EU competition policy has always been an important policy tool for the European Commission. In these times of growing Euro-activity, competition policy has increased significantly in importance. It will continue to be used within European economies as we move towards a single currency and beyond.
In this essay, I will begin with a discussion of what exactly competition policy is and where it came from. I will analyse it under different headings and finally assess its importance within the European economy, now, and in the future. In terms of implications for business, I will be concerned primarily with the Irish economy, using an example of competition policy at work in Ireland.
Competition policy officially came into effect with the Treaty of Rome in 1957. At that stage there were six members of the European Community, none of whom had a formal policy of any kind. Initial policy was loosely based on US anti-trust policy of the time. The European Commission formulates policy at a supra-national level in conjunction with national policy. It has become one of the most developed and recognised areas of European policy.
Articles 85 and 86 of the Treaty specifically cover competition policy:
Other areas mentioned in the Treaty, which also come under the heading of competition policy, are:
Generally it is felt that the level of state aid in Europe is too high. Critics feel that such measures give an unfair advantage to certain firms and constitute a form of protectionism. The aim at the moment is to decrease the level of aid granted in the Union.
The European Commission formulates competition policy at a supra-national level and so is above national law. Member states also have their own authorities at the national level. The consequent policy is a result of many negotiations between the two. The European Court of Justice monitors the Commission.
Competition policy gives a set of 'well developed and effective competition rules, without which the market would not function properly and consumers cannot reap the benefits which they normally derive from the free market system'. A strong competition policy is an effective tool in the move towards an integrated European market. Cartels or restrictive agreements are prohibited, meaning the market can operate normally and remain open to outside pressures. 'Consumers get the full benefits of a healthy and competitive market. It allows a wide choice of goods and services, available at lowest possible prices.'
The Commission must be notified in advance of any agreements that may violate the Treaty. Staff representing the Commission have the right to investigate any company without any advance warning. Usually, violations that are discovered are solved by voluntary policy changes on the part of those involved. Otherwise the Commission is free to impose fines of up to 10% of annual company turnover, as well as demanding policy changes. A company may appeal to the Court of Justice if they do not agree with Commission findings.
Other policies (such as agriculture, trade and transport) feed into competition policy. As Pelkmans says, in establishing an internal market in areas such as trade and transport, competition policy can be applied to facilitate the harmonisation process, by removing barriers, for example. The more competition policy is used at this early stage, the less chance there is of it being needed to promote or restore competition at a later date. The exemptions are included to ensure that efficient market winners are not penalised.
Competition policy is becoming more important as we move towards the year 2000. Current trends show an overall increasing level of globalisation and hence competition. As Europe becomes more internally integrated, the focus must move onto the external environment. Future policy must increase competition and improve competitiveness of EU goods and services in terms of US and Japanese goods and services. 'Increasing competition puts a downward pressure on prices and costs'.
When EMU is fully implemented there will be an increase in competitive pressures. With a common currency, prices will be fully transparent within the Union. European producers will no longer be able to benefit from price distortions due to currency fluctuations. Customers will clearly be able to see any price differences. This will increase internal competition.
In 1993 the commission completed a White Paper on growth, competitiveness and employment in the EU. Its general goal was to foster an increase in competitiveness within Europe. This goal has been a dominant one throughout the 1990s, especially in smaller countries such as Ireland. 'A competitive environment is basic to an efficient allocation of resources, and stimulates investment innovation and R&D.'
Implications for European Business
Competition policy is important and useful in European businesses for many reasons. In this section, I will list some relevant uses of the policy and discuss its importance.
As already mentioned, we are moving towards an era of global competitiveness. With the US and Japan, Europe will be one of the major players in the world economy. Europe must be ready to align itself beside these two other major economies. Successful implementation of the single currency, and the completion of the single market will make Europe united and powerful. However, competition policy will play a part in helping Europe improve its global competitiveness. Europe needs a strong competition policy, implemented at a European level, and supported by national governments. This centralised policy must work on the idea of competitive rather than comparative advantage. As the White Paper states, competitive advantage is based much more on corporate strategies and public policy, as opposed to endowments of natural resources. The onus is thus on both European and National institutions, as well as the European companies themselves to formulate and implement a strong competitive element for advancement into a level of international competition.
