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Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

Improving Europe’s competitiveness in the global economy

The Future of Europe

Brussels, 17 January 2012


Ladies and Gentlemen:

I would like to thank you for the kind invitation to talk to you today and discuss the challenges facing Europe’s economy as we enter the New Year.

And of course, I appreciate very much Mr. Vanhevel's kind words. Thank you very much, dear Jan.

The organisers have chosen "The future of Europe" as the headline of this event. This is a good choice. From the economic and the political point of view, this is what is at stake today.

What is the future of the euro? Will Greece stay with us? How will we manage the sovereign debt crisis? What about its consequences on the banking sector? Are we entering into a new recession?

Many such questions are addressed to us as well as to national governments by companies, but also by ordinary citizens who feel scared by the uncertainties surrounding the European integration and the future of the single currency.

So, before starting to use a more technical language, I want to underline the fact that behind talks of imbalances, adjustments, structural reforms and competition-policy decisions, there is a real world of SME’s fighting for financing, workers searching jobs, and young people looking for opportunities.

With this in mind, let me first describe how the EU – and the euro area in particular – is coping with the crisis to regain growth, jobs and competitiveness. Then in the second part of my speech I would like to focus on how competition-policy instruments can contribute to finding sustainable solutions to our main problems.

The sovereign debt crisis

2011 was a year of turbulence. The financial crisis turned into a crisis of sovereign debt in the periphery of the euro area threatening the banking sector and the fiscal sustainability of many European governments. It also severely impaired credit flows towards the real economy.

Over the past 20 months – from the first decisions to tackle the Greek problems until last week’s downgrading by S&P of several sovereigns – we have had to intervene reaching agreements that few years ago would have been unimaginable, and adopting adjustments of a size that just a few years ago would have been considered socially unacceptable and politically non viable.

We are not yet out of the woods. The worsening situation and the difficulty in finding appropriate solutions are symptoms of deep underlying problems in the functioning of the Economic and Monetary Union that now must be addressed if we want to exit the crisis successfully.

Beyond the short-term decisions that are being discussed right now, we need to look at our problems from a broader perspective.

It is clear that the first decade of the Economic and Monetary Union saw an excessive accumulation of debt in both the public and private sectors.

Particularly severe was the lack of fiscal discipline in some euro-area Member States whose public debt reached very high levels.

In other cases, Member States who kept their public finances under control, allowed their external private debt to rise to unsustainable levels.

This degree of indebtedness couldn’t be financed in some Member States by internal savings and was accompanied by strong inflows of foreign capital.

This was financed by ever increasing external surpluses in other countries. In other words, some countries experienced export-led growth and a surplus of savings; while others financed their internal demand with external debt.

In the face of these growing internal imbalances, EMU governments, and the Euro group as their informal gathering, did not react adequately.

The Stability and Growth Pact was breached in November 2003 by a coalition of countries led by France and Germany and never recovered its full credibility.

From 2008 on, the impact of the crisis made it impossible to keep deficits under the 3% rule, further aggravating problems of fiscal sustainability.

On top of that the EMU was not equipped with adequate mechanisms to correct external imbalances. In fact, real interest rates rather contributed to the imbalance by ensuring cheap access to capital to the periphery of the euro area, irrespective of its fiscal or current-account situation.

It became obvious that the governance of the EMU was inadequate and that these imbalances should have been duly analysed, monitored and corrected.

Warnings and advice were issued at the time by the ECB and the Commission, such as in the 2008 report to commemorate the 10th anniversary of EMU – called EMU@10. But such warnings received scant attention from governments.

In a similar vein, many countries kept postponing the necessary structural reforms to increase our growth potential and improve the flexibility and resilience required for the good functioning of the EMU.

The revised Lisbon Agenda, which laid out a plan for each country for supply-side restructuring measures, was not taken seriously as a necessary contribution to the success of monetary integration.

Instead, perverse economic dynamics arose. There was endemic low growth in Portugal and Italy; growth supported by asset-price bubbles in Spain and Ireland; and extreme levels of fiscal and current account imbalances in Greece.

This is about the past. The good news today is that now we have learnt the lesson, albeit the hard way.

The Europe 2020 strategy, which is now being implemented, tries to deliver in this decade what the Lisbon strategy was not able to achieve in the last.

And, what is more important, the European institutions have embarked on a fundamental reform of the governance of the euro area.

With the adoption of the so-called Six Pack, national budgets are now being closely monitored by the European institutions and there will be financial sanctions for countries that do not correct imbalances are foreseen.

