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European Commissioner for Competition Policy
Strengthening the European Economy through Competition Policy
Institute for International Monetary Affairs
TOKYO 29 October 1999
It is a great pleasure for me to be here at the Institute for International Monetary Affairs in Tokyo, to appear before a very distinguished audience, with the hard task of explaining the role of the EU competition policy in a changing economic environment. The competition rules have been since the very beginning a cornerstone of European integration and of the Treaty of Rome. There would have been little point in establishing what at that time was called the European Common Market if competition was to be limited by cartels or restrictive agreements. The same is true for State Aids where incompatible state aids create unacceptable distortions in allocation of resources. The EU competition policy ensured successfully all over the years a strong common approach at the European level, and the strict enforcement of rules. When the Single Market was put in place its crucial role appeared even more clearly, to the point that it can now be considered a pillar of the so called EU "Economic Constitution" based on economic freedom and economic stability.
I would like to recall the key components of this « Constitution » (i.e., the principles laid down by the Maastricht Treaty on which the European model is based):
Bearing this in mind, I have to say that in my previous term of office as Commissioner for the Single market I had to act in much the same perspective. Indeed, one of the basic principles on which the European Union is founded is the freedom of movement of goods, services, capital and people and many of the activities of the European Commission are directed at removing the obstacles to a free and fully integrated single market.
Now, responsible for competition, I see great continuity in my action, targeting it more to the specific purpose of competition policy to keep this market as competitive as possible.
Strengthening the European economy
Today, we notice that a great transformation is on its way in the European economy. There are at least three factors that are responsible for these changes.
The first is the globalisation process of the world economy. In recent years, the pace of globalisation has significantly accelerated. This is due to technological factors, but is also explained by the evolution of the political framework in the last decade. Gradually, most of the world countries and I refer in particular to those of the former Soviet bloc have come to accept the principles of a free market economy and of freedom of trade.
The second factor is the liberalisation process of our economies. The area of market economy is not only expanding geographically, but also within the boundaries of our countries. Technological progress is constantly reducing the scope of natural monopolies. Wrong incentives and mis-management of public enterprises have made the case for privatisation. Accordingly, many sectors and industries previously reserved for public ownership and management are being opened to private enterprise.
The third factor, perhaps the most powerful one, is the establishment of the European Monetary Union, which represents the fulfilment of the long-standing goal of creating a truly single market in Europe.
All these are welcome developments. They push forward the integration and modernisation of the EU economy and increase the level of competition in our markets. However, they also pose some serious challenges, on one hand to further improve the enforcement of competition rules and, on the other, to renew the EU competition instruments so as to steer and strengthen the impact into the markets.
The processes of globalisation, liberalisation and monetary integration set the conditions for considerably improving the strength and competitiveness of the European economy. Wider and more efficient markets will be available to firms on both the demand and the supply side.
Firms will have a wider choice of inputs over which to minimise their costs, be it raw materials or financial services. On the supply side, economic integration enlarges the market (or opens new ones) for firms' output. There will be new opportunities to exploit economies of scale. This will especially be true for industries where sales networks have previously been mainly confined to national boundaries and where companies see prospects for obtaining important cost savings by enlarging these to a European scale. In expanding markets defensive strategies are less useful than more aggressive behaviour aimed at gaining market shares. Firms will be encouraged to innovate more their processes, products and commercial practices.
I would like to add a few more words on these aspects, with particular reference to the role of competition policy faced with these changes.
The European Monetary Union
As of 1 January 1999, a single currency was introduced in eleven Member States, creating a large area of economic stability, which is vital for investment and growth. First, because the consolidation of public finances already achieved (and still under way) releases savings that can more usefully be channelled into investment and consumption instead of funding government borrowing. Second, because it improves the outlook for investors and confidence for firms. Third, because it will encourage further structural reforms.
The most immediate effect is to remove the obstacles to trade represented by the exchange-rate risk and transaction costs associated with converting one currency into another. As a result, trade flows between the participating Member States are likely to increase, so deepening the single market and the necessity of further integration within the Union. In this context, it is more vital than ever to improve the market's flexibility and efficiency so as to overcome structural weaknesses in the supply side. Competition policy is a fundamental leverage in this respect, in view of exploiting to the full the benefits of the Economic and Monetary Union.
