SPEECH/07/301 Neelie Kroes European Commissioner for Competition Policy European competition policy facing a renaissance of protectionism - which strategy for the future? St Gallen International Competition Law Forum St Gallen, 11 th May 2007
Ladies and Gentlemen, Thank you for inviting me to speak here at St Gallen today. 1. The benefits of 50 years of integration 50 years after the signing of the Treaty of Rome, the EU is the world's largest economy, trading power and supplier of capital. We certainly owe a lot to our unique Single Market! We have a dynamic economy. And, like others, it is undergoing rapid change to respond to the globalised world in which we all live and work. 50 years of integration has confirmed that free movement of goods, capital, people and services and free and fair competition promote prosperity. Europe s record in generating wealth and a better standard of living speaks for itself. The removal of barriers to free movement has required commitment and effort, but few now question that this has been worthwhile. Most people also agree that the expansion and integration of markets worldwide provides us with a great opportunity for economic development and prosperity. Removing global barriers to trade and competition opens up new markets for the goods and services we produce. It creates opportunities for investing capital overseas and for attracting investment into our own economies. The Single Market is a unique launch pad from which European companies can grab the opportunities created by globalisation. Studies have shown that the deregulation of markets is associated with faster productivity growth and competitiveness 1. By having to adapt to compete successfully in the EU economy, companies are trained to win in the global marketplace. If the Single Market is to continue to deliver for the next 50 years, it needs to be further reinforced. Obstacles that prevent competition on a level playing field must be removed. And a successful, competitive Single Market needs an effective competition policy to support it. All this demands constant vigilance. I will come back to how the European Commission is delivering on this later on. But I'd like to start by questioning why, despite the benefits of an outward-facing, globally competitive single market, some still prefer to look inwards and create, or maintain, barriers. There is a word for trying to avoid change in this way: protectionism. This may be tempting behaviour for politicians, but is it responsible? I don't believe so. 1 Faini, Haskel, Navaretti, Scarpa, Wey: "Contrasting Europe's decline: do product reforms help?", July 2005. 2
2. Why not look inwards? Whilst globalisation brings huge opportunities, the rapid pace of change can also leave people fearful. This is quite natural. And I am of course aware of the dilemma that policy-makers face. On the one hand, they see concentrated, local, often painful adjustment needs. On the other hand, gains from economic integration are spread widely and only materialise in the medium to long term. In other words, the losers of economic developments are always more visible, in the here and now, than all the winners. So some are tempted to create obstacles to competition in our Single Market, to shield companies or sectors, to impede cross-border mergers, to prop up lame duck industries with state aid. But building a "fortress" to protect against deeper European and global economic integration is not a viable option. In the long term it cannot be sustainable. It will only reduce economic efficiency, income and employment opportunities. It will also weaken our bargaining stance against trade barriers in other countries. The EU economy would undoubtedly pay the price of any reluctance to open up and let market forces control the allocation of resources. Equally importantly, looking inwards is not in the interest of European citizens - as workers, tax payers or consumers. It is estimated that about one fifth of the increase in living standards in the EU-15 over the past 50 years is the result of more economic integration. Today's citizens would not benefit from lower air transport and telecommunications charges if those industries had remained closed to competition, as they were for decades. According to a recent Eurobarometer survey, 67% of European citizens think it is a good thing that the Single Market increased competition in many areas. 2 Looking inwards gives a false impression of some kind of "security". But it certainly does not protect citizens from higher taxes to keep inefficient companies or industries on artificial life support. It does not protect citizens from higher prices and less choice as consumers. Even the short-term benefits from protecting industry can be an illusion. Without competitive pressure companies may have an incentive to reduce output and cut jobs. And that is even before we look at the wider effects of a downward spiral of decreasing competitiveness. So how should policy makers respond to the reality of change as a result of globalisation? What is the responsible reaction? I'd argue that the key to all this is to look outwards before looking inwards. To see the changes, understand them, draw the necessary conclusions and implement them through the necessary reforms. Crucial in this is accompanying citizens through the process. For example by equipping workers with the skills required to respond to changes in the type of labour that is needed. Or by investing more in research, development and innovation activities or in environmental protection, to put Europe at the cutting edge of tomorrow's growth industries. But most importantly, politicians have a responsibility to make sure we get the most out of our greatest asset: the market. Markets, not politicians, are best placed to allocate resources efficiently. Markets, not politicians, are best placed to identify the companies and technologies of the future. Markets, not politicians, are what at the end of the day will generate the wealth we need to maintain our way of life, based on our shared social and environmental values. 2 Eurobarometer, Special EB254, INTERNAL MARKET - Opinions and experiences of Citizens in EU-25. December 2006. 3
