Outline the evolution of E.U. competition policy. Is current policy likely to be successful in meeting the original objectives of E.U. policy?

University Degree Business and Administrative studies

ES3931 – Competition & Industrial Policy in E.U. Ayo Olatunji

Competition Policy is the branch of law concerned with the regulation of anti-competitive practices, restrictive trade practices, and abuses of a dominant position or market power1. EU competition policy dates back to 1951 with the Treaty of Paris. Since then, EU policy on competition has evolved somewhat, however not to the extent that it will be successful in meeting the early objectives of EU policy.

The 1951 Treaty of Paris, and subsequent creation of the European Coal and Steel Community (ECSC) in 1953, demonstrates the early EU belief in the static and dynamic benefits of competition. As such, the High Authority of the ECSC was given power to rule over certain anti-competitive practices that conflicted with the foundation of an integrated coal and steel market2. Soon after, the 1955 Messina Conference occurred followed by the Spaak Report – this laid the foundations for the landmark Treaty of Rome.

The 1957 Treaty of Rome was a major watershed for pan-European economics. With regards competition policy, the Treaty established the Commission as ‘the authority in all matters of competition’3 and two articles were particularly relevant to competition.

Article 85 was concerned with Anti-Competitive practices. This provision was concerned with any potential for firms to diminish, distort, restrict, or reduce trade or competition in the EU. Thus it covers price fixing, price discrimination, the pre-determination of market shares, and any controls on production, investment or technological development. Thus, it is often used against cartels. Agreements that infringe the Article are void and unenforceable.

Article 86, was the provision of the treaty that prohibits abuses of a dominant position by businesses in the EU. It would, therefore, cover unfair pricing, restrictions on supply or technical development, tying clauses, or refusal to license intellectual property rights.

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These two Articles are highly significant. Article 85 ruled the practices that it prohibits as incompatible with a Common Market, in general. It was concerned only with those practices that affect trade between Member States. However, certain block exemptions were included; in the case where an anti-competitive practice may reap benefits, it could gain an exemption. These benefits may be that they promote productive or distributive efficiency, technical progress, and provide consumers with benefits. Block exemptions are strikingly rare, because the onus has been placed firmly on the relevant firm(s) to produce evidence that the practice is beneficial. It is vital to distinguish between exemption and inclusion; exclusion is when the Article does not apply whatsoever to the particular practice. Examples of exemption include technology transfer, and motor vehicle distribution.

Article 86 was concerned with market abuse but, like Article 85, applied only so far as the practice affects trade between Member States.

By the 1960’s, Article 86, in principle, begun to apply to Mergers and Acquisitions (M&A), due in part to the merger boom at the time. However, because it didn’t refer specifically mergers, it failed to provide clear guidance on the treatment of mergers in E.U.1. Whilst perhaps giving grounds for an ex-post ruling, it failed to provide any ex-ante guidance on the legitimacy of a merger. Due to this weakness, Article 86 was used very infrequently, relative to Article 85. A landmark case in competition policy is that of the Continental Can Company, in 1971. The Company’s acquisition of a German and Dutch company was deemed to violate Article 86, according to the Commission, because it created a monopoly for metal cans. After an appeal, the Court of Justice overturned the decision of the Commission, but crucially, ruled that Articles 85 and 86 can apply to mergers in ex-post situations.

In terms of UK policy, significant milestones include the 1973 Fair Trading Act. This established the Office of Fair Trading (OFT), charged with monitoring competition, and referring any uncompetitive practices to the now defunct Monopolies & Mergers Commission. The MMC structure made it vulnerable to a large political influence. The 1976 Restrictive Trade Practices Act built on the previous Acts of 1956, and made the MMC more judicial.

The Competition Act of 1980 in the UK was much more specific about the notion of anti-competitive practices – it introduced this term as a real concept2. Significantly, it acted as a catalyst for the programme of privatisation throughout the 1980s by providing for the investigation of public enterprise monopolies.

A merger boom spread across Europe in the 1980s and was highly influential in the evolution of the EC Merger Regulation. This legislation documents procedures for measuring whether intra-EU mergers may yield a dominant position, which may have abusive effects, and importantly, could also apply to mergers between EU and non-EU firms. Judgement was delegated to DG IV, and a Merger Task Force (MTF) was established. At this time, the concern was that although most mergers were insignificant, certain mergers at specific points in time could have far reaching effects on that specific industry.

Four general criteria were established for the Commission to look at a merger. The first was notification; mergers notified to the Commission over one week after completion of the deal would not be looked at. The second criterion was size; a merger was within the realms of the regulation if it passes the following three tests. First, a combined global turnover of ecu 5bn, second an aggregate EU turnover of at least two of the firms exceeding ecu 250m, and thirdly none of the involved parties should generate 2/3 or more of their turnover within one Member State.

The third criterion is regards the impact of the merger. This involves the Commission making an arbitrary judgement of the mergers’ likely impact on particular markets in the EU, based on market share and the strategic positions of the firms involved. Finally, the fourth criterion was competence. If the merger is only going to affect a certain region of the Community, it is likely to be dealt with by domestic competition law.

The New Merger Regulation, and Articles 81 and 82, are enforced today. Over the last 50 years European competition has evolved in two ways. There has been a harmonisation of all domestic policies so as to become compatible with EU policy. For instance, the 1980 UK Competition Act was a step in that direction, and the 1998 Act further integrated British and European policy.

But EU policy has also very slowly, but surely, become closer to resembling American policy, operating on a case-by-case basis. Indeed, EC competition Commissioner Mario Monti has been in recent discussions with his US counterpart to accelerate the process.

The original objectives of EU policy were clearly set out. The main objective was to generate free trade within the Community, and to therefore remove any impediments to trade. The crucial factor is that competition policy was not an end in itself – in the 1950s, the EC were NOT concerned with competition for competition’s sake. Rather, free competition was seen as a means to an end – a hurdle needed to be overcome in order to achieve the goal of an integrated economic community with free trade.

Will current policy be succesful in meeting the original objectives of EU policy? It is doubtful, for two principle reasons; firstly, EU policy has not integrated far enough within its own boundaries, let alone with that of the US, its main trade partner. Secondly, the institutional set-up is still too weak to deal effectively with competition issues.

On the first issue, I point to the new UK Enterprise Bill. This makes anti-competitive behaviour come within reach of the Criminal Justice System – an approach not taken in other EU countries1. More importantly, US and EU policies still diverge, which affects large, successful American corporations with a presence in Europe. For instance, the 2001 Honeywell-General Electric merger was blocked by Brussels, but permitted in the U.S.2

On the point of institutions. In recent months there has been a spate of merger decisions made by the MTF that have been consequently overturned by the courts. This suggests a number of things, not least that MTF staff are not up to the job. Additionally, it often produces, at best, half-baked results, as a result of the crippling, self-enforced deadlines, and a soaring workload. These elements clearly undermine the achievement of the objective of free trade.

Thus, in conclusion, EU competition policy has a chequered past. It is becoming more effective in achieving the original objectives of the EU, but, now we are in the 21st century, it has not progressed quite enough, nor in the exact correct direction, to meet those objectives.