The surveillance goes beyond fiscal deficit and will cover debt as well as economic restructuring.

Last November, new measures were put forward by the Commission to impose quantitative limits on fiscal deficits and to increase the powers of scrutiny of European institutions in the national budgetary processes.

At this moment, a new inter-governmental agreement is being negotiated to add even more rules and commitments to the ones being put in place under the current Treaty.

I believe all these reforms are necessary.

Will these measures be sufficient? My answer is yes, provided the Member States realise that their political commitment is indispensable to protect the immense achievements of European economic integration.

We are not talking about fiscal discipline only, but also about the need to restructure and to adjust other macroeconomic imbalances. To take the path to sustainable growth, implies pursuing medium- and long-term objectives even in the current turbulence.

The guidelines provided by the EU 2020 Strategy provide a common plan for national governments to take appropriate measures to improve productivity and to promote innovation and achieve the necessary flexibility for economic resilience.

An increasing and permanent divergence of economic performance within the euro area is not sustainable. There must be strong economic coordination for governments to take adequate measures. And, when appropriate, national governments will have to accept that they must share part of their national sovereignty at EU, or at least at EMU level.

Improved economic governance of a monetary union comes hand in hand with more effective economic integration. And this requires, first and foremost, a clear political vision and determination.

Competition Policy: State aid Regime and bank restructuring

At this point, let me switch the focus to the concrete action that the Commission is using competition policy as an instrument in the resolution of the financial and sovereign-debt crisis.

Competition – fair competition – is a necessary condition for the full realisation of the Internal Market and, as such it is a key component of a common strategy to help Europe thrive at the global level.

I want to refer first to the state aid rules that have been vital in the rescue of the banking sector during the crisis.

Since the start of the crisis, we have had to intervene to facilitate the rescue of a very large number of banks. €1.6 trillion of state aid have been used to rescue and restructure European banks since the beginning of the crisis. We have taken 39 decisions on restructuring with 24 banks still undergoing restructuring.

The Commission has also approved national schemes in 20 Member States that use an array of tools provided under the crisis regime. These include capital injections, support for the divestment of impaired assets, and guarantees.

We have used state aid in a way that has fostered bank restructuring while maintaining a level playing field in the market.

Conditionalities of crisis state aid rules for banks were imposed with a triple objective: safeguarding financial stability, preserving the internal market, and restructuring aid beneficiaries for long-term viability.

Thanks to the crisis regime designed by the Commission, structural problems that had been affecting many banks well before the crisis are being addressed.

For example, we are asking some banks to move away from unsustainable business models based on excessive leverage and overreliance on short-term wholesale funding. We are encouraging banks to focus once again on their core business.

Significant restructuring efforts need to continue. Although good progress can be seen in some countries such as Ireland; other countries like Greece still face very complex situations.

And I also consider that there is unfinished business in – among other countries – Portugal, Austria, Germany, Spain and Belgium. In Belgium, we have two ongoing cases – Dexia and Arco – and we are monitoring the implementation of the restructuring plans for KBC and Ethias.

I have said many times that we cannot afford the presence of zombie banks. But the resolution of the banking crisis has been complicated – as I said earlier – by the fact that it has now become inextricably linked with the sovereign-debt crisis. Governments and private banks aggravate each other’s financial stress.

The worsening of the sovereign debt crisis in the summer of 2011 forced us to extend the crisis rules for banks into 2012. These rules will continue to function as restructuring, resolution and coordination tools for State aid to the banking sector in the EU.

Once the situation stabilises, we will need to put in place a more permanent set of state aid rules for banks, consistent with the future crisis resolution regime on the regulatory side.

Competition as a recipe for growth

I have just described how state aid policy is proving to be a key instrument in restoring the stability of the financial sector.

Now I will refer to the role of competition policy as a tool to promote the kind of efficient markets that we need for the medium-term objectives of economic growth and innovation.

By imposing competition on the merits – that is, competition on innovation, quality and price – competitive markets are best placed to produce firms that are equipped for long-term success.

Staying with the financial sector, we are using antitrust scrutiny to promote efficient pan-European payment systems that would lower the costs of payments, produce innovative payment methods, and ultimately facilitate trade across the EU.

In wholesale financial markets, we have already intervened against S&P and Thompson Reuters to limit abuses in the licensing of financial information. In addition, we are investigating possible abuse of dominant positions by investment banks in the market for CDS clearing and in the market for CDS trade data.

