There are many instances of policy conflicts in economics. In moving to a single market the European Union has had to formulate all policies with the possibility of incoherence in mind. Martina Lawless identifies the divergence of the objectives of industrial and competition policy within the EU and resolves that there can be no further extension of the its power until this obstacle has been overcome.
"All public authorities, including the European Commission must be, and increasingly are, concerned by the problem of cross-policy coherence, be it at the micro or macroeconomic level. Contradictions between policy can spill over and cause inefficiencies to each instrument, undermining their respective credibility and creating a climate of insecurity."
Alexis Jacquemin
Introduction:
Policy coherence across public sector departments is an important determinant of their efficiency and ability to reach overall policy goals. Unfortunately, it is frequently difficult to prevent overlap, and even conflict, between departments and this is just as true of the EU as it is of national governments. A case in point is the European Union's simultaneous aims of ensuring full and free competition within the Member States, while also trying to make its mark on the international scene by breeding "Euro-champions", companies large enough to take on global competitors. Both very laudable ambitions it may be argued, but ones that can scarcely be described as complementary. This essay will first of all look at competition policy and industrial policy separately; the economic reasoning behind them and how they operate within the EU. The two will then be brought together in order to weigh up the extent of the overlap or conflict between them and how this may be addressed.
On Competition Policy in General:
Ever since the days of Adam Smith, the pursuit of perfect competition has been the central tenet of economics. At its most basic, the aim of competition policy is to bring this ideal a little closer to reality by removing distortions from the market in order to ensure efficient allocation of resources. According to traditional theory perfect competition will be characterised by large numbers of firms competing for customers, which will put pressure on prices to remain at or close to the marginal cost level. At this point, consumer surplus (or benefit) is maximised and all resources are being efficiently utilised. However, as is all too common in economics, the model and the reality diverge considerably. There are numerous reasons why markets can fail to demonstrate competitive tendencies, ranging from a simple lack of information to orchestrated collusion among firms. Explaining the existence and effect of such barriers to competition is beyond the scope of this discussion, and the emphasis is therefore turned to the operation of competition policy within the EU and how it attempts to deal with these distortions.
On EU Competition Policy in Particular:
The philosophy underlying EU competition policy is based broadly on the laissez-faire approach of classical economics, whereby equilibrium is expected to be brought about by the free interaction between supply and demand, once the legal framework laid out in the Rome Treaty has prevented distortions from undermining the efficiency of this system. EU competition policy aims at preventing excessive market power and other distortions applying to intra-EU trade. This means, in effect, that no attempts will be made to interfere with national competition policies as long as they relate only to domestic competition and do not have "an appreciable impact on actual or potential" trade between EU Member States.
The Rome Treaty devotes ten articles (85-94) to laying down the basic principles of competition policy in the EU. The first two of these articles (85 and 86) are known as the Cartel Rule and the Monopoly Rule respectively.
Article 85 deals with aspects of collusive behaviour such as price-fixing, joint-purchasing agreements and market sharing which are judged to be "incompatible with the common market…[as] they affect trade between Member States". This follows on from the theory that if collusion is perfect, the effect on consumers is no different from a monopoly. However, this article also acknowledges real world complications in applying an anti-collusion rule, and allows for exceptions in certain cases such as joint R&D agreements. It is hoped that in these circumstances future consumer benefits from innovation will outweigh the welfare costs of allowing firms to work together in the short-term. All such agreements must be brought to the Commission's attention to ensure that they do not become a base for the setting up of cartels.
Article 86 deals with controls on monopoly and abuse of a dominant position. The inclusion of this provision comes from the general proposition that firms in a position to influence the market will push prices above MC and reduce the levels of consumer welfare and efficiency in the economy. The implication of this article is that it is concerned with the firm's behaviour and not the actual market structure. However, in practice "dominance and abuse are almost indistinguishable. This inevitably leads to the position that a certain conduct, permissible for smaller firms, may be held to be abusive for a dominant firm". This clause therefore places the onus on the dominant firm to prove that it is not being anti-competitive.
One gap in this original article was the absence of controls on mergers that might result in the emergence of a dominant position. This was rectified when the Commission's Merger Regulation was adopted and came into force in 1990. This covers all mergers that have a "community dimension" in terms of turnover and potential impact. Although relatively few mergers have been refused outright, several cases have occurred where the Commission has insisted upon amendments to the deal before approval was given. One instance of this was the case of the world wide food company Nestle buying out Perrier, a leading French drinks manufacturer. Permission for the take-over was granted only on condition that a number of Perrier's brands were sold off to a third competitor and that Nestle would be banned from attempting to buy back any of these brands for at least ten years.
