The role of Competition Policy
Speech of Dr. Ansgar Held, Competition Directorate General of the European Commission, at the conference on "Status and Prospects of Croatian Competition Law" of the Croatian Bar Association on 23 September 2008 in Zagreb
1. For a representative of a competition agency it is always a specific challenge to talk to an audience of lawyers. They are the experts that keep a close eye on our actions and statements while representing. Therefore I gladly accepted the invitation to share with you the Commission’s view of the role of Competition policy.
2. Competition policy is one of the Union's key policies. It has maintained this central role since the entry into force of the EEC-Treaty in 1957.Competition became a key policy area in the EU because the founding Member States wanted to ensure equal competitive terms between Member States and their industries in the common market. When the European Economic Community, the predecessor of the EU, abolished all customs duties and similar barriers to trade between the Member States they wanted to avoid that fair trade in the common market is distorted by anti-competitive practice.
When now the EU is in the process of growing economic integration with Croatia, similar consideration leads the EU to expect from Croatia a comparable competition environment for companies doing business in and from Croatia.
It goes without saying that this consideration is even more valid when we talk about accession. On the time of accession the Croatian economy has to be accustomed to deal and act in an environment where economic decisions are driven by the market and competition – and companies must have also learned to accept that they are bound by the competition rules.
This learning process cannot start early enough.The Croatian competition authority started its work already in 1997. This means already before the Stabilisation and Association Agreement (SAA) with the EU obliged Croatia to introduce competition rules and administration in line with the standards of the EU.
This fact shows that the SAA cannot have been the only justification for your country to establish a competition policy.
3. There is in fact a predominant role competition as such plays for our economy. We in the European Union believe that competition is an excellent thing for our wealth. The reason is that competition policy ensures competitiveness and economic growth.
The European Union’s system of economy is based on the principle of an open market economy with free competition. This choice is inspired by the conviction that a competitive and open internal market provides the best guarantee for European companies to increase their efficiency and to innovate and to remain competitive.
This significance of competition for the success of an economy applies to Croatia in the same way as to the EU.
Competition is not an end in itself. It is a vital market process which rewards firms offering lower prices, better quality, new products, and greater choice. Competition puts pressure on firms to innovate and to reorganise their business activities, to continuously improve their cost structure, productivity and products. At the same time they have to keep prices attractively low. Competitive markets ensure best that the desired range and quantity of goods and services are produced at the lowest possible cost to society.
In short, industry is driven to be excellent, which means competitive. This is also important in view of the debate how our western economy may survive in times of globalisation.
Lack of competition reduces the innovation and research efforts. Dominant firms, or firms which have divided up the market, may be less inclined to pursue new products and services.
4. The results of competition are clearly for the benefit of consumers. As already indicated, competition is forcingcompanies to be attractive in terms of quality and price. This ensures that firms cannot ask for any price. This effect curbs inflation. I just came across an example of the region here. A market survey of the central bank of Montenegro indicated that prices of vegetables are 9% higher in Montenegro than in Croatia and even 60% higher than in Serbia, although the average salary is of course much higher in your country. The central bank blamed a lack of competition as reason for this difference.
5. What role are competition law and policy playing in this context? Sound competition policy supports competitiveness. A market economy must not be confused with a policy of laisser faire, of anything goes, of not setting limits. Also a so called free market needs strict rules of the game. Those who do not play by the rules are hit by the full force of law. Otherwise the market would not function properly.
Competition law and policy have to promote and protect competition. They are the means to ensure that the market process just described is really taking place. The three main areas of European competition policy are Antitrust, merger control and State aid control.
- Antitrust addresses the market behaviour of companies;
- Merger Control addresses planned structural changes in the market;
- State aid control addresses State measures with impact on the market position of companies.
Let me just briefly touch upon a few aspects. The EC Treaty prohibits in Article 81 cartels and other similar restrictive agreements between undertakings. Such agreements are among the most serious market distortions. They usually try to keep prices high and choice and quality low, to the detriment of the citizens. The fight against cartels should therefore be a priority for any competition authority. It would effectively contribute to price discipline.Examples: cement, vitamins, lifts and elevators, cars, beer, air transport, Nintendo (video games).Cartel fighting has immediate and positive effects: cuts in prices and a wider choice of products or services. This helps to make the work of competition authorities popular.
