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SPEECH/99/146
Mario MONTI
European Commissioner for Competition Policy
Strengthening the European Economy
through Competition Policy
Institute for International Monetary Affairs
TOKYO – 29 October 1999
Introduction
It is a great pleasure for me to be here at the Institute for International Monetary
Affairs in Tokyo, to appear before a very distinguished audience, with the hard task
of explaining the role of the EU competition policy in a changing economic
environment. The competition rules have been since the very beginning a
cornerstone of European integration and of the Treaty of Rome. There would have
been little point in establishing what at that time was called the European Common
Market if competition was to be limited by cartels or restrictive agreements. The
same is true for State Aids where incompatible state aids create unacceptable
distortions in allocation of resources. The EU competition policy ensured
successfully all over the years a strong common approach at the European level,
and the strict enforcement of rules. When the Single Market was put in place its
crucial role appeared even more clearly, to the point that it can now be considered a
pillar of the so called EU “Economic Constitution” based on economic freedom and
economic stability.
I would like to recall the key components of this « Constitution » (i.e., the principles
laid down by the Maastricht Treaty on which the European model is based):
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Economic stability, which is vital for investment and growth, through notably
sound public finance and price stability
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Economic freedom, which also constitute an important source of citizens’
rights;
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Social dimension, where the Treaty not only offers space to social partners for
participation in the decision making process but, more broadly, also foresees
instruments to incorporate the Social dimension in the European policies.
Bearing this in mind, I have to say that in my previous term of office as
Commissioner for the Single market I had to act in much the same perspective.
Indeed, one of the basic principles on which the European Union is founded is the
freedom of movement of goods, services, capital and people and many of the
activities of the European Commission are directed at removing the obstacles to a
free and fully integrated single market.
Now, responsible for competition, I see great continuity in my action, targeting it
more to the specific purpose of competition policy to keep this market as
competitive as possible.
Strengthening the European economy
Today, we notice that a great transformation is on its way in the European
economy. There are at least three factors that are responsible for these changes.
The first is the globalisation process of the world economy. In recent years, the
pace of globalisation has significantly accelerated. This is due to technological
factors, but is also explained by the evolution of the political framework in the last
decade. Gradually, most of the world countries – and I refer in particular to those of
the former Soviet bloc – have come to accept the principles of a free market
economy and of freedom of trade.
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The second factor is the liberalisation process of our economies. The area of
market economy is not only expanding geographically, but also within the
boundaries of our countries. Technological progress is constantly reducing the
scope of natural monopolies. Wrong incentives and mis-management of public
enterprises have made the case for privatisation. Accordingly, many sectors and
industries previously reserved for public ownership and management are being
opened to private enterprise.
The third factor, perhaps the most powerful one, is the establishment of the
European Monetary Union, which represents the fulfilment of the long-standing
goal of creating a truly single market in Europe.
All these are welcome developments. They push forward the integration and
modernisation of the EU economy and increase the level of competition in our
markets. However, they also pose some serious challenges, on one hand to further
improve the enforcement of competition rules and, on the other, to renew the EU
competition instruments so as to steer and strengthen the impact into the markets.
The processes of globalisation, liberalisation and monetary integration set the
conditions for considerably improving the strength and competitiveness of the
European economy. Wider and more efficient markets will be available to firms on
both the demand and the supply side.
Firms will have a wider choice of inputs over which to minimise their costs, be it raw
materials or financial services. On the supply side, economic integration enlarges
the market (or opens new ones) for firms’ output. There will be new opportunities to
exploit economies of scale. This will especially be true for industries where sales
networks have previously been mainly confined to national boundaries and where
companies see prospects for obtaining important cost savings by enlarging these to
a European scale. In expanding markets defensive strategies are less useful than
more aggressive behaviour aimed at gaining market shares. Firms will be
encouraged to innovate more their processes, products and commercial practices.
I would like to add a few more words on these aspects, with particular reference to
the role of competition policy faced with these changes.
The European Monetary Union
As of 1 January 1999, a single currency was introduced in eleven Member States,
creating a large area of economic stability, which is vital for investment and growth.
First, because the consolidation of public finances already achieved (and still under
way) releases savings that can more usefully be channelled into investment and
consumption instead of funding government borrowing. Second, because it
improves the outlook for investors and confidence for firms. Third, because it will
encourage further structural reforms.
The most immediate effect is to remove the obstacles to trade represented by the
exchange-rate risk and transaction costs associated with converting one currency
into another. As a result, trade flows between the participating Member States are
likely to increase, so deepening the single market and the necessity of further
integration within the Union. In this context, it is more vital than ever to improve the
market’s flexibility and efficiency so as to overcome structural weaknesses in the
supply side. Competition policy is a fundamental leverage in this respect, in view of
exploiting to the full the benefits of the Economic and Monetary Union.
