European Commissioner for Competition Policy
Competition law in an economic crisis
Opening address at 13th Annual Competition Conference of the International Bar Association
Fiesole, 11 th September 2009
In such a beautiful setting as Fiesole it can be difficult to remember there is still a very serious economic crisis out there. And while we may be heading in the right direction, our recovery is far from complete.
So it is inevitable that my remarks today will deal with the crisis.
Given the unprecedented and systemic nature of the problems we face, I think the collective effort of European governments – and others in the G20 - to deliver stability and confidence to financial markets has been impressive.
Our role at the Commission in the field of state aid policy has been two-fold :
To increase financial stability by giving legal certainty to measures taken by EU Member States
Ensuring a level playing field between national measures, so that one Member State does not export its problems to others.
Preserving a competitive environment within the Single Market has therefore been our main objective. The Single Market has delivered Europeans the most prosperity for the longest period in Europe's history. It is our crown jewel and our best bet for recovery.
You will have heard me speak previously about the Commission's role as referee of the Single Market. This crisis is the ultimate proof of why we need that referee; and need those checks and balances.
It is a daring amount that we have approved in favour of the banks. At over 2,900 billion euros in bank state guarantees and over 300 billion euros in bank state recapitalisations, there must be a system of control regarding this investment. It is not responsible to put that sort of money 'on the line' without knowing precisely why it is being offered and what is happening to it.
Yet, while this spending has allowed us to pass through the first stage of the crisis, money is not the long-term answer.
We now need to be honest about the need for deeper change. By deeper change, I mean adopting business models for the banking industry that acknowledge the failure of the wholesale funding model and ensure viable banks in the longer term.
Banks are not ordinary businesses. They are both anchored in the real economy and the anchor for the real economy: their primary function is to lend money to individuals and businesses, such as SMEs, that are highly dependent on bank finance. If they do not serve this purpose then what purpose do they serve?
To help banks be in a position to serve these functions and enhance their viability we need to work towards more sustainable business models and internationally co-ordinated regulation.
Regarding regulation: we are seeing signs of progress, for example at recent G20 meetings, and it is clear that new regulations requiring greater transparency and accountability are needed; global capitalism can't work unless we deliver these changes.
Regarding business models: we hope that the second stage of our state aid system - restructurings of individual banks – will help move our banking system towards this safer footing. It is our view that, while some banks may have been too big to fail, none are too big to restructure.
These goals are fleshed out the Commission's 22 July Communication on restructuring aid for individual financial institutions.
This guidance sets out the conditions banks should meet for the Commission to authorise restructuring aid to them. It aims at transparency, predictability and equality of treatment between Member States and the different financial institutions.
Let me say it clearly today – there is no trade-off between competition policy and financial stability. This Communication is about competition policy supporting financial stability and being a tool to manage orderly the return to normal market functioning.
Let me go through the three main ideas:
First , we don't want restructuring to be a band-aid, it must work in the long-term. Restructuring plans will therefore have to demonstrate strategies to achieve viability also under adverse economic conditions; they will have to be based on rigorous stress testing of the business. In some cases, divestments may not be needed, but in many cases they will be essential. One element we pay attention to is notably the remuneration incentive structure, in accordance with Commission Recommendation of 30 April 2009 on remuneration policies in the financial services sector, to verify whether it promotes the beneficiary's long-term profitability. It is in that context that many governments have also given us in the past six months a series of commitments on how to frame bonuses and pay in aided banks. In short, we did not wait for G20 endorsement to take care of bonuses in the financial sector!
S econd, the bank and its capital holders should contribute to the cost of restructuring as much as possible with their own resources. This addresses moral hazard and creates appropriate incentives for their future behaviour. An appropriate price should also be set for State support, ensuring adequate burden sharing, so that the aid cannot be used to finance market distorting activities not linked to the restructuring process.
Third, competition distortions created by the aid need to be addressed in order to restore conditions which foster the development of competitive markets after the crisis. We are advocating measures that are tailored to the market conditions of each case. These may include divestments, temporary restrictions on acquisitions by beneficiaries or other behavioural safeguards to tackle competition distortions between banks which have received public support and those which have not.
Bank customers and taxpayers
I cannot say often enough that our action in the financial sector is not a gift to the banks, but an effort to stabilise the sector and save us all from financial meltdown. That means we must deliver outcomes that protect taxpayers and innocent banking customers.
The trillions that have been used to support banks is your money. I want you to escape paying for the mistakes of unsound banks. If banks are properly restructured they will be able to repay the State and pay that bill.
Real economy – state aid and 'crisis cartels'
Regarding our wider application of state aid in this crisis, we have taken a similar approach as with banks. Relaxing the rules has not been an option, but we have tried to minimis e the human cost through the adoption of temporary rules taking into account the specific problems of access to finance in the current crisis.
In practice this has meant things like quick approval of aid or temporary grants, for example to ensure liquidity for sound SMEs. These measures, of course, are possible under Article 87 (3), but we have been firm that no discriminatory conditions may be attached to aid.
Other competition instruments in the crisis
Turning now to the wider application of competition policy through the crisis...
I believe that in tough times, market distortions caused by state subsidies or anti-competitive practices hurt us even more than in good times. I am therefore determined to continue with our usual enforcement. We would do no favours to the economy by going soft on enforcement.
If anything, anti-competitive activities -such as cartels- hurt consumers and the economy more in the bad times. So you will see us carrying on with our zero tolerance on cartels.
I've heard some criticisms of our fining approach in recent months. It is appropriate to remind our critics that we always operate well within our legal limits, and that an alternative to fines is criminal sanctions.
As regards mergers, the Commission is continuing to apply the existing rules, taking full account of the economic environment. Our rules provide the necessary flexibility to deal with decisions that require fast treatment, such as transactions which are part of rescue operations, in order to enable immediate implementation of these transactions. On substance, the EU merger control rules allow the Commission to take into account rapidly evolving market conditions and, where applicable, the failing firm defence. So whereas there is no provision for public interest considerations other than competition policy, the existing Merger Regulation offers sufficient flexibility to deal with today's situations ( such as acquisitions by States of majority stakes in banks and other types of undertakings ) .
To finish, let me say that 2009 has been a difficult year. But I want to finish on an optimistic note because I am genuinely optimistic about the future.
If anything was going to knock competition policy off course, it was this crisis.
We remain on course :
our instruments have proven flexible and effective
we continue to build competition cultures across the globe
we c ontinue our long-term convergence with the US, regardless of what occasional headlines may suggest.
I am confident the Commission can meet all the challenges it will face in 2010.