Vice President of the European Commission responsible for Competition Policy
Competition policy for the post-crisis era
Lewis Bernstein memorial lecture
Washington DC, March 30, 2012
Ladies and Gentlemen:
I am very grateful to Ms Pozen for the kind invitation to speak at this lecture series presented by the Antitrust Division of the U.S. Department of Justice and the Antitrust and Consumer Law Section of the D.C. Bar to honour the memory of Lewis Bernstein. Thanks to this invitation, I have learned about the figure of Mr Bernstein; whose dedication to public service deserves to be held up as an example. He commanded the respect of colleagues and adversaries and was especially admired by the many younger lawyers he taught and mentored. All of us would like to be remembered for the same reasons. Outstanding public service in the competition policy field can easily be recognised on both sides of the Atlantic, because one of the aspects of public life that brings Europe and the US together is the belief that fair and open markets are essential for the wellbeing of our economies and societies. And we share the view that it is our task to keep them that way.
Our systems developed at different times and under different historical conditions. I can still remember how much my professor of Competition Law at the Deusto University in Spain admired the Sherman Act and its consequences, in particular the breakup of Standard Oil. The reach of US competition law increased over the decades in the 20th century, extending to different types of issues – notably mergers. The basis for intervention also changed over time, from the heavy intervention of the 60s and 70s to the more nuanced intervention based on the consumer-welfare tests of today.
As to Europe, the founding fathers of the EU were seeking to bring lasting peace to the continent after the Second World War. According to their unique vision, economic and political integration would be gradually achieved through the creation of the internal market, and since the beginning it was crystal clear that a common competition policy was necessary to make it work in practice. A single set of laws must apply without distinction across the united Europe to prevent and eliminate the distortions to competition caused by private-sector actors and public authorities. As a result, the European Commission has the responsibility of enforcing EU competition policy throughout the Union, and the European Court of Justice has the task to review our decisions in case of appeal and to ensure the proper application of the law.
Since its inception more than fifty years ago, our system has matured and now the competition authorities in the EU and the US are recognised as the most important in the world. We have established an excellent level of cooperation both with the Department of Justice and the Federal Trade Commission. To mention only a couple of very recent cases, the European Commission and the Department of Justice have worked together extensively on the acquisition of Motorola Mobility by Google, which we cleared last month. Another example of cooperation is the work that led to the decision the European Commission took two days ago against 14 freight forwarding groups which had run four different cartels between 2000 and 2007.
These examples – and many others I could give you after two years in office – show that our agencies share objectives and methods which allow us to cooperate in practice regardless of the differences in our systems. The day to day co-operation in individual cases that I have just mentioned is only one part of the picture. We also share a common belief in the need for impartial, independent competition enforcement, subject to the rule of law and the control of the courts. We share a common view on the need to fight cartels as a matter of priority. We both agree on the need for sound economic analysis when assessing mergers and unilateral conduct. We know that, in today’s global economy, our strengthened cooperation can make competition policy even stronger in our respective jurisdictions.
Ladies and Gentlemen:
Why do we consider competition policy so important today? The years of slowdown and of turbulence in the financial markets are taking their toll on our economies. Unemployment has been rising and the standards of living of large portions of the population are at risk. The citizens are asking for answers. Public authorities must heed their call; it is our responsibility to redouble our efforts and give our people better prospects for the future.
We are ready to deliver. Europe has responded to the crisis with changes that would have been unthinkable only a few years ago. Since the autumn of 2008, and especially since the start of the sovereign-debt crisis in the euro area two years ago, the EU has taken many important decisions to strengthen the economic and budgetary coordination in the Economic and Monetary Union. The first major decision was taken in May 2010, when the EU set up a temporary rescue fund – called European Financial Stability Facility – which has helped to stem the sovereign crises in Greece, Ireland and Portugal.
But the most significant advances were made last year. In spring, a permanent mechanism to stabilise the euro was established. The European Stability Mechanism will soon replace the temporary Facility. Last December, a set of measures became law to reinforce both the preventive and the corrective arms of the Stability and Growth Pact that has been in use since 1997 to coordinate our national fiscal policies. Still in December, the EU gave itself a new ‘fiscal compact’, which introduces tighter rules to curb public debt; reinforces the coordination of economic policies; and takes steps for a new governance of the euro.