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To mention one sector as an example, the introduction of the Euro will greatly
enhance competition in financial services. The single currency, in combination with
the introduction of new technologies, will enable banks to compete for retail deposit
business in countries where they have no physical presence. On the asset side,
within the Euro-zone, lending operations in any Member State can be financed from
deposits obtained in any other Member State. Competition in homogenised
segments of the loan market, where direct customer contact is less important
(consumer credit, standard mortgage loans) should therefore intensify. All in all,
stronger competition in the financial sector should lead to easier access to and
lower cost of funding. This should provide further incentives to firms to increase
investment activity or undertake restructuring operations.
Thus, most important of all, the introduction of the Euro brings about an enormous
“transparency shock” which concerns all sectors without distinction. Comparison of
prices, costs, taxes, balance sheets, etc. will be immediate. Consumers and firms
will decide where to source their purchases, sell their products and make their
investments, being able to immediately compare the conditions that are available
anywhere in the Euro zone. In general, prices will convey much clearer signals to
economic agents and resource allocation will be considerably improved in most
sectors.
The Liberalisation process in Europe
The second circumstance I would like to draw your attention to is the liberalisation
process. Liberalisation in the European Union has mainly been an essential
component of the establishment of the single market. It is obvious that a market
based on competition and the free circulation of goods, services, people and capital
is at odds with systems based on national monopolies. Progress in liberalisation
implies that entire sectors where private companies were previously excluded
(public monopolies in the utilities) are now open to private capitals and initiative.
Some of these sectors are characterised by fast growth due to technological
change.
As of 1 January 1998 the telecommunications sector has been open to full
competition in almost all Member States. This brings another sector, traditionally
characterised by State intervention and very often State ownership, into the area of
market economy, after the liberalisation of air transport. In other sectors such as
electricity, gas, postal services and railways, the European Commission and the
other institutions are continuing to work on a programme of liberalisation that is
already producing positive results for users.
This is not to say that the European Commission dismisses the concept of public
service. The Commission has made clear that only services of general economic
interest are aimed at by the liberalisation and even then it has always striven to
reach a balance between public service and single market. Such a balance
between services of economic interest, market integration and competition is deeply
rooted in the Treaty itself. The Treaty is based on the assumption that in general
free competition is the best way to satisfy consumer needs. However, the Treaty
recognises that this mechanism also has limits.
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It is my opinion that in cases where the market mechanism would fail to provide a
satisfactory solution from the social point of view, new regulation could be required.
I think for instance of safety in air travel or in the provision of universal service in
telecommunications, as the most evident examples.
Another problematic issue raised by the liberalisation process is the risk that public
monopolies may turn into private monopolies.
In sectors such as
telecommunications or air traffic, incumbents enjoy substantial advantages with
respect to new entrants. It is the role of the Commission to ensure that previous
monopolists do not abuse their traditional position or strengthen it by way of anticompetitive mergers
The globalisation of the world economy
The phenomenon of globalisation has been a constant economic theme for many
years, albeit under different guises. What has emerged in the recent past has, in
fact, been a combination of internationalisation in a number of industrial and service
sectors, globalisation of capital and financial flows and acceleration in the
development of key technological innovations. Although some have questioned the
reality of globalisation, there is ample evidence for its existence. For example,
whilst world GDP has grown by an average of 1.5% per year since 1990, trade has
increased annually by 6%. Figures on world foreign direct investments tell a similar
story – FDIs are now about four times higher than they were in 1980.
Globalisation cannot be stopped nor should it. Trade liberalisation has the
advantage of favouring the correct allocation of resources and of providing the
necessary stimulus towards economic and technological progress. There is strong
evidence that countries that have opened their markets have enjoyed greater
growth than protected areas.
The process, however, cannot be left to itself without any governance. Strong
competitive pressures with a total absence of control have several risks, some of
which are particularly relevant to competition policy.
I refer not only to those competitive advantages that can be obtained by neglecting
obligations that are imposed in the general interest (e.g. minimum social, health,
safety, environmental or prudential standards) but also in particular to the fact that
multinational firms could take advantage of the difficulties the authorities can
experience in detecting and punishing unlawful practices in a global environment.
Faced with projects of strategic alliances or mergers, which go beyond our political
and legal jurisdiction, the question is how to ensure an effective control and
enforcement.
Finally, companies may foreclose access to the domestic market for foreign
competitors. This would represent a clear obstacle to trade and, when tolerated by
the authorities, a disguised form of protectionism. In this case, the preservation of a
truly competitive environment helps to prevent the obstacles to trade, which could
stem from the abusive behaviour of domestic operators versus foreign competitors.