At the moment Europe is competing poorly with the US and Japan in terms of the price and quality of its goods and services. Labour productivity is relatively low and European companies are not able to tap into the new high growth areas of the world market. Typically, state welfare payments in some European countries are very high. This increases the cost of labour, making it expensive compared to the USA and Japan. Generally there is not enough investment at the European level to foster a competitive spirit.
The Competitiveness Advisory Group (CAG) was appointed by the President of the Commission to look into competition vis-à-vis the rest of the world. According to a report by the National Economic and Social Forum (NESC) on EU integration and enlargement, the CAG has seen a need for policy action at both National and European level. The CAG advised a co-ordination of member states, the Union, and other social and economic partners. This follows on from the themes and suggestions in the White Paper.
In December 1996, a Dublin meeting of the European Council decided that there should be a regular check of the Union's competitiveness on a world-wide level. This meeting also decided that competition policy has an increasingly important role when considered alongside trade, industrial, and technical policy. It was felt that competition policy could be enhanced by 'developing benchmarking as a tool for regular monitoring and evaluation of EU competition against the strongest world economies.'
As the single market programme continues, competition policy must be built up in both an internal and external dimension. Factor mobility needs to increase, again both internally and externally. Generally Europe must create a strong and competitive industrial infrastructure.
In his paper for the ESRI entitled 'Ireland and Europe - Challenges for a new century'; Rory O'Donnell mentions some areas that are affecting competition within the European business environment. These include:
Small European countries, like Ireland, have a very low level of innovation and technological development. They have a high dependence on indigenous economic activity. Although not every member state has these problems, they are still substantial in weakening the internal level of competition within the Union.
O'Donnell suggests that improvements can be made. These include reforming the tax system, switching from grants to equity for indigenous industries and increasing the focus on growth areas within the economy.
An Eastward enlargement of the Union, implementation of a single currency, completion of the single market, economic forces, cultural forces and the question of European identity - these are all future pressures for the Union, even before globalisation is considered. Building a competitive environment for the EU, despite these pressures will be a problem. In the long run, it is hoped that 'the completion of the internal market is sufficient to re-establish the competitiveness of Europe, and to unleash forces of innovation and growth.'
Lately the Irish economy has seen an increase in merger and acquisition activity. It was recently announced that of the six largest accountancy firms in the country, four hope to merge in the coming months to form two separate identities. KPMG/Ernst and Young, and Price Waterhouse/Coopers and Lybrand are the two proposed mergers.
If the mergers go ahead they will create two very powerful and very large identities. This will cause a large divide in the accountancy market, which is more commonly made up of many small consultancy firms. The mergers may lead to a decrease in competition within the market, which could cause fees to increase. There is a further danger that customers may be drawn to the large, well known firms, that can offer them a wider range of services for the same money.
Within the accountancy profession there are ethical guidelines that protect against the conflict of interests that mergers sometimes produce. In conjunction with this, the European Commission is currently investigating both mergers. They will not be allowed to proceed if the Commission deem them to be anti-competitive, regardless of the shareholder's opinion.
Such a development has serious implications for the businesses concerned. No matter how beneficial or profitable the mergers may be, they will not be allowed to proceed if the Commission decides they violate competition policy. For the larger companies involved in the mergers, they lose the chance to increase their profits, their power, their share of the market, their market capitalisation, and they may even experience a decrease in shareholder wealth as a result of not being able to merge. On the other hand the smaller companies are protected. They do not have to worry about being completely overshadowed by a company that would be too large for them to compete with. Two very large companies will not dominate the market, and prices will not rise as there will be no reduction in competition.
It could be argued that in this case the policy is being used as a form of protectionism. However, even if the merger is prevented from going ahead the market will still be comprised of large and small companies. The smaller companies are not being given any special treatment; they will have to survive in the market in just the same way as before. However, they are spared from competing with a monopoly type power which would distort competition, and push the smaller firms out of the market.
As Competition Commissioner Karel Van Miert said in a speech in 1997, competition policy is 'applied to ensure that markets are kept open and that protectionist measures are never applied by companies.' Van Miert continues, stating that any new form of policy which emerges must 'emphasise economic analysis whilst furnishing business with a sufficient level of legal certainty'.
Competition policy in the past has been relatively successful. However, the European economy faces new challenges as it moves towards the 21st century. The nature of competition policy needs to be adapted to deal with these new demands and pressures, so that the emerging Europe can be powerful both on an internal and an external level. This will help in achieving increased economic prosperity, to the benefit of all the citizens of the Community.
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