To mention one sector as an example, the introduction of the Euro will greatly enhance competition in financial services. The single currency, in combination with the introduction of new technologies, will enable banks to compete for retail deposit business in countries where they have no physical presence. On the asset side, within the Euro-zone, lending operations in any Member State can be financed from deposits obtained in any other Member State. Competition in homogenised segments of the loan market, where direct customer contact is less important (consumer credit, standard mortgage loans) should therefore intensify. All in all, stronger competition in the financial sector should lead to easier access to and lower cost of funding. This should provide further incentives to firms to increase investment activity or undertake restructuring operations.
Thus, most important of all, the introduction of the Euro brings about an enormous "transparency shock" which concerns all sectors without distinction. Comparison of prices, costs, taxes, balance sheets, etc. will be immediate. Consumers and firms will decide where to source their purchases, sell their products and make their investments, being able to immediately compare the conditions that are available anywhere in the Euro zone. In general, prices will convey much clearer signals to economic agents and resource allocation will be considerably improved in most sectors.
The Liberalisation process in Europe
The second circumstance I would like to draw your attention to is the liberalisation process. Liberalisation in the European Union has mainly been an essential component of the establishment of the single market. It is obvious that a market based on competition and the free circulation of goods, services, people and capital is at odds with systems based on national monopolies. Progress in liberalisation implies that entire sectors where private companies were previously excluded (public monopolies in the utilities) are now open to private capitals and initiative. Some of these sectors are characterised by fast growth due to technological change.
As of 1 January 1998 the telecommunications sector has been open to full competition in almost all Member States. This brings another sector, traditionally characterised by State intervention and very often State ownership, into the area of market economy, after the liberalisation of air transport. In other sectors such as electricity, gas, postal services and railways, the European Commission and the other institutions are continuing to work on a programme of liberalisation that is already producing positive results for users.
This is not to say that the European Commission dismisses the concept of public service. The Commission has made clear that only services of general economic interest are aimed at by the liberalisation and even then it has always striven to reach a balance between public service and single market. Such a balance between services of economic interest, market integration and competition is deeply rooted in the Treaty itself. The Treaty is based on the assumption that in general free competition is the best way to satisfy consumer needs. However, the Treaty recognises that this mechanism also has limits.
It is my opinion that in cases where the market mechanism would fail to provide a satisfactory solution from the social point of view, new regulation could be required. I think for instance of safety in air travel or in the provision of universal service in telecommunications, as the most evident examples.
Another problematic issue raised by the liberalisation process is the risk that public monopolies may turn into private monopolies. In sectors such as telecommunications or air traffic, incumbents enjoy substantial advantages with respect to new entrants. It is the role of the Commission to ensure that previous monopolists do not abuse their traditional position or strengthen it by way of anti-competitive mergers
The globalisation of the world economy
The phenomenon of globalisation has been a constant economic theme for many years, albeit under different guises. What has emerged in the recent past has, in fact, been a combination of internationalisation in a number of industrial and service sectors, globalisation of capital and financial flows and acceleration in the development of key technological innovations. Although some have questioned the reality of globalisation, there is ample evidence for its existence. For example, whilst world GDP has grown by an average of 1.5% per year since 1990, trade has increased annually by 6%. Figures on world foreign direct investments tell a similar story FDIs are now about four times higher than they were in 1980.
Globalisation cannot be stopped nor should it. Trade liberalisation has the advantage of favouring the correct allocation of resources and of providing the necessary stimulus towards economic and technological progress. There is strong evidence that countries that have opened their markets have enjoyed greater growth than protected areas.
The process, however, cannot be left to itself without any governance. Strong competitive pressures with a total absence of control have several risks, some of which are particularly relevant to competition policy.
I refer not only to those competitive advantages that can be obtained by neglecting obligations that are imposed in the general interest (e.g. minimum social, health, safety, environmental or prudential standards) but also in particular to the fact that multinational firms could take advantage of the difficulties the authorities can experience in detecting and punishing unlawful practices in a global environment. Faced with projects of strategic alliances or mergers, which go beyond our political and legal jurisdiction, the question is how to ensure an effective control and enforcement.
Finally, companies may foreclose access to the domestic market for foreign competitors. This would represent a clear obstacle to trade and, when tolerated by the authorities, a disguised form of protectionism. In this case, the preservation of a truly competitive environment helps to prevent the obstacles to trade, which could stem from the abusive behaviour of domestic operators versus foreign competitors.
The role of competition policy
Companies do not necessarily react to a more competitive environment by improving their efficiency or the quality of their products. They could also attempt to reduce the competitive pressure either by engaging in tacit collusion or by forming cartels. Alternatively, they could seek State aid in order to gain an advantage over competitors.