In sum, it seems to me that – as has been the case with previous crises – Europe has used this one to move forward in its process of integration. But more work lies ahead of us. Now that we are seeing the first signs of recovery, public authorities should create the best possible conditions to support it. In this phase of transition, competition policy must have pride of place among the public policies that can promote economic growth. I do not agree with the argument that we should be more lenient in the implementation of EU competition law to help companies weather the storm. On the contrary, I am convinced that a fair and robust competition policy is especially needed in times of crisis.
We must preserve competition on the markets to create better conditions for doing business; to deter companies from adopting practices that bog down economic activity; and to deliver wider choice and lower prices to consumers when they most need them. And let us not forget that, unlike other public policies, competition policy can promote growth at no cost to the taxpayer. In addition, when a cartel is busted or a company is asked to make room for new entrants in a market it occupies with too much fervour, the effects of our work can be felt almost immediately.
To illustrate what we are doing in Europe to tap the potential of competition policy as a driver of innovation and growth, I will touch upon four broad areas: financial services, energy, telecoms, and some issues linked to intellectual property rights which are central for the development of the digital economy.
The EU and its member countries have agreed a common strategy for smart, sustainable and inclusive growth – called Europe 2020. As part of this strategy, broad initiatives have been launched for research, development and innovation, the digital economy, energy and climate change, green growth, education, youth opportunities and the fight against poverty. It is the policy of the Commission to mobilise all available resources to turn Europe 2020 into a success – and competition policy can do a great deal in this respect. Let us see how we are doing this in practice starting with our work in the financial services sector.
Any analysis of what we can do to put this long crisis behind our backs must start from banks and financial services. The crisis precipitated with the collapse of Lehman Brothers and – when its epicentre moved from the US to Europe – it fed on the feedback loop between banks and the state of public accounts in some countries of the EU. To cut a very long story short, let me just tell you that if we want to take the road to recovery, we need to put public and private finances in order first, and the European Commission – as a competition authority – has been involved in this process since the start.
At the end of 2008, when the global financial system was heading towards a meltdown, Europe turned to State aid policy as the only available means to manage the crisis at EU level. Let me remind you that State aid is the area of competition policy the European Commission uses to make sure that competition in the internal market is not distorted by government action. When financial markets were on the brink of collapse, the natural instinct of some policy-makers was to put our common rules aside and act unilaterally. Without some form of EU-wide coordination, we would have seen a subsidy race, massive transfers of capital from one country to another, and probably the end of the internal market as we know it.
We were quick to respond to the challenge. We introduced an emergency State aid regime which – with minor changes – still specifies the conditions under which EU governments can use public resources to rescue their banks. Under the emergency regime, we have decided the viability, restructuring or liquidation of 43 banks, and are still discussing the restructuring of more than 20 other banks.
Three main goals guide our work; safeguarding financial stability, preserving the integrity of the internal market, and ensuring that the beneficiaries of aid return to long-term viability. For instance, we have asked some banks to move away from unsustainable business models based on excessive leverage and the over-reliance on short-term wholesale funding. In other cases, we have required a downsizing and the simplification of banking structures. Finally, when it was clear that the viability of a bank could not be restored, we proceeded to its orderly resolution. In all cases, we ask banks to pay back the aid received from their governments. This condition is vital, because it addresses the moral-hazard issue and limits the cost to the taxpayer.
To all intents, the competition authority of the European Commission has been acting as a crisis-management and resolution authority at EU level addressing both the emergency situation and the structural problems that had been affecting many European banks well before the crisis. Our action follows the ultimate goal of giving Europe a leaner, cleaner and healthier banking system centred on the financing of the real economy. And we have been using the instruments of State aid control to achieve this goal and protect the interests of taxpayers.
In the post-crisis environment, not only banks but financial markets at large must become more open and more transparent. To this end – and among other actions – the EU is putting in place new regulations for Credit Default Swaps and Over The Counter derivatives with measures that are comparable to those that are being introduced in the US through the Dodd-Frank Act. The new legislation will reduce risk in the financial system by introducing mandatory central clearing for OTC derivatives and more transparency in the markets.
This is an area in which regulation and competition control must go hand in hand, because asymmetrical information can bring large benefits to certain market players, who have strong incentives to maintain the markets opaque in spite of regulatory efforts. We are aware of this fact and monitor the financial sector with special care. At present, we are conducting antitrust investigations in the markets for Credit Default Swaps, the payments services sector, and the distribution of trading data and financial information.
Our main goal in all these cases is promoting the transparency and openness necessary for financial and payment markets to operate in a fair and efficient way. In the CDS case, we are investigating whether major dealer banks have taken action to keep that market opaque and away from more transparent exchange platforms. Markets cannot function properly if the basic information about supply, demand and price is not accessible to all participants. Such opacity creates unfair conditions and may ultimately lead to market manipulation.
