The Common Market and Competition Policy in the European Union

ANALELE ŞTIINŢIFICE ALE UNIVERSITĂŢII „ALEXANDRU IOAN CUZA” DIN IAŞI Tomul LV Ştiinţe Economice 2008 THE COMMON MARKET AND COMPETITION POLICY IN THE EUROPEAN UNION Luís PALMA MARTOS* Abstract The article addresses, from a mainly economic perspective, the analysis of the competition policy in the European Union and its contribution to the process of consolidation of the common market. The core of the work consists of a panoramic view of the European competition policy. First, we offer a synthesis of the five areas: suppression of the restrictive agreements of the competition and abuse of dominant position; the control of the aid granted by the states; the liberalization of the economic sectors under monopoly; these three in the Treaty establishing the European Community, as well as the merger control between companies and international cooperation. Secondly, addressing the analysis of the new framework of the European competition policy, configured from the Council Regulations 1/2003, concerning the implementation of the rules of competition under articles 81 and 82 of the Treaty and the 139/2004, on the control of the mergers between companies. We close the paper with an entry of conclusions in which outlines the key challenges facing the European competition policy in the scenario of the global economy. Key words: competition policy, dominant position, merger control, European Union JEL classification: D4, K2, K21, L4 1. INTRODUCTION The European Commission on the web page of the Directorate General for Competition (http://ec.europa.eu/comm/competition/antitrust/overview; consulted on 24/09/2007) said that the competition is a basic mechanism of the market economy and encourages companies to provide consumers with the products they want. At the same time, favours the innovation and pressed to the low prices. However, said the European Commission, in order to be effective, the competition requires bidders who are independent of one another, each of them subject to the competitive pressure exerted by the other. In short, the European Commission, outlines the positive effects of the competition but, at the same time, clarifies some conditions that must be given for it to be effective. This means that we must establish, through the appropriate institutional framework, the conditions for the competition is able to energize a market economy as the prevailing in the European Common Market. * Luís PALMA MARTOS (lpalm[email protected]) is professor Ph.D. of the Economic History and Applied Economics Department at the University of Seville, Faculty of Economics. His research interests include: applied economics, European economics, cultural economics, industrial economics, welfare economics. The common market and competition policy in the European Union 287 In relation to the common internal market, the European Commission itself points out that the best guarantee for the increased efficiency and the innovative potential of European companies is that the domestic market is open and competitive. Therefore, says the Commission, vigorous competition is a key factor for competitiveness and economic growth (European Commission, 2004; p. 2). In the framework of the Lisbon strategy and in the new scenario of an enlarged Europe, the competition policy is erected in key element to stimulate the competitiveness of European industry in order to achieve the demanding targets set out in the aforementioned Strategy. The new context claimed a new approach of the competition policy, which came into force on the 1 st of May 2004, coinciding with the accession of ten new Member States. The new approach was described as proactive by the European Commission (2004, p. 2) and was characterized by:  The improvement of the regulatory framework of the competition in order to promote an intense economic activity, a wide dissemination of knowledge, the better conditions for consumers and an economic restructuring efficient throughout the internal market;  An action aimed at eliminating barriers to entry and obstacles to effective competition. This work is designed to analyze this new framework proactive of Competition Policy in the European Union of 27 Member States. We are going to focus our interest in highlight the innovations introduced from the 1 st of May 2004, in contrast with the previous regulatory framework. To carry out this task will be a fundamental referent the two Regulations (EC) in which has embodied the new approach: the no. 1/2003 of the Council of 16 December 2002 (Official Journal of the European Communities of January 4, 2003), on the implementation of the rules on competition under articles 81 and 82 of the Treaty and the no. 139/2004 of 20 January 2004 (Official Journal of the European Union on January 29 2004), on the control of the mergers between companies (Community Regulation of Mergers). 2. THE COMPETITION AS A FUNDAMENTAL VALUE IN THE PROCESS OF EUROPEAN CONSTRUCTION As stated by the European Commission (2004, p. 3), the system of economic governance of the EU and the Treaty of the European Communities (TEC) itself are based on the "principle of an open and free competition market economy ". Also understands the European Commission that vigorous competition in an enabling business environment is a key factor for growth in productivity and competitiveness. However, there must be clear, as does the European Commission, that the competition is not an end in itself. In the document, the Commission (2004, p. 3) defines the competition as "a vital market process that rewards to companies that offer lower prices, higher quality, new products and an offer of broader product". It seems that the Commission has opted for a dynamic approximation of competition – competition as a process of market" compared to other approximations of static and structuralist character. 1 1 For a comprehensive discussion about the concept of competition and its multiple approaches, see Palma Martos (2005). 