for what - in the longer - term, risks resulting in a downward spiral of decreasing competitiveness.

In short, the answer to the challenges faced by industry in today’s globalising economy is not to seek to shield industry from the forces of competition, but to put in place the conditions which will allow industry to flourish in an increasingly competitive environment.

Ladies and gentlemen, it is time to put old-fashioned industrial protectionism to bed, and instead to develop a modern, proactive industrial policy which embraces change and paves the way for our future competitiveness.

A modern industrial policy

It goes without saying that if the EU is to derive the full benefits of globalisation, our industry needs to be able to compete on global markets. An effective industrial policy is one which is designed to ensure that the conditions are in place for industry to prosper in a global economy and for citizens to enjoy the rewards of such prosperity. The governments of all EU Member States have signed up with the European Commission to this vision of a modern industrial policy, in committing - and re-committing - to the “Lisbon agenda”, a partnership for delivering long-term growth and jobs and the competitiveness of the European economy.

So what do I mean by a modern industrial policy? I mean a policy which addresses the structural short-comings of the European economy. A policy which equips firms to compete effectively in the global economy. A policy which builds on our comparative advantages .

Concretely, this means shaping a policy which allows European industry to specialise in what it does best, not only adapting to technological changes, but really driving them. This policy must prioritise investment in research and development, so facilitating the ability of European industry to constantly innovate. It must put resources into education, training and re-training, so as to equip our labour-force with skills that match up to our ambitions. It must facilitate investment in the constant up-grading of the infrastructures (transport, communications, financial, etc..) which are the life-line of efficient commerce. And – last but not least – this policy must ensure that unnecessary red tape is cut so that the regulatory environment in Europe is more conducive to doing business. Such a broadly-based and enlightened industrial policy will not only enable European companies to compete more effectively in global markets - it will also make Europe a more attractive place in which to invest.

A key role for competition policy

Which brings me to competition policy. What place should competition policy occupy in a modern industrial policy of the kind I have just described?

By stimulating efficiency in production, innovation and the allocation of resources, competition in the provision of products and services ensures sustainable economic growth, employment and economic welfare generally. As the OECD has put it, competition has “pervasive and long-lasting effects on economic performance by affecting actors’ incentive structure, by encouraging their innovative activities, and by selecting more efficient ones from less efficient ones”. Indeed, there is considerable empirical evidence of a clear and strong link between competition and productivity growth - and hence of an important link between competition and competitiveness. Competition policy - which above all else is designed to ensure the maintenance of competitive markets - is therefore central to an industrial policy aimed at enhancing the competitiveness of industry.

The European Union has a unique combination of competition policy instruments at its disposal. Each contributes to the pursuit of what are ultimately industrial policy goals in the broadest sense. Let's take a look at how they contribute concretely to the realisation of a modern industrial policy.

The basic antitrust rules - Articles 81 and 82 - outlaw collusion and abuse of market power. The challenge for the Commission in applying these rules is to prioritise its enforcement resources to focus on remedying the most serious impediments to the functioning of markets. Targeted enforcement of this kind - centred on sectors which are key to competitiveness and behaviours which produce the most harmful economic effects - helps to deliver clear benefits for European industry.

In our many dealings with Microsoft, for example, central to the Commission's rationale for intervention has been the importance of preserving the incentive for firms to innovate. In this regard, an artificial interoperability advantage for a super-dominant player actually dampens the market's incentives to innovate since companies know that however good their products are, they cannot compete on the merits of these products. Similarly, tying to a super-dominant platform can send signals which limit available venture capital and deter innovation in adjacent product markets, by large and small companies alike. Our enforcement philosophy has therefore been guided by these principles, and our actions are designed to maximise the level of innovation in the market. This will result in benefits in terms of industrial competitiveness – and will ultimately, I believe, translate into more consumer choice and lower prices.

Another example is in our enforcement activity against cartels, which I have made a priority of my mandate as Commissioner. Defeating cartels lowers prices for consumers, individuals as well as business customers. We are using a mixture of more tasty carrots and tougher sticks. Cartels are hard to detect – so we are improving our leniency programme in particular by looking at a one-stop-shop solution to make it easier for applicants to come forward. On the stick side, our new fines guidelines are designed to deliver an effective deterrent, and are likely to result in an overall increase in the level of fines, particularly where there are aggravating circumstances such as repeat offences.