This is also illustrated by several cases we initiated in 2011. One of them concerns products linked to the Euro Interbank Offered Rate, or EURIBOR. Others focus on products tied to other benchmark rates for specific currencies, such as LIBOR and TIBOR, the Tokyo benchmark rate. We have concerns that the companies may have violated the rules that prohibit cartels and restrictive business practices in the trading of the financial derivatives based on those benchmarks. Given the number and value of transactions in interest-rate derivatives and the crucial role these products play in the management of risk, any confirmed manipulation of these interest rates would imply a very significant cost to the European economy.
Competition policy defends efficient and competitive markets. I hope I have sent that message in the recent prohibition of the merger between Deutsche Börse and NYSE Euronext. The deal would have created a quasi-monopolistic player with the clout to dictate commercial conditions on thousands of firms operating with European derivatives. With the prohibition, we have kept efficient players in the market that will strive to bring more innovation and transparency.
Finally, we are now addressing cases where companies might attempt to capture a market by withholding access to standards or by imposing standards that make life difficult for competitors. This is why I have opened an investigation on the standard-setting activities of major banks with respect to the development of electronic payments.
To sum up, our action in the financial sector is carried out in two complementary areas. On the one hand, using State aid control, we ensure the restructuring or the orderly resolution of the banks that receive taxpayers’ money. We require that they profoundly change their business models so that, in the long run, they can return to operate without more public bail-outs. On the other hand, we have launched a number of investigations in sectors of finance beyond banking. It is our responsibility to make sure that companies genuinely compete rather than collude and that the markets are transparent, contestable, and open to innovation.
Our work in the financial markets aims to prepare a systemically vital sector for the economic environment that will emerge from this crisis. The work we are carrying out in network industries – such as energy and telecoms – is similar in two important respects; first, because these industries provide the infrastructure for many other economic activities and, second, because in this area too success depends on finding the right policy mix between regulation and competition control.
Several factors come together to form our priorities in energy; such as the need to keep prices low, the need to ensure security of supply, and the need to meet our environmental targets. The EU made energy markets a priority in the late 1990s, but by 2005 it was clear that two waves of liberalisation had not delivered the open and competitive markets Europe needed.
This is when the competition authority decided to carry out a broad inquiry into the energy sector, which identified a number of bottlenecks. Vertically integrated companies, a lack of integration between energy markets in different EU countries, and underdeveloped market infrastructures were our main findings.
While a new regulatory framework is now being implemented across Europe, the inquiry launched a raft of antitrust cases. These cases brought an end to behaviours that had kept prices artificially high and had prevented the entry of new players. They also brought about changes to the structure of gas and electricity markets in Europe.
For instance, after a case we brought against Germany’s E.On in 2008, the company sold its high-voltage transmission grid business, which was a milestone in opening up the electricity market in Germany. In the gas sector, we investigated Italian incumbent ENI for allegedly abusing its control over gas networks to exclude competitors. As a result, ENI sold its shares in three international transport pipelines into Italy and now its competitors can access the networks through an independent company.
The creation of a Single European Energy Market – planned for 2014 – is a very significant challenge. I see this as a crucial step forward for Europe’s energy sector and I am focusing our antitrust enforcement efforts on supporting its objectives.
The EU has been more successful in its efforts to introduce competition in the telecoms markets than in the energy markets. The regulatory measures introduced since the 1990s managed to liberalise the traditional strong monopolies. Today, the old incumbents must provide wholesale services to alternative operators and give them access to their networks. However, many still have a dominant position as they own the nation-wide networks they rolled out when they were monopolists. So, once again, we can see that competition policy complements regulatory action. In particular, our enforcement work must grant new entrants the opportunity to launch their services and compete effectively in the markets.
For instance, we imposed fines on Deutsche Telekom and, later, on Telefónica – Spain’s old incumbent – for abuse of dominant position in telecoms markets. Both decisions were confirmed in full by the General Court – the Telefónica judgment was actually delivered yesterday. And last year we fined the Polish incumbent, Telekomunikacja Polska, because it had failed to give other operators access to its network and wholesale broadband services.
But the most challenging work we are carrying out in this industry relates to the commercial battles for the control of the mobile communications environment. These markets are moving fast on the wings of rapid technological change and companies are jostling for position. In this regard, we are closely following the standardisation processes led by major telecommunications incumbents to make sure that they are not used strategically to foreclose operators in any part of the market. I am also reviewing joint ventures established by telecoms operators to offer new, mobile-supported services such as payments and advertising. Here too, we will be wary of market capture and foreclosure.