288 Luís PALMA MARTOS Among the objectives of the Treaty establishing by the European Community (TEC) is the improvement of living and a continuous and balanced expansion of economic activity, achieved through the establishment of a common market. This expansion should not be spoiled by the creation of barriers among Member States. In this context of free movement of goods and services, competition policy seeks to ensure consumers the opportunity to choose freely through the prevention and punishment of the proceedings of the agents seeking to establish barriers to the free choice (Prieto Kessler, 2005). Next to this rationale, that Prieto believes it is essential, seeks other that contribute to the process of European construction. First, and we have previously noted, a dynamic internal market improves the competitiveness of European companies and favours its success in the global economy. And this is so, because a open and competitive market force companies to carry out innovative strategies to improve the quality and downward pressure on prices. Secondly, competition policy is aware of the necessary balance to be given between innovative processes and competition. The European Union cannot base its competitive strategy in the low costs, but in the incorporation of high technology. And it may be generated only in a context that ensures the return of the high and risky investments, necessary to achieve it. This warranty of monopolization, even temporarily, contravenes the spirit of competition, while it is needed to move in the knowledge and in the economic progress. Thirdly, the European competition policy should contribute, simultaneously, the benefit of consumers and business interests in the processes of mergers. These processes are justified by the need to strengthen cooperation and to adjust the size of the companies to the global scale in which they operate. The concentration limits competition while it can offer benefits through improvements in efficiency. Here lies the key to the intervention in this field. Finally, competition policy is facing a complex challenge, which requires solutions that go beyond the community sphere. I refer to the possible international character of the cases. The European Commission has powers to deal with cases of community level, but such treatment is highly complicated by the existence of very different national legislation and different institutional frameworks in regard to the configuration of the competition authorities. In the community level would therefore requires an effective mechanism of coordination, especially when the new partners have a tradition far from the market economies. The Network of Competition Authorities can and must fulfil this role. But there is another front of necessary coordination, already given operations and actions of the economic operators that transcend community. Are the differences with the USA. And they give rise to conflicts that require greater harmony between the competition authorities on both sides of the Atlantic. In a world economically global, is incomprehensible, in addition to hinder the governance on that scale, the lack of competition rules which ordered the enormous world trade. At the moment, we have to stick to the reinforcing coordination and transatlantic cooperation. 2 We have seen that competition is flying as essential pillar in the strengthening of European common market and hence of economic construction of the EU. This conviction encourages the community competition policy, one of the most active and profiled in the making up the set of policies of the community. 2 See Evenett, S.J.; Lehmann, A. and Steil, B. (Eds.) (2000). The common market and competition policy in the European Union 289 3. THE COMPETITION POLICY IN THE EUROPEAN UNION At this point we are going to stop in the institutional framework of the European competition policy, drawing initially in the Establishing Treaty 3 . 3.1. Five areas of action of the competition policy in the European Union Among the measures to be taken to achieve the objectives with the establishment of the common market, the article three of the Treaty of Rome envisaged "create a system of guarantees against the distortion of competition in the common market" (Alcaide Guindo, 2005). In the course of its 50 years of existence, the European Union has been weaving the system that today covers five areas essentially. In order to provide an overview of those, we dedicate the lines that follow. We need to clarify initially that the Treaty does not collect these five areas, because, as we will see, the control of economic mergers and actions toward a coordination and integration international, beyond the borders of the EU, of the competition policy, are not reflected in the text of the Treaty. This, in the third party, Policies of the Community, in the Title VI, Common rules on competition, taxation and approximation of the laws, devotes Chapter 1 to the rules on competition and in this chapter 1 are collected, with more or less precision, the three remaining areas. The suppression of the restrictive agreements of the competition and abuse of dominant position; the control of the state aid and the impulse to the liberalization of the economic sectors. Let's start with the three areas in the treaty. 