How much does the European Union really encourage competition?
THE eyes of the world will be on the European Union's summit in Brussels this week. So claims the European Commission's president, José Manuel Barroso, anyway. He may just be wrong; powerbrokers in Washington, Beijing and Delhi probably have better things to do with their time.
But let us pretend they did tune in. What would they find? The summit hopes to set the rules for a common energy policy and a single energy market, both of which would make quite a difference. To establish the energy market, the commission has proposed breaking up national gas and electricity behemoths around Europe into separate companies for the transmission and retail ends of the business (this is known in EU jargon as “ownership unbundling”). But what the outside world actually sees will be quite different. The EU's political leaders are likely only to require transmission and supply to be run separately, allowing the behemoths to retain ownership, and they may set up regional energy markets, rather than a single European one. Whatever the final details of the eventual deal, the summit's outcome will thus fall well short of its advertised goals.
This is typical enough. For the past two years the commission, the central institution in the European project, has been selling itself as the embodiment of economic modernisation. When he came to office in 2004, Mr Barroso set economic reform (ie, the Lisbon Agenda) as his priority. Under his leadership, he said, the commission would become a slasher of red tape, an advocate of free markets and a sponsor of fiercer competition. In Paris he was rewarded with the sobriquet of an “ultra-liberal”.
There was sound sense in choosing this course, even so. Europeans have been rebelling against grand dreams, such as enlargement or the draft constitution. The hope was that they might respond more favourably to measures to promote competition, cut prices and help consumers. To use a phrase of the moment, this promises a “Europe of results”. And, at the macroeconomic level, the results have been pretty good: growth was healthy last year and EU countries created 3m jobs. But the answer to the question of whether the union has really fostered free markets and more competition has to be: well, it's tried.
On the credit side, fines on cartels are running at record levels—last month, the commission imposed its largest-ever penalty (on lift-makers, for rigging the market). The European Court of Justice has slapped down a German law protecting Volkswagen from takeover. The commission has told 17 countries to get rid of special protective rules cosseting notaries. Only last week, the commission and American trade negotiators reached a tentative “open skies” deal that could partially liberalise air travel between Europe and the United States (see article).
Moreover, at least to judge by intentions, the EU's drive to open up markets is accelerating. The commission recently outlined plans to limit the remaining powers of national governments to block trade in goods within the EU. It wants to storm the last bastion of post-office monopolies (carrying ordinary letters). Neelie Kroes, the competition commissioner, is investigating the insurance industry for conflicts of interest, and promising to tighten the rules against state aid. This may come to nothing, but at least Europe's competition authorities show willing.
The debit side is, however, just as weighty. The commission has given up its long-running attempt to scrap the use of poison pills and other barriers to takeovers—a victory of managers over shareholders. It has limited the ability of national watchdogs to intervene in cross-border financial mergers and backed away from threats to abolish “interchange fees” charged by credit cards and retail banks. (Mrs Kroes once lambasted these companies for “outrageous” profiteering.) The single-market commissioner, Charlie McCreevy, says the big four accounting firms ought to be shielded from lawsuits that threaten their stability; he might even propose capping their liabilities. None of these actions is necessarily wrong-headed. But they are largely designed to help specific industries rather than to improve the working of markets. In short they are pro-business, not pro-market.
This generally pro-business stance has been softened by good old-fashioned economic populism, such as price controls on mobile-phone roaming charges, and plans to limit car emissions, albeit not as much as green lobbyists had hoped. In both cases the commission proposed new rules without the sort of impact assessment it promised when it set itself up as a champion of competition and destroyer of red tape. These decisions were thus pro-consumer, but again not necessarily pro-market.
The national resistance
The biggest problem has long been the ability of national governments to squash the commission's more competitive instincts. At best, this produces uneasy compromises between consumers and business—examples include the deal over car emissions and the extraordinarily strict rules governing every aspect of the chemicals industry. At worst, national governments manage to eviscerate reforms altogether. Witness the gutting of the commission's efforts to reform services. Witness, too, the lamentable failure to set up an EU-wide patent. And witness the latest financial-markets directive, intended as a single rule-book for Europe's investment industry, which has had so many national bells and whistles added that it risks becoming, in Mr McCreevy's own words, a “nightmare”.
The commission could reply that it must be pragmatic, and that it is at least pushing for consumer rights as the only force strong enough to stand up to both governments and businesses. That much is true. But sometimes pragmatism lures it into backroom deals with big countries, notably France and Germany, undermining both reform in general and hopes of a break-up of national champions. That is not so much pragmatism as negotiating the terms of your own surrender.