Finally, let me tell you about another important area of operations in the telecoms markets; the roll-out of new infrastructure for broadband networks. The main challenge here is that commercial operators are shouldering most of the investment, but they have little incentive to bring the networks to rural areas or to places where they do not expect enough business.
However, the Digital Agenda – one of the flagships of the Europe 2020 strategy for growth – specifies that every European should have access to the internet by 2013 and to fast connections by 2020. So, we are looking at a classic case of a public-interest goal that the market alone cannot deliver; and government subsidies are required to fix the market failure.
We monitor the funds that EU governments spend on broadband infrastructure using our State aid rules; and in the past two years we approved aid for about €4 billion. In our control, we verify – among other things – that public funds do not crowd out private investment. I have to say that in most cases publicly-funded networks do not compete with private ones but complement them; which confirms that the impact of a credible competition authority results from both its power of deterrence and the repression of infringements.
We have specific guidelines for the public funding of new broadband networks and some of their provisions ensure that the public investments have pro-competitive effects. For instance, they provide that publicly-funded networks must give access to all operators. In this way, these networks can promote competition among service providers. With conditions like these – which are becoming the norm in our State aid policy – we try to encourage governments to make better use of taxpayers’ money fostering competitiveness and the innovative services of the future.
The broadband networks have already taken us to the last point I will touch upon today; our action on the issue of patents and Intellectual Property Rights. We can see in our practice that in certain industries there is a trend toward the strategic use of patents as a means to block competitors. This worrying trend defeats the very purpose of the patent system, which is to reward invention and stimulate innovation. Let me take the on-going patent wars in the mobile-phone industry as an example.
A smartphone is useless if it cannot exchange information with other devices and it can do so only thanks to common standards. However, because thousands of patents are needed to build a modern smartphone, the holders of standard-essential patents have considerable market power. This market power can be used to harm competition; in some cases, the holders of standard-essential patents can effectively hold up the entire industry with the threat of banning the products of competitors from the market.
I don’t need to tell you that this is unacceptable, and I am determined to use antitrust enforcement to prevent such hold-up by patent holders. We have recently opened an investigation against Samsung to make sure that the company has not failed to honour the commitments it had taken back in 1998 to make its standard-essential patents for mobile phones available in fair, reasonable and non-discriminatory terms. We have also received similar complaints by Apple and Microsoft against Motorola. I am considering whether we need to investigate these complaints formally to help bring more clarity into this area of competition control. This is of course only a brief overview of some of the areas of our work involving Intellectual Property Rights.
Obviously, competition enforcement in Europe is not limited to the actions I have just mentioned regarding the financial sector, the network industries and the new challenges of the digital economy. Other important cases are on the table, such as our ongoing investigation into Google’s conduct in search and search advertising and into the practices of major international publishers and Apple on the market for e-books.
We are also watching closely the pharmaceutical industry, where we have opened several investigations on patent settlements and where I expect to take further steps in the coming months. Airline alliances are also being examined, whereas, in other classic industries such as the automotive sector, we have recently launched cartel investigations as a matter of priority.
In parallel, we are observing a new wave of mergers and acquisitions in several sectors, some of which raise serious competition issues. While our review of Johnson and Johnson’s expansion into the health sector through the acquisition of Synthes will be finalised soon, we recently opened an in-depth investigation in the proposed acquisition of Goodrich by United Technology in the aviation-equipment sector. In addition, we are reviewing two proposed mergers involving EMI in the already concentrated music industry. Finally, beyond cartels, antitrust and merger control, we are active in State Aid control in the non-financial sectors.
Ladies and Gentlemen:
In closing, I would like to reiterate my firm belief that, in spite of our different systems, the relationship between the EU and the US in competition matters is the bedrock on which global competition enforcement will be based. We must continue to work together with the common objective of promoting open, fair and competitive international markets. Thanks to broadly shared principles and goals, we can overcome the structural differences in our systems. We need to build on our excellent record of cooperation and on the gradual convergence of our approaches.
I also want to reiterate that the overriding policy objective of the EU in this period is promoting growth and creating new jobs; and competition policy is essential to establish the best possible conditions for this to happen. We must redouble our efforts in the present phase of transition to help our economies and societies overcome the years of uncertainty and start looking at the future with renewed optimism.