Articles 90 and 92 are the other important provisions on competition in the EU Treaties and they are also the ones in which potential conflict between competition and industrial policies first becomes evident. These are the Articles dealing with state ownership and aids to industry. In principle, state aids and subsidies are prohibited by the Treaty, but the number of derogations allowed meant that a total of ECU 89 billion was spent on state aids between 1988 and 1990. Before discussing this issue of conflict further, I will turn to a brief introduction to EU industrial policy.
Industrial Policy:
According to Jacobson and Andreosso-O'Callaghan, "industrial policy can refer to all activities of public authorities that affect…the performance of the manufacturing and service sectors". Industrial policy refers to active state intervention in the market to increase the productivity of the whole economy and of particular industries within it. Unlike competition policy which aims to remove restrictions on market forces, industrial policy seeks to overcome the effects of these forces and to channel them into working for particular national or industry interests.
Jovanovic identifies "respectable" economic arguments in favour of using industrial policy and includes in this group the overcoming of market failures (particularly in the cases of externalities and public goods) and the development of infant industries. He also refers to "false" or unfounded arguments sometimes used in reference to industrial policy. In this he includes employment objectives (on the grounds that this distorts the labour market and lowers the supply of labour available to growing industries) and protection from imports (as this contravenes the comparative advantage model of gains from trade).
Industrial policy is not explicitly dealt with in the Treaties underpinning the EU, and it has been observed that this area of policy is considerably weaker and less developed than competition or trade policies. This is due largely to the limited size of the Union's budget, which makes large-scale intervention difficult. Direct EU subsidies tend to go mainly to R&D improvement, through various programmes designed to increase the level of technological collaboration and co-ordination across Member States. An explicit commitment to encouraging R&D became one of the foundations of the Single European Act (SEA) in order to narrow the perceived technology gap between EU countries and firms in the US and Japan. Industrial policy in the EU also tends to favour certain sectors above others, with specific policies for areas such as textiles and airlines.
Comparing Competition and Industrial Policies:
The 1993 White Paper on "Growth, Competitiveness and Employment" argued that the pursuit of national "champions" at the expense of competitive, Europe-wide business should be avoided at all costs. This identifies the conflicting aims of the freeing up of competition and the desire to "pick winners". Jovanovic describes current EU policy as:
"a mixture of two irreconcilable impulses. On the on hand, there is an argument for a concentration of business, which rationalises production and which benefits from economies of scale. On the other hand there is a case for anti-trust policy which prevents monopolisation and, through increased competition, increases welfare."
The problem facing the Commission is how best to balance these two policy areas so as to maximise economic welfare inside the Union without losing out to foreign multinationals on the global market. With the introduction of the single currency, the EU is more desirous than ever to be seen as a major player on the world scene, and sees industrial policy as a way towards this.
Andreosso-O'Callaghan and Jacobson put forward the argument that a more active and positive industrial policy "should not be confused with systematic government intervention and with protectionism". Instead such a policy could focus on building up a favourable business climate and encourage Euro-champions through public aid, fiscal exemptions and public procurements. Unfortunately however, these are the very approaches which competition policy has been trying to bar since the establishment of the Union, as they can be seen to distort the functioning of the market in favour of a select few firms.
Conclusion:
As has been demonstrated in this brief analysis, the objectives and methods of competition policy and industrial policy come into conflict more than once within the EU. This lack of policy coherence has not caused major difficulties thus far, as competition policy has developed more quickly and been given wider scope than industrial policy. However, it will not be possible for both to continue to develop along diverging paths without severe problems arising in the future.
The problem of introducing and maintaining clarity and coherence within and between policy areas is an important issue currently facing the European Union. This is particularly true of the conflict between competition and industrial policies, and it is a question that needs to be addressed before any further extension of Union power can satisfactorily take place.
Bibliography:
Andreosso-O'Callaghan, B. and D. Jacobson (1996) Industrial Economics and Organisation. McGraw-Hill: London.
Barnes, I. and P.M. Barnes (1995) The Enlarged European Union. Longman: London.
El-Agraa, A.M. (1998) The European Union – History, Institutions, Economics and Politics. Prentice Hall: London.
Hansen, J.D. and J.U. Neilsen (1997) An Economic Analysis of the EU. McGraw-Hill: London.
Jovanovic, M.N. (1997) European Economic Integration – Limits and Prospects. Routledge: London.
Pelkmans, J. (1997) European Integration – Methods and Economic Analysis. Longman: London.