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Vice President of the European Commission responsible for Competition Policy
Opening a Path for Recovery: Competition in Financial Markets
University College London
London, 6 February 2014
Members of the faculty,
I would like to thank the UCL Economics and Finance Society for inviting me to University College London. It is an honour for me to speak at one of Britain’s leading centres of higher education.
Today, I would like to share with you my views on two pillars of the European Union: the Single Market and EU competition law.
To keep the Single Market whole, well-functioning, and a level playing field, the Treaties give to the European Commission the exclusive responsibility to enforce EU competition law across the territory of the Union. Let me add that the competition-enforcement system also includes the network of competition authorities in all EU countries, the European Courts in Luxembourg that review our decisions, and the national courts of law.
I chose to talk about the internal market and the implementation of EU competition law because I regard them as core elements in the array of public policies that will take the EU back on track after these years of recession. In doing so, I will make special reference to financial markets. I will tell you what the Commission and other EU institutions are doing to make sure that lenders and other financial institutions meet the needs of firms and households without posing any more threats to our economies and societies.
So, let me start by saying that a competitive and open internal market has always been Europe’s ace in the sleeve. It is a boon for Europe’s businesses and consumers – of course – but it is also crucial in our efforts to bring Europe closer together socially and politically.
Tapping the growth prospects offered by the Single Market has become even more important now that we must lead our economies out of the crisis. Over the past few months we have finally seen the first signs of recovery in many parts of Europe, both within and outside the euro area.
These are good news, but we should take them a pinch of salt. We are not out of the woods yet. Growth for the EU28 was 3.2 percent in 2007 and was probably nil last year. From whichever way you look at it, Europe’s economy is still far from its pre-crisis levels. And we will not come back to the pre-crisis situation.
The consequence of this long downturn that worries me most is unemployment. There are 26.5 million people in the EU who are looking for a job and cannot find it. Of these, over 5.5 million are under 25. Almost one young person in four of those looking for a job is unemployed. Such high jobless rates cast a shadow on our future. We cannot afford to let this happen. First of all on political grounds, because Europeans expect their governments to come to the rescue and fix the underlying problems. We cannot afford it on economic grounds either, because squandering so much human capital would cripple growth across the EU for many years to come.
We need to prevent this impending disaster. Public policy needs to create the best possible conditions for sustainable growth. And, of course, this will require a sustained reform strategy. From this standpoint, a deeper and broader internal market and the robust enforcement of the European rules that keep it competitive have pride of place.
There are two main levers we can use at European level to help realise the full growth potential of the internal market.
First, there is European legislation. The Commission, the European Parliament and the Council can agree rules to tear down the remaining barriers. For instance, completing the Single Market in financial services, the digital economy, and energy markets are top priorities. But the Single Market – once established by law – needs to work as intended. And this is the task of competition policy.
I have to add at this point that these views are not without their detractors. Even before the crisis, some would say that Europe needed to go soft on competition control to help our companies respond to the challenges posed by international competitors old and new. As was to be expected, these calls have become louder during these lean years.
Here my position is clear. We must not listen to the sirens of protectionism. It would be a tragic mistake now to raise barriers around the Single Market or protect national interests at the expense of our common European interests. Before long, everyone would be worse off. Europe’s governments – at regional, national and European level – should do the right thing.
The right thing to do today is responding in a pro-active way to globalisation by improving our competitiveness. And competition contributes to it – and therefore to economic growth – across the spectrum. It spurs firms to become more efficient as they strive to stay ahead of competitors. It also promotes productivity in whole industries, as more dynamic firms replace the laggards. Finally, it encourages efficiency, investment and innovation in the economy at large.
In sum, I’m convinced that we must lay the foundations for a sound growth strategy for the whole of Europe based on a stronger, deeper and competitive Single Market.
The right thing to do is also continuing our work to open up markets in banking and finance, which I said at the start would be a special focus for my presentation today. Financial markets remain fragmented across Europe, which prevents the optimal allocation of capital across national borders. In my view, venture-capital markets are a particular source of concern. Europe lags far behind its global competitors, and this makes life unnecessarily difficult for our start-ups and innovators.
As to the state of competition in capital markets; I have to say that it’s quite good in certain areas and not so good in others. Equity markets, for instance, were opened up in 2007 by a European law called the Markets in Financial Instruments Directive – or MiFID. Thanks to the Directive, these markets have become more transparent, the costs of financial transactions have fallen, and new technologies have been introduced to offer investors and savers more attractive products.