Over the last couple of decades, the Commission has also spear-headed the liberalisation of certain industrial sectors that were previously either closed altogether to competition, or characterised by pervasive restrictions or impediments (whether public or private), to competition. Opening these sectors – notably through the use of Article 86 of the Treaty - has created a “virtuous circle” of increased growth and employment, lower costs for industry, and at the same time lower prices and better choice for consumers. The most obvious example are the telecoms and airlines sectors, in both of which prices have come down significantly and the range of services has increased significantly as a result of EU-led liberalisation, with direct benefits for European consumers and for European industry . Reduced input costs and better choice of services have had clear cost benefits across European industry. As a result of liberalisation, there has therefore been economic growth and increased employment not just in the liberalised sectors themselves, but across all industrial sectors which consume these essential inputs.

In the telecoms sector, liberalisation has led to the emergence of a multitude of competitors for fixed-line and mobile voice services as well as Internet connections. Research by the OECD indicates that mobile subscriber growth rates are positively correlated with the number of competing networks in the market. So competition not only gives more customers access to mobile services, faster and at lower prices. But it also grows existing markets and creates new ones, provides market entry opportunities for new firms, and lowers the input cost of telecommunication services, as well as widening the choice of available services. So, I think it is evident from the EU’s experience that a carefully planned and executed liberalisation policy is a central piece of a comprehensive modern industrial policy.

Of course, I am not naïve, and I have already mentioned how some in Europe have been and continue to be less keen to put liberalisation into practice when they perceive it as bad news for their own national players. That will not stop me from continuing to explain why the facts prove that it is the best route for European industry and consumers. And I think the arguments also carry the same weight outside Europe – and I will not hesitate to export them.

Last, but by no means least, I’d like to address an aspect of EU competition policy which is crucial to the modern industrial policy which the EU is pursuing: the control of State subsidies to industry. My top priority as Competition Commissioner has been a comprehensive reform of our state aid rules. Our objective is to help Member States to spend only as much taxpayers' money on subsidies as is absolutely necessary, and to target that expenditure as effectively as possible. So our motto is "less and better targeted state aid". We look first to the markets to deliver, and only where there are clear gaps does state aid play a role.

And it is true that there can be gaps. Properly targeted state aid can serve to complement structural policies of the kind I mentioned earlier, by tackling genuine market failures to enable firms and workers to adapt to a rapidly changing economic environment. For example, state aid which is designed to support training or the employability of the workforce can fall into this category, and new rules are being developed for aid where this really is needed to promote the emergence of young innovative enterprises. In this respect, we've learnt a lot from the US Small Business Act! But in all of this one thing has to be made crystal clear: grant too much state aid, and quite simply the private money – which is the real long-term driver of our economy – will be crowded out.

To finish, let me add that, while far-reaching State aid control – beyond WTO discipline - may be unique to the European Union, I do believe that other economies would benefit from seeking greater discipline for the manner in which the State supports industry. I don't think it's just in Europe that we believe in the markets. And I know for a fact that it is not just in Europe that state money is sometimes wasted on lame ducks. If you believe in the market, then you should trust in the market first and foremost. We should all respect WTO discipline, but, if possible, we should actually all go beyond it.

Conclusion

I've said it before and I'll say it again. Competition policy is not an end to itself – not even for a Competition Commissioner! – but a means to reach a goal. I am not interested in having competition for the sake of it. I am not interested in taking ideological stances concerning policy agendas. My priority is policy measures that are sound, pragmatic, and really work in real life, modern solutions which match up to the challenges of today's market place.

With this in mind, I have been trying for almost two years to focus European competition policy on what really matters for the competitiveness of European industry, for the benefit of European consumers. This is why I have strengthened our fight against cartels; this is why I have undertaken a wide ranging revision of our State Aid policy; this is why I have launched competition sector inquiries in sectors that I regard as crucial to the overall competitiveness of our industry; and this is why I have launched – here in Fordham a year ago – an ambitious review of our enforcement policy against unilateral conduct. And I think that the results are starting to speak for themselves.

Is this an industrial policy? I suppose it is. Call it what you like, but personally I think it is the only modern and realistic policy approach to today's environment. Which is why, whether I'm on the Forbes list or not, I'll still continue to be an ambassador for competition in Europe and throughout the world.

Thank you.


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