3.1.1. Suppression of the Restrictive Agreements to Competition and Abuse of Dominant Position a. The prohibition of restrictive agreements between companies The first section of the aforementioned chapter one contains provisions applicable to the companies (articles 81 to 86). The first paragraph of article 81 is the prohibition of the agreements between operators impeding, restricting or distorting competition. Then, and as an example and not as closed list, offers a typology of these agreements among which we can emphasize the price-fixing and market sharing. As Prieto Kessler (2005) highlights, the mere intent to limit the competition is sufficient for the prohibition applies, even though does not cause the intended effect. On the contrary, if you do not observe intent would have to calibrate the effects present or potential that, on the market, had the agreement, with adequate consideration of the structural characteristics of the relevant market. The agreements to which referred to in article 81 have to affect trade between Member States of a sensitive manner, so he tries to avoid a over implementation of the community standard in cases in which the impact was not relevant. The Commission has broad powers to combat the restrictive agreements of the competition. Thus, can request information from companies and administrations, to make home 3 See: Treaties of the European Union. Consolidated Texts (2000). Official State Gazette. Ministry of the Presidency. Madrid. 290 Luís PALMA MARTOS inspections and impose fines that can reach up to 10 percent of the sales volume (Prieto Kessler, 2005). It should be noted, however, that the article 81, in its third paragraph provides possible exceptions from the general prohibition; provided that the agreements contributes to improving the production or distribution of products or to promote technical or economic progress and reserve at the same time, users an equitable participation in the benefits. Likewise these agreements should not impose to companies concerned restrictions that are not indispensable to achieve the planned objectives and must not allow the possibility of eliminating competition in a substantial part of the products involved in the agreement. b. The abuse of dominant position Article 82 of the Treaty declared incompatible with the common market and prohibited the abusive exploitation, by one or more companies, of a dominant position in the common market or in a substantial part of it. It is necessary to clarify that what is prohibited is not the dominant position in itself, but its abuse. An additional element and key to gauge whether exist or not abuse in the position of domain is the determination of the relevant market on which such abuse is exercised. There are to take into account, to understand the difficulty of the competition policy in this area, which both the concept of dominant position as the relevant market are subject to ongoing debate both in theoretical terms as of political practice 4 . Take, for our purposes, the definition of dominant position offered by the Court of Justice of the European Community in the Judgment Hoffman-La Rôche (13/21/1976, As. 85/76): "the power to hinder the maintenance of effective competition in the market in cause and to act with a considerable independence against competitors, customers and consumers". For his part Prieto Kessler (2005) said that the relevant market must include all goods or services to exert a competitive pressure on the company subject to review and cover the geographic area from which the competitors can, in his case, disciplining their behaviour 5 . From the previous concepts, the abuse refers to any conduct of a company with dominant position which produces a weakening of the conditions of competition in the market, where the dominant company relies on different practices to the usual. The article 82 offers a list of abusive practices, by way of guidance without the will of completeness. This set of abusive practices could be classified into two broad typologies: exploitative and anticompetitive. (Prieto Kessler, 2005). In the exploitative the dominant company takes advantage of its market power to seize part of the incomes of its customers through the setting of high prices, discrimination that is not based on objective criteria or payment of supplies to abnormally low prices. In the abuses anticompetitive behaviour, the dominant company seeks to limit the competition, in order to preserve or expand its market power. 3.1.2. The control of the aid granted by the States The objective pursued by the European Commission (Directorate-General of Competition, 2007) by controlling the aid granted by the States is to ensure that interventions by the governments do not distort competition and the intra-community trade. The aid granted by 4 See Prieto Kessler (2005) and Cabral (1997), pp.15-18. 5 See in this regard the communication from the European Commission (1997) on the definition of market of reference for the purposes of the Community rules on competition. The common market and competition policy in the European Union 291 the States are regulated in the Second Section (Articles 87 and 88) of the already referred chapter one on competition rules. Shall be considered State aid, for the purposes of control by the Commission, the aid granted by States or through state funds, under any form, which distorts or threatens to distort competition by favouring certain enterprises or productions (article 87, paragraph 1). Would have to clarify that subsidies granted to individuals or the general measures open to all the companies would not be affected by the article 87 and do not constitute, therefore, State aid. Although the Treaty draws a general ban on the granting of State aid, recognizes, however, that under certain circumstances, might be necessary interventions of governments. Thus, article 87 in their paragraphs 2 and 3, contains a series of aid compatible with the common market: the social, the intended to repair the prejudice caused by natural disasters, the intended to promote economic development of regions with standards of living abnormally low or with a grave unemployment situation, the intended to promote projects of common European interest or the intended to promote culture and heritage conservation, among others. Along with articles of the Treaty, the Commission provides a serie of legislative acts, setting up a single system and integrated rules by which the Commission oversees and approves the State Aid in the area of the EU. This legal framework is subject to regular review in order to improve the efficiency of the system and to meet the requirements of the European Council of minors, even better State Aid