The picture is different if we look at derivatives markets. Here regulatory action is ongoing. Another European law called Markets in Financial Instruments Regulation – or MiFIR – proposed by the Commission in 2011 is being debated by the European Parliament and the Council, and will be finally adopted soon. The main issue is that at present derivatives markets are highly concentrated. The Regulation addresses this problem by making exchange-traded derivatives markets more contestable and by allowing the entry of new, reputable players.
I’m telling you this to give you a sense of what the EU institutions have been doing to join the global efforts to re-regulate financial markets in the wake of the crisis. But there is one aspect in this domain that is quite specific to Europe – and this is the work we have done to solve the euro crisis and give the Economic and Monetary Union all the instruments it needs.
In 2012 the Commission proposed the Banking Union as a comprehensive solution to these problems. In June last year the 28 Heads of State and Government endorsed this ambitious project which – once implemented – will strengthen the architecture of the EMU and restart adequate lending flows to the real economy. The main goal of the Banking Union is breaking the vicious link between banks and sovereigns. And the best way to break the circle is by adopting a EU-wide approach to the extent of the possible.
The Banking Union was always going to be a difficult project. However, in spite of the many interests at stake and the inevitable differences, good progress has been made over the last few months. The European Central Bank is getting ready to take on its new task next autumn as central supervisor of all significant banks in the euro area. In addition, as of 2015, we will have a common set of tools to tackle potential banking crises at three stages: preventive, early intervention, and resolution. Finally, last December the Ecofin Council agreed on how to progressively set up a Single Resolution Mechanism and a single fund to support resolution decisions. But this is not to say that the debate is over. For instance, much remains to be discussed with the European Parliament on what to do in case a bank should fail.
In the meantime, to complete the regulatory overhaul of Europe’s banking system, last week the Commission proposed the separation of a bank’s riskiest activities from retail banking. The proposals would prevent the biggest EU banks from engaging in proprietary trading. These are the transactions where bank traders speculate on financial markets using the bank’s capital but not on behalf of its customers. The proposal also gives banking supervisors the power to split potentially risky trading from deposit-taking business if financial stability is at risk. Finally, certain transactions in the shadow-banking sector would be made more transparent.
Ladies and Gentlemen:
This much about the regulatory work that is going on in the EU to reinforce the internal market for banking and financial services. I will devote the rest of my presentation to the implementation of competition rules, which keep markets open and level in actual fact.
The competition department of the European Commission is active in three main domains. The first is the corrective and deterrent action we take with our antitrust decisions. The second is the preventive work we do as we review proposed mergers. Finally, I will say a few words on State aid, which is the part of our practice that is closer to public policy proper.
I will start with the antitrust domain. I call this area of work ‘corrective’ because we can intervene only after companies adopt anti-competitive and illegal practices. Our control also works as a deterrent because the fines and commitments we impose – and the guidance we provide – encourage other companies to take all the measures needed to stay within the law.
The most straightforward type of infringement we pursue in this domain is the setting up of cartels. Cartels can harm economic activity in many ways. They force consumers and client companies to pay above-market prices. They can also keep new and more efficient competitors away. As a consequence, the companies that are within the cosy circle of a cartel have no incentive to invest and innovate.
The main cartel decision involving financial institutions is from last December, when seven international banks and a broker received fines for a total of €1.7 billion for creating cartels in the markets for interest rate derivatives. This is part of the European Commission’s response to what the press calls the LIBOR scandal.
In these cartel decisions – called “settlement decisions” – the companies involved must acknowledge liability for the infringement. The investigation continues for a number of companies that were not part of the settlement.
Competition in financial services can be harmed by other illegal practices too, such as abuses of dominant position. For example, in December 2012 our intervention persuaded Thomson Reuters – a leading provider of financial information – to change certain practices that made it very difficult for its customers to switch to other providers.
This case shows that not all our antitrust decisions end with the imposition of fines. We can also accept commitments when these can restore good competitive conditions in a market – and this is sometimes a good option, especially in fast-moving markets.
In this type of decision, the company can offer to change its practices before we establish an infringement. If the pledges allay our concerns, we stop our investigations and make the pledges legally binding.
Let me make an aside to a different sector for an important on-going investigation which will probably be concluded with a commitment decision of this kind. I am referring to the case involving Google for suspected abuse of dominant position, which took an important step forward yesterday.
The investigation revolves around four concerns we identified in the company’s business practices about three years ago.