Mergers, collusion and State aids are three distinct but equally relevant issues for competition policy. Let me briefly characterise them in turn.
Mergers and restructuring operations
A higher degree of competition will put pressure on less performing companies and on sectors already suffering from structural problems. Also, wider markets will offer new opportunities for exploiting economies of scale. Within this framework, we are likely to witness many restructuring operations and an increase in the number of cross-border mergers and acquisitions. Actually, a wave of mergers is expected in the next few years similar to the one observed during the establishment of the single market. We already had indication of this in 1997 and 1998: in the last two years the number of notifications lodged within the services of the Commission increased by 31% and 36%, respectively. In 1998, the Commission had to adopt an unprecedented number of decisions: 238.
In the field of mergers it is the duty of competition authorities to prevent that dominant positions are being created or reinforced, while still allowing firms to innovate and react quickly to the changing market place. Also, we have to impede the establishment of tight oligopolies, in which firms, under certain market conditions (significant barriers to entry, presence of the same firms in neighbouring markets, weak technological progress, transparent prices, etc.), might consider it profitable to abstain from vigorous competitive behaviour. This is often the case in certain manufacturing sectors. It is not by chance that many of the mergers that have raised competition concerns belonged to the manufacturing sector.
Cartels and agreements
As I already mentioned, there is a risk that companies could react to increased competition by making attempts to reduce its level. Incumbent firms might enter into vertical or horizontal agreements with the object of foreclosing rivals' markets. Companies in oligopolistic industries could be tempted to engage in tacit collusion or to form cartels. This conduct will be made easier by the introduction of the Euro as the increased price transparency will facilitate the monitoring of competitors' prices. It will also be more difficult to deviate from agreed prices and hide this fact behind exchange rate fluctuations.
The formation of cartels is indeed one of the most damaging practices for the consumer. It is the responsibility of the Commission to challenge these practices. During 1998, the Commission has shown its determination in pursuing prohibited agreements between firms. Four cases were the subject of a final decision in the year, while new procedures were set into course. The total amount of fines imposed in those four cases is 178.83 million Euros or around 190 million US $. This is a clear indication of the Commission's determination in fighting vigorously these anti-competitive practices.
Another reason for concern is that firms having difficulties in coping with a more competitive environment may seek State aid.
As a general rule, the Commission takes the view that State aid contributes very little to lasting economic welfare. On the contrary, enforcement experience has shown that it leads to unfair competition between firms, to market distortions and to an inefficient allocation of resources. It also puts at risk the achievements of the Single Market when its effect is to increase barriers to trade. The only benefits of State aid are, under precise conditions and strict monitoring, to remedy market imperfections. For example, small firms are an important and dynamic part of the European economy, as well as a key source of job creation. Yet their access to capital markets is limited. We therefore permit various aid programmes to SMEs, in order to "level the playing field" and help them compete. Similarly regional aid and support for R&D and environmental programmes can, in certain circumstances, be useful in remedying market imbalances and achieving other policy objectives, such as economic cohesion.
The introduction of the single currency and the liberalisation process, together with the world-wide trend of globalisation, offer a great opportunity for the modernisation and strengthening of the European economy.
It is clear that many of the benefits that can be drawn from these developments derive specifically from the expected increase in competition in ever more liberalised and integrated markets. That is why I believe that competition authorities bear considerable responsibility for the successful adaptation to these new realities.
If governments or firms were allowed to alter or reduce the operation of the competitive mechanism, this would not only work to the detriment of consumers and competitors, but would eventually weaken those very firms and sectors which have initially profited from such conduct.
Sometimes it is said that competition is not to the benefit of all: it can favour larger firms, but hurt smaller businesses. I do not share this view. Greater competition in the financial sector or in the utilities already benefit smaller customers, which, alike the final consumer, suffer the most from suppliers' market power and restrictive practices. Enhanced competition in one sector will have positive spill-over effects in other sectors. Competition forces will call upon governments to improve the quality of public services and the efficiency of the public administration. All this is in the general interest.
Naturally, competition will reward greater efficiency. It will put pressure on less performing companies and on sectors already suffering from structural problems. It may require a restructuring of certain firms and industries, also to be achieved via mergers and acquisitions. Therefore, exposing companies to the rigours of competition is the best way to improve their performance. Competition does more than benefit the consumer. It leaves companies fitter, leaner and more prepared to face competition domestically and abroad.