finalists. While the new legislation is adopted in close cooperation with the Member States, the implementation of exceptions to the general prohibition is the exclusive jurisdiction of the European Commission, which owns some broad powers of investigation and of decisionmaking. As the nucleus of those powers is the notification procedure that, except in certain instances, the Member States should follow. Until the European Commission does not approve a measure that incorporates a State aid, it may not be launching. (European Commission, 2007; In: http://ec.europa.eu/food/fs/scoop/comm/state_aid/overview. Page consulted on 24/09/2007). The Commission (2004, p. 14) is aware that in the European Union of 27 Member States is impossible assume the evaluation of each and every one of the possible distortion of competition produced by the State aid. Accordingly, the Commission says the will of the strategy of implementation of the rules are based on an economic analysis more rigorous on the effects of the aid on the competition. Among the factors that can be considered to calibrate the greater or lesser impact of the aid on the competition are, in the view of the Commission: that an activity is the subject of trade, the amount of aid, the structure of the market concerned, the market power of the beneficiaries and the availability of aids among different market operators. These concepts are integrated into the general guidelines that the European Commission makes available to the Member States to which they design Aid which comply with the requirements to be considered compatible with existing rules. 3.1.3. The liberalization of the Economic Sectors Under Monopoly The third field of action of the competition policy in the European Union has its origin in Article 86 of the Treaty that incorporates a call attention to the Member States in relation to the public enterprises. Specifically, in its first paragraph, article 86 refers to the Member States not adopted or maintained respect of public enterprises and those companies to which 292 Luís PALMA MARTOS they grant special or exclusive rights, any measure contrary to the Treaty rules (with special reference to the provisions in articles 12 and 81 to 89). In its second paragraph, article 86 submits to the rules of competition to the companies responsible for the management of services of general interest or having the character of fiscal monopoly prosecutor, in the well understood that this submission should not prevent, in fact or law, the compliance of specific objective of these companies. It should be noted that the provision of goods and services of general interest has evolved for some parameters that go beyond the subjugation of public enterprises or of the legal monopolies, providers of these services, to the rules of competition. In fact, over and above has been superimposed a process of liberalization of these markets with the component of the dismantling of the monopoly situations. And in this process, the European Commission has had a very active role, which has sought to respond to diverse questions (European Commission, 2007; http://ec.europa.eucomm/competition/liberalisation/overview. Page consulted on 24/09/2007). The first question refers to the advantages of the liberalization compared to supply on the part of national organizations with exclusive rights. The European Commission argues that the opening of these markets (air transport, telecommunications, energy, postal services, gas, has enabled consumers the choice between a greater number of suppliers and services, also the consumers have benefited from lower prices and an offer of services more attentive to their necessities. Found the advantages of liberalization will need to investigate the way in which it has been opening step in different markets. In this regard, we must indicate that the approach of the European Commission has evolved over time. To allow national governments opt for the sharing of the infrastructure or to build new infrastructure for the use of competitors, approach visible at the beginning of the 1990S, it has become an approach that separates legally the management of the infrastructure from the offer of the commercial services are offered using such infrastructure network. The change of approach was due to the difficulty of building new networks given the enormous volume of investment required and inefficiency detected in its use . This new approach requires to the operators owners of the network permission for competitors to free access to the network. The monitoring of this free access is the key for the advantages of free choice enabling consumers the choice of supplier that offers the best conditions. In assessing the degree of success of this approach will be asked whether its implementation has had a positive and clear effect for consumers. According to the European Commission (2007), this effect is found with sharpness in the two markets that were opened in the first place to competition: air transport and telecommunications. In these two sectors, the average prices have fallen significantly. In the rest of sectors mentioned above, open to competition after or in the process of opening, have not been appreciated price reductions, and even in some, as is the case of gas, they have risen, due perhaps to its close relationship with oil prices. In any case can be argued a direct relationship between lower prices and greater scope of the processes of opening up markets to competition. A last question is the relevance of delivering public services in open markets to competition, taking into account that the supply of these services due to the satisfaction of a general interest. At this point it should be noted the requirement of an adequate regulation to ensure a certain level and quality of the supply. We must insist that greater liberalization means greater exposure of the market to competition and no further deregulation. The intro- The common market and competition policy in the European Union 293 duction of competition must be accompanied by an efficient regulation on, but not exclusively, in the case of the provision of public goods and services 6 . The new framework of the European competition policy on that topic leads to greater cooperation between the European Commission and the national competition authorities. Another primary route for collaboration is what keeps the Commission with the national sectorial regulators, which play a key role in this liberalisation process. It is obvious note here that the enlargement is a great challenge for this process and the Commission must intensify this coordination with the competition authorities and with the sectorial regulators, particularly those in the new Member States. (European Commission, 2004, p. 18). 