The first was that Google displayed its own specialised search services in a more prominent manner than those of competitors. To give you an example of a specialised search, this is what we do when we go to the internet to look for flights, restaurants and products to buy.
The second concern was that Google was using content from competing specialised search services without their consent.
The third was that Google imposed exclusivity agreements on publishers who wanted to use its advertising programmes.
And the fourth was about the restrictions imposed on advertisers who were using those programmes.
So, yesterday I announced that Google has offered a package of commitments that can finally allay these competition concerns. This was the third package of commitments offered by the company. I had rejected the first two because they were not good enough to restore good competitive conditions.
I will focus on the first of the four competition concerns to briefly tell you what these new pledges are like. Google guaranteed that it will display the links of competitors in a way that is comparable to its own services. This will give users a real choice between different alternatives which, in turn, will encourage both Google and its rivals to innovate and improve.
One aspect I would like to stress is that these pledges are dynamic. This means that when Google introduces new specialised services, those of rivals will also be displayed in a comparable way. In terms of presentation, if Google decides to promote a specialised search using pictures, its rivals will also have pictures displayed prominently on the page. If it uses videos, the rivals will have videos, too.
I’m highlighting this aspect because in a fast-moving market such as the one for online searches effective commitments must necessarily be future-proof. And this is also why it is reasonable to go for commitments in this case. In the alternative procedure, a final decision and possibly a fine would have taken about two or three more years. And in the meantime things would not have changed.
Instead, if all goes according to plan, these commitments will restore good competitive conditions in the market for online search in a few months.
Ladies and Gentlemen:
Prohibition decisions and fines in antitrust look back at the past, whereas commitment decisions look ahead towards the future. This is a feature they share with merger control, the second area of activity I would like to tell you about.
When two companies decide to merge, it is our responsibility to make sure that the resulting entity does not have too much market power. The reason is simple; without a significant pressure from rivals, the larger company resulting from a merger could raise prices, stifle innovation, and generally distort competition.
We clear the vast majority of the mergers that are submitted to us either unconditionally or with remedies that preserve a competitive market structure. Only occasionally are we forced to block a deal when the remedies proposed by the companies are not good enough to allay our concerns.
This was what happened in February 2012, when the Commission prohibited the proposed merger between Deutsche Börse and NYSE Euronext; a deal that would have led to a near-monopoly in exchange-traded European financial derivatives worldwide.
As always in competition control, what really counts is the ability to sort out good mergers from bad and give the green light to the deals that raise no competition concerns and may have a positive effect on growth.
To complete this quick review of competition control in the EU, I will now turn to State aid. The main difference with the antitrust and merger domains we have just seen is that these have to do with the behaviour of private businesses, whereas State aid involves governments.
Subsidies and other forms of public support, including through taxation, are often important to fix market failures, foster growth and strengthen the internal market. However, they can also give advantages to certain companies to the detriment of others and the Treaty makes the European Commission responsible to make sure that this does not occur.
A good example of this is the work we have carried out since 2008 to control the massive amounts of public support granted to Europe’s banks. Since the introduction of the special State aid regime for banks in distress, the Commission has analysed the restructuring or liquidation of around one quarter of Europe’s banking sector in terms of assets.
In all these cases – almost 70 to date – we have made sure that taxpayers’ money would be used according to the same rules in all Member States and in pursuit of the same set of common objectives.
Ladies and Gentlemen:
I would like to close my presentation today with an overall assessment of the state of competition in banking and financial services. My experience as European Commissioner for competition suggests that, in spite of the efforts to better supervise and regulate these industries, there are still individuals and organisations that find it hard to kick bad habits.
As many commentators say, the financial world needs a profound culture change. This is all very well, but what does it mean exactly? In my opinion, it mainly means that every player in this sector should recognise that they too have a corporate social responsibility.
This is perhaps the goal that brings together the many efforts taken by public authorities around the world to discipline the sector and give it more stringent rules. Taken together, these measures should put enough pressure on companies to persuade them to put the common interest on top of their corporate interests or even of the interests of individual managers and traders.
As far as EU competition policy is concerned, I can assure you that we will continue to do our part. I hope that the decisions I’ve talked about today and the rest of our work in the industry make it sufficiently clear that we will remain alert to keep financial markets open, competitive, and transparent. We’ve all seen what can happen when things go wrong in the financial sector. Financial markets will remain a top enforcement priority for us.
I have no doubt that competition policy can greatly help to re-build the trust of the people in the financial sector and – perhaps more urgently – to re-open normal capital flows to the real economy.