These actions reflect my belief that financial markets, the same as any other market, provide more efficient service when they are open and competitive, without any entity or group of entities engaging in abusive practices to foreclose viable competitors.

Having firms compete on the merits for the business of their customer is the best guarantee for cost efficiency and innovation.

By now all of you are aware that the European Commission has raised preliminary concerns in the announced merger between two large exchanges in the EU and that it has launched an in-depth investigation that is still ongoing. Our Decision will be adopted soon.

In this case as in others, the Commission will seek to ensure that European markets remain fair, efficient and therefore competitive to the advantage of firms and households.

Exchanges are a crucial instrument for modern and efficient capital markets. Trading and post-trading activities, for cash or derivatives, are essential for our companies and investors to be competitive at European and global level. And for this reason, competition between exchanges is necessary.

We introduced competition through regulation with MIFID, and we succeeded. We need to go down this route in terms of fees, services, and interoperability. This is what the College of Commissioners will keep in mind when it decides on this particular case – as it does with all the other cases.

This objective is also embedded in the European financial regulatory work, which is supportive of open and competitive markets.

I remain convinced that in this period of crisis, competitive markets are the best way for incubating globally successful firms. They also constitute the environment that serves citizens the best by providing better and more affordable services.

This is why I intend to use all available instruments in antitrust policy and merger control to preserve the competitive nature of European markets thereby promoting the resilience of European firms. Let me explain why this is important, now more than ever.

It is not rare that in mature sectors and in industries with low growth rates, large established firms develop collusive behaviour and cartels ganging up against their own customers in order to protect their collective interest.

These cartels eliminate any possibility for an industry to reinvent itself and turn the focus of activity to the maximisation of rent extraction rather than on innovation. This is why I have made the fight against such defensive cartels and collusive practices one of our priorities in this time of crisis.

Our investigation of the practices by some publishing houses to exert collective control over the development of e-books, possibly hurting its prospects, is one example of such actions.

We have also expressed concerns over the standardisation work of e-payments where we are investigating allegations of foreclosure of potential rivals by financial entities. In the pharmaceutical sector, the activities that unduly delay the entrance of generics to the market are also a matter of concern.

In highly innovative environments, established firms might be tempted to control the process of innovation to their own advantage and to the detriment of new entrants. Antitrust enforcement must ensure that dominant firms at any point in time do not use their dominance to thwart the entry of smaller challengers with viable new ideas. I have not hesitated to open investigations in innovative environments for example on the activities of Google.

Competition policy also actively contributes to preventing strategic abuse of intellectual property rights and abuses of the fairness and transparency of standardisation processes .

In network industries, competition policy must promote efficient and integrated services in Europe. Since the beginning of my mandate, I have taken decisions and started investigations in both the telecommunication and energy sectors in order to foster competition and prevent market segmentation.

I have started a comprehensive investigation on possible market portioning in the market for gas in large parts of the EU. I am also looking into past attempts to partition the market for telecom services in the Iberian peninsula.

I firmly believe that furthering the integration of the European Single Market is essential to provide European companies with the scale and opportunities they need to become global competitors.

A Europe-wide market also provides small business with a large enough pool of potential customers for launching innovative ideas with growth potential.

Working to integrate and interconnect European markets must therefore remain a priority action in competition policy and more generally in the European strategy for growth and jobs.


Ladies and Gentlemen:

Today I have given you a picture of the economic and political crisis in Europe.

I have explained the need to act on several levels, improving the governance of the euro area, tackling macroeconomic imbalances across the EU moving ahead with long-overdue structural reforms in those economies that have experienced lapses in productivity.

I have also wanted to convey the importance of state aid and competition policy in the exit strategy and recovery of the European economy.

With the implementation of a State aid regime adapted for the crisis situation, we are succeeding in restructuring failing banks into viable institutions. With a rigorous antitrust enforcement, we are promoting efficient and dynamic markets that will be the breeding ground of our future champions.

But let me now make a last and very important point. All the measures I have mentioned relating to an improved governance are necessary. But they will not be successful without a strong political commitment by participating Member States.

European countries must recognise that they depend on each other. Economic conditions in any single part of the Union affect the whole. There will be no satisfactory end to the crisis without close coordination of economic policies. There will be no sustainable growth without the efficiencies generated by further market integration.

I trust that all political leaders around Europe understand the urgency of the situation. Europe is at a historical crossroads. I am confident that once again we will use the crisis to forge a strengthened and prosperous Union.

Thank you.

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