THE eyes of the world will be on the European Union's summit in Brussels this week. So claims the European Commission's president, José Manuel Barroso, anyway. He may just be wrong; powerbrokers in Washington, Beijing and Delhi probably have better things to do with their time.
But let us pretend they did tune in. What would they find? The summit hopes to set the rules for a common energy policy and a single energy market, both of which would make quite a difference. To establish the energy market, the commission has proposed breaking up national gas and electricity behemoths around Europe into separate companies for the transmission and retail ends of the business (this is known in EU jargon as “ownership unbundling”). But what the outside world actually sees will be quite different. The EU's political leaders are likely only to require transmission and supply to be run separately, allowing the behemoths to retain ownership, and they may set up regional energy markets, rather than a single European one. Whatever the final details of the eventual deal, the summit's outcome will thus fall well short of its advertised goals.
This is typical enough. For the past two years the commission, the central institution in the European project, has been selling itself as the embodiment of economic modernisation. When he came to office in 2004, Mr Barroso set economic reform (ie, the Lisbon Agenda) as his priority. Under his leadership, he said, the commission would become a slasher of red tape, an advocate of free markets and a sponsor of fiercer competition. In Paris he was rewarded with the sobriquet of an “ultra-liberal”.
There was sound sense in choosing this course, even so. Europeans have been rebelling against grand dreams, such as enlargement or the draft constitution. The hope was that they might respond more favourably to measures to promote competition, cut prices and help consumers. To use a phrase of the moment, this promises a “Europe of results”. And, at the macroeconomic level, the results have been pretty good: growth was healthy last year and EU countries created 3m jobs. But the answer to the question of whether the union has really fostered free markets and more competition has to be: well, it's tried.
On the credit side, fines on cartels are running at record levels—last month, the commission imposed its largest-ever penalty (on lift-makers, for rigging the market). The European Court of Justice has slapped down a German law protecting Volkswagen from takeover. The commission has told 17 countries to get rid of special protective rules cosseting notaries. Only last week, the commission and American trade negotiators reached a tentative “open skies” deal that could partially liberalise air travel between Europe and the United States (see article).
Moreover, at least to judge by intentions, the EU's drive to open up markets is accelerating. The commission recently outlined plans to limit the remaining powers of national governments to block trade in goods within the EU. It wants to storm the last bastion of post-office monopolies (carrying ordinary letters). Neelie Kroes, the competition commissioner, is investigating the insurance industry for conflicts of interest, and promising to tighten the rules against state aid. This may come to nothing, but at least Europe's competition authorities show willing.
The debit side is, however, just as weighty. The commission has given up its long-running attempt to scrap the use of poison pills and other barriers to takeovers—a victory of managers over shareholders. It has limited the ability of national watchdogs to intervene in cross-border financial mergers and backed away from threats to abolish “interchange fees” charged by credit cards and retail banks. (Mrs Kroes once lambasted these companies for “outrageous” profiteering.) The single-market commissioner, Charlie McCreevy, says the big four accounting firms ought to be shielded from lawsuits that threaten their stability; he might even propose capping their liabilities. None of these actions is necessarily wrong-headed. But they are largely designed to help specific industries rather than to improve the working of markets. In short they are pro-business, not pro-market.
This generally pro-business stance has been softened by good old-fashioned economic populism, such as price controls on mobile-phone roaming charges, and plans to limit car emissions, albeit not as much as green lobbyists had hoped. In both cases the commission proposed new rules without the sort of impact assessment it promised when it set itself up as a champion of competition and destroyer of red tape. These decisions were thus pro-consumer, but again not necessarily pro-market.
The national resistance
The biggest problem has long been the ability of national governments to squash the commission's more competitive instincts. At best, this produces uneasy compromises between consumers and business—examples include the deal over car emissions and the extraordinarily strict rules governing every aspect of the chemicals industry. At worst, national governments manage to eviscerate reforms altogether. Witness the gutting of the commission's efforts to reform services. Witness, too, the lamentable failure to set up an EU-wide patent. And witness the latest financial-markets directive, intended as a single rule-book for Europe's investment industry, which has had so many national bells and whistles added that it risks becoming, in Mr McCreevy's own words, a “nightmare”.
The commission could reply that it must be pragmatic, and that it is at least pushing for consumer rights as the only force strong enough to stand up to both governments and businesses. That much is true. But sometimes pragmatism lures it into backroom deals with big countries, notably France and Germany, undermining both reform in general and hopes of a break-up of national champions. That is not so much pragmatism as negotiating the terms of your own surrender.