3. What is the response of competition policy? So getting and keeping markets working properly is the bottom line. Keeping our Single Market working as a fair and level playing field is a constant challenge. And this brings me directly to my area of responsibility. What is competition policy doing to remove barriers and improve the functioning of the Single Market? And what is our strategy for the future? Of course not all barriers to competition in our Single Market are the result of state action. However, our focus today is on protectionism by politicians, not by CEOs. EC competition law provides us with powerful instruments against misguided interference by public authorities in the functioning of the market. Look at the merger control Regulation. Look at the state aid rules and the provisions governing exclusive and special rights. These are powerful tools, which the Commission strives to use effectively and responsibly. Let's first take a closer look at merger control. Consolidation including across borders - is a normal response to globalisation. If companies are to benefit from economies of scale or to pool research and innovation resources, they must be able to restructure themselves according to market conditions. I'm pleased to say that most significant cross-border mergers approved by the Commission go ahead without any interference from national governments. But in some recent cases direct or indirect steps have been taken by national European governments or authorities to frustrate the takeover of what they consider to be important national industrial concerns based in those Member States. Article 21 of the Merger Regulation gives the Commission the power to adopt binding decisions about the legitimacy and proportionality of state measures that adversely affect such mergers. Most recently, the Commission has had to refer Spain to the European Court of Justice for failure to respect two Commission decisions requiring the withdrawal of the illegal measures adopted in relation to German energy company E.ON's bid for the Spanish company Endesa. Our line is clear: if interference by any Member State - is not justified by a legitimate public interest, the Commission will continue to condemn such national measures. But Member States should also remember that Article 21 of the Merger Regulation is not just a coercive instrument. First and foremost, it offers the possibility of a dialogue about how best to conserve legitimate public interests in cases where these are genuinely threatened by a merger, particularly in regulated sectors of the economy such as utilities and banking, without removing the raison d être of the merger itself. And the Commission alone is in a position to act as a neutral arbiter, in order to prevent protectionist intervention by one Member State leading to tit-for-tat reprisals by others because their firms have been denied the benefits of the Single Market. Another source of distortion to the Single Market is the provision of subsidies. Whilst some State Aid may be needed to address certain market failures, all subsidies have a real cost. The less spent, the better. And what is spent should be targeted where it distorts least and delivers best results. The focus of any State Aid should increasingly be on targeting horizontal structural change, for example supporting workers to retrain following industrial restructuring, rather than trying to hold back the tide of change through operating aid. Member States who grant illegal State aid to failing undertakings, protecting them from more efficient competitors, undermine the level playing field. And I can assure you that the Commission will continue to react robustly in those instances where Member States provide illegal Aid. 4
I am committed to continuing to use our enforcement tools to facilitate the proper operation of the Single Market. In addition, competition policy also has a role to play as part of wider Commission action to ensure the continuous improvement of the Single Market framework in which firms operate. This role includes the promotion of the better regulation agenda and the completion of the liberalisation process, for example in the postal, energy and financial services sectors. Competition screening, and properly-targeted in-depth sector inquiries where needed, are useful in identifying and removing obstacles to the effective functioning of markets at both European and at national level. An excellent example of this is the energy sector inquiry, which we published in January this year. Regulatory barriers to entry and expansion can certainly act to protect companies already in the market. Divergent technical standards for payments systems and obstacles to customer mobility in retail banking identified by the Commission's sector inquiry - are good examples. Modernising regulation and removing outdated rules can really release innovation and new ways of doing things. In our 2004 and 2005 reports on competition in professional services we provided a framework for Member States to take the initiative and review existing regulation in this area, working closely with stakeholders. Lifting the burden of excessive regulation is also something we are implementing closer to home. Our ongoing review of the state aid rules is intended to deliver simpler, more user-friendly rules which are transparent and predictable. And through instruments like the draft General Block Exemption published last month, we are seeking to remove unnecessary administrative burdens on companies and local, regional and national authorities. Finally, I am well aware that if we really want to get rid of obstacles to competition, we have to look out beyond the borders of Europe. I agree with those who say that Europe needs to respond strongly to restrictions on access to foreign markets and to unfair foreign subsidies. This is where competition and trade policy interact. We must work together with our major partners to ensure that positive changes brought about by globalisation are not undermined by private anticompetitive practices or State induced distortions. For example, a greater convergence of substantive competition rules would help to ensure fair and open access for European companies to the markets of our trade partners. Free Trade Agreements negotiated by the EU should reflect these principles. And as regards unfair foreign subsidisation, let me be clear. Yes, we need a more active use of trade policy instruments, be they unilateral, bilateral or multilateral. But to relax our EU State aid rules at the same time would be disastrous. The last thing our Single Market needs is a damaging subsidy race, which pits the richer against the poorer Member States to the detriment of all. 5
4. Conclusion In conclusion, 50 years of experience proves that European businesses and consumers have a lot to gain from an efficient, competitive single market that trains our firms to compete on a global scale. Competition policy has had, and will maintain, a critical role in achieving this. We will be vigilant in tackling the remaining obstacles. Protectionist pressures can be resisted. After all, 27 Member States have signed up to pursue an "open market economy with free competition". Those who put up barriers, or who don't want to take them down, need to know that they are acting against the interest of their economy and their citizens. Our approach, combining the targeted use of our competition tools with wider work that seeks to improve the functioning of the Single Market, demonstrates an effective strategy in the context of a global economic market. The Single Market has been a great asset to us and by continuing to strengthen it we can safeguard its success for the next 50 years and beyond. 6