3.1.4. The Merger Control between Companies As also notes Prieto Kessler (2005) the TEC does not include any standard related to the merger control. Until it approves the first community regulation in this matter (Regulation 4064/89) in 1989, the Commission used article 82 on the abuse of dominant position to prohibit some concentrations. The implementation of article 82 requires the prior existence of a dominant position, something that may not happen, to be precisely the achievement of the position the ultimate goal of the process of concentration. If exist the position of dominance, the merger could be oriented toward the strengthening of it. Considering that processes of concentration are a critical pathway for the structural configuration of a market and that it has a direct effect on the conditions of competition, the Commission understood that scrutiny ex-ante merger could benefit the competition, to preserve an adequate structure in the market. Moreover, the deepening in the process of construction of the Single Market required the existence of an instrument with which the Commission could control operations that passed the national borders of the Member States. Sought, essentially, mix the conditions that should govern the operations of concentration throughout the community. The Commission is aware of (2005, p. 8) that the increase in the competition in the European internal market and the increased economic globalisation, are factors that lead to the companies to seek proper organization to such challenges. Such processes may be positive for the competitiveness of European companies in the world stage, although they should not hinder competition. Prevent the harmful effects on this is the objective declared by the Commission for the examination of the projects of concentration. For that a project of concentration was considered by the European Commission should be given the fact that the annual turnover of the companies that want merged exceeds certain thresholds in terms of worldwide and European sales. In this case, the proposal must be notified to the European Commission for review. Below these thresholds, the operations could be examined by the national competition authorities. Also, there are rules to apply to all concentrations, regardless of the place in which the companies involved in the project having their head office, its headquarters, or their production facilities. This is due to that the concentrations of companies based outside the European Union can affect the community markets if these companies operating in the EU. Since the first of May 2004 is in force on the new regulation (EC) No. 139/2004 of the Council of 20 January 2004 on the control of mergers between companies ("Merger Regulation"), the topic that later we will analyse when we look at a whole the modernization of the 6 See Petitbó (2001) 294 Luís PALMA MARTOS competition rules that took place on May 1, 2004, coinciding with the largest enlargement of the history of the European Union. 3.1.5. International Cooperation With the increasing globalization more companies, mergers and cartels are an international character. As a result, the activities of the companies based outside the EU can affect competition within the EU. This reality has become essential international cooperation in the field of Competition Policy. The EU has established bilateral agreements in defence of the competition, in particular with its main trading partners. It is also located as head of the efforts of multilateral cooperation. Has been one of the major players in the world economy in proposing the inclusion of the competition policy as a topic of discussion in the World Trade Organization (WTO) and adopts a key role in the International Network of Competition (CIP) and in the Competition Committee of the OECD. 7 3.2. The new framework of the european competition policy The one in May 2004 came into force two regulations to redefine the framework of European action in competition. We refer to the Regulation 1/2003 on the application of Articles 81 and 82 of the Treaty, which replaces the force since 1962, and the Regulation 139/2004 on merger control which replaces the force since 1989. We, therefore, with the paragraphs that continue to proceed to an analysis of the main developments that presents this new scenario compared to previous. 3.2.1. The Modernization of the Community Competition Policy in relation to the Implementation of the Articles 81 and 82. In the White Paper on the modernisation of the rules of application of Articles 85 and 86 (now 81 and 82) of the Treaty (1999, p. 6), the European Commission says: "In 1999, this policy is unfolding in a world very different from that knew the authors of the founding texts. 15 Member States, a currency and a single market, a global economy, enlargement to the countries of Central and Eastern Europe and to Cyprus... That is now need to modernise the system not to diminish merits: created “ex nihilo” the community competition policy helped lay the foundations of the single market and to ensure the dynamism of the European economy. The new task is reorganizing the system to meet the challenges of the coming years". 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