Successful cartel fighting is based on some indispensable elements. One is independence of the regulator from external influence. Another is an effective system of sanctions which convince companies that they better oblige. Deterrent fines are an effective tool. But also negative publicity can be deterrent: firms do not like to get caught when cheating or squeezing customers. This would damage their reputation.
6. I would like to make now a view remarks on State aid control. Also the State may pose serious barriers to competition by its financial intervention. The EC Treaty prohibits the granting of State aid by Member States to companies which might distort competition in the Common Market. This field of competition policy is distinct from classical antitrust to the extent that the Commission assesses the behaviour of EU governments, not of companies.
Why controlling state aid? Many will say that it is good if a government helps its companies. Isn’t it up to national governments to decide how they want to spend the money of taxpayers? This view is, if taken too broadly, short sighted.
Of course: each government should help its industry! There are many efficient and successful ways: cut down on bureaucracy; keep taxes low, but collect them effectively; provide good infrastructure and a good education system; provide legal protection and certainty. Those are in fact the decisive criteria for attracting foreign direct investment.
But if it comes to the selective distribution of money, the EC Treaty takes a very careful approach to the admissibility of State aid.There is an obvious reason: A State aid discipline is there to maintain a level playing field among EU companies in the different MS, to avoid discrimination among them and to avoid a subsidy race between Member States.The same applies of course in relation to those countries to which the EU has widely opened up its internal market.
Furthermore,selective subsidies usually make no sense in economic terms: taking away competitive pressure from companies makes them in the medium term less competitive. And any money given to one sector needs to be taken away from other companies. Is this fair?
Is all State aid forbidden? Of course not! There are indeed areas where the EC Treaty recognises a need for government intervention, areas, where market forces alone do not lead to results which are desirable in the public interest. Therefore the rules allow for great flexibility for aid measures that are designed to address the objectives of a general public interest. Member States and Croatia have ample possibilities under the state aid rules to finance small and medium sized enterprises, researchdevelopment, training, innovation, environmental protection, and venture capital.
Our main concern relates to cases where State aid is granted to bail out failing firms, or where the production is subsidised on a continuous basis. In those cases State aid seriously disrupts competition.
7. What do we expect from Candidate countries? From an acceding country we do expect that from day one of membership in the EU it can be an active member of the ECN. This needs preparation.
The Stabilisation and Association Agreement already sets a clear framework: The parties to that agreement are obliged to introduce competition policy.Later, in the run up for accession, a future MS is expected to have effectively in place the body of community law, what we call in Brussels acquis communautaire. To ensure this, the EU has, at the occasion of the two last rounds of accession, defined three benchmarks for the closing of negotiations on the competition chapter:
- Firstly, the country is expected to have adopted the so called acquis, that means having in place rules which establish a competition regime that equals the European one;
- In addition it should also have established the necessary administrative capacity to apply these rules;
- Finally, the Commission would require a credible enforcement record. This means a proof that the rules are applied effectively, that there is a real review of the governments subsidy spending, and prosecution of distorting business conduct.
During the past ten years, Croatia has made substantial progress in that direction. This is also recognised in the annual progress reports of the Commission.
Why is the EU so strict with its conditions? Wouldn’t it be sufficient to apply the rules from day one of Membership only?
Firstly, it would not be sufficient for the reason just mentioned: a level playing field for our business should be established as early as possible. We want to ensure that there is a fair comparable set of rules for our companies trading with your companies.
But more importantly: accession means that from day one the economy of the new Member State is submitted to the full application of EU competition rules – and that can sometimes be harsh. It is therefore essential, that the economy is already accustomed to a competition environment.
8. I have no doubts that the Croatian Competition Authority is up to this task. The Croatian Competition Authority cannot achieve these objectives alone. It needs to be embedded in an environment that supports competition policy.
It needs the support of the government.It needs the support of the public opinion. Last but not least it needs experts. That requires that the academic institutions, notably in the area of law and economics, teach Croatian and European competition law.
But competition policy needs in particular lawyers. Lawyers need to advise companies - not so much in setting up and hiding cartels but in helping them to avoid cartels. Once a cartel is discovered, or a merger needs to be filed, lawyers are needed to represent the companies.
Competition law offers a wide range and scope for legal advice and representation. In Brussels a large international community of law firms is living quite well on the activities of the European Commission. I am sure also in Zagreb there will be increasing need for your expertise in the matter.