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The role of competition policy
Companies do not necessarily react to a more competitive environment by
improving their efficiency or the quality of their products. They could also attempt to
reduce the competitive pressure either by engaging in tacit collusion or by forming
cartels. Alternatively, they could seek State aid in order to gain an advantage over
competitors.
Mergers, collusion and State aids are three distinct but equally relevant issues for
competition policy. Let me briefly characterise them in turn.
Mergers and restructuring operations
A higher degree of competition will put pressure on less performing companies and
on sectors already suffering from structural problems. Also, wider markets will offer
new opportunities for exploiting economies of scale. Within this framework, we are
likely to witness many restructuring operations and an increase in the number of
cross-border mergers and acquisitions. Actually, a wave of mergers is expected in
the next few years similar to the one observed during the establishment of the
single market. We already had indication of this in 1997 and 1998: in the last two
years the number of notifications lodged within the services of the Commission
increased by 31% and 36%, respectively. In 1998, the Commission had to adopt an
unprecedented number of decisions: 238.
In the field of mergers it is the duty of competition authorities to prevent that
dominant positions are being created or reinforced, while still allowing firms to
innovate and react quickly to the changing market place. Also, we have to impede
the establishment of tight oligopolies, in which firms, under certain market
conditions (significant barriers to entry, presence of the same firms in neighbouring
markets, weak technological progress, transparent prices, etc.), might consider it
profitable to abstain from vigorous competitive behaviour. This is often the case in
certain manufacturing sectors. It is not by chance that many of the mergers that
have raised competition concerns belonged to the manufacturing sector.
Cartels and agreements
As I already mentioned, there is a risk that companies could react to increased
competition by making attempts to reduce its level. Incumbent firms might enter
into vertical or horizontal agreements with the object of foreclosing rivals’ markets.
Companies in oligopolistic industries could be tempted to engage in tacit collusion
or to form cartels. This conduct will be made easier by the introduction of the Euro
as the increased price transparency will facilitate the monitoring of competitors’
prices. It will also be more difficult to deviate from agreed prices and hide this fact
behind exchange rate fluctuations.
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The formation of cartels is indeed one of the most damaging practices for the
consumer. It is the responsibility of the Commission to challenge these practices.
During 1998, the Commission has shown its determination in pursuing prohibited
agreements between firms. Four cases were the subject of a final decision in the
year, while new procedures were set into course. The total amount of fines imposed
in those four cases is 178.83 million Euros or around 190 million US $. This is a
clear indication of the Commission’s determination in fighting vigorously these anticompetitive practices.
State aid
Another reason for concern is that firms having difficulties in coping with a more
competitive environment may seek State aid.
As a general rule, the Commission takes the view that State aid contributes very
little to lasting economic welfare. On the contrary, enforcement experience has
shown that it leads to unfair competition between firms, to market distortions and to
an inefficient allocation of resources. It also puts at risk the achievements of the
Single Market when its effect is to increase barriers to trade. The only benefits of
State aid are, under precise conditions and strict monitoring, to remedy market
imperfections. For example, small firms are an important and dynamic part of the
European economy, as well as a key source of job creation. Yet their access to
capital markets is limited. We therefore permit various aid programmes to SMEs, in
order to “level the playing field” and help them compete. Similarly regional aid and
support for R&D and environmental programmes can, in certain circumstances, be
useful in remedying market imbalances and achieving other policy objectives, such
as economic cohesion.
Conclusions
The introduction of the single currency and the liberalisation process, together with
the world-wide trend of globalisation, offer a great opportunity for the modernisation
and strengthening of the European economy.
It is clear that many of the benefits that can be drawn from these developments
derive specifically from the expected increase in competition in ever more liberalised
and integrated markets. That is why I believe that competition authorities bear
considerable responsibility for the successful adaptation to these new realities.
If governments or firms were allowed to alter or reduce the operation of the
competitive mechanism, this would not only work to the detriment of consumers and
competitors, but would eventually weaken those very firms and sectors which have
initially profited from such conduct.
Sometimes it is said that competition is not to the benefit of all: it can favour larger
firms, but hurt smaller businesses. I do not share this view. Greater competition in
the financial sector or in the utilities already benefit smaller customers, which, alike
the final consumer, suffer the most from suppliers’ market power and restrictive
practices. Enhanced competition in one sector will have positive spill-over effects in
other sectors. Competition forces will call upon governments to improve the quality
of public services and the efficiency of the public administration. All this is in the
general interest.
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Naturally, competition will reward greater efficiency. It will put pressure on less
performing companies and on sectors already suffering from structural problems. It
may require a restructuring of certain firms and industries, also to be achieved via
mergers and acquisitions. Therefore, exposing companies to the rigours of
competition is the best way to improve their performance. Competition does more
than benefit the consumer. It leaves companies fitter, leaner and more prepared to
face competition domestically and abroad.
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