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EU Competition Policy
European competition law and policy have changed significantly in recent years. With an enlarged EU of 27 member states, new rules, policies and administrative procedures have become increasingly important to ensure that this fundamental legal regime continues to promote competition and protect consumer welfare. In an attempt to define Competition policy, Massimo Motta described it as follows: Ð²Ð‚Ñšthe set of policies and laws which ensure that competition in the market place is not restricted in such a way as to reduce economic welfare.Ð²Ð‚Ñœ
European Competition policy is concerned with setting common standards of conduct among member states and its main goal is to ensure free and fair competition within the EU. It regulates the exercise of market power by large companies, governments and other economic entities. It has steadily increased its effectiveness in controlling restrictive practices, abuse of dominant positions, mergers, state aid and the liberalisation of utilities. In order to ensure that all economic entities understand, adhere and treat the competition policy with esteem, discipline is used not only with noncompliant companies but governments as well. Competition officials can invade factories, firms, and private residences to confiscate papers and computers on a suspicion of infringement of competition rules and regulations as set down by the EU.
EU competition policy is an important part of ensuring the completion of the internal market, meaning the free flow of working people, goods, services and capital in a borderless Europe. It is about protecting and expanding competition as a process of rivalry between firms in order to win customers. It also acts as a process of creating and protecting markets. Competition policy affects how we do our jobs, how benefits are distributed, and how and what we consume, from the price of cars to the location of supermarkets in our towns. Rationale comes in both economic and political forms for the policy.
The main provisions of European competition law are contained in Articles 81 and 82 of the Treaty of the European Communities and in the Merger Regulation. Articles 83-89 also deal with competition issues such as public enterprises and state aids. Articles 81 and 82 of the Treaty are characterised by Ð²Ð‚Ñšdirect applicabilityÐ²Ð‚Ñœ; this means that they are part of the law of each member state and are directly enforceable by national courts. The development and implementation of competition policy is under the Commission by the Directorate-General for Competition (DG COMP), a small organisation which employs nearly 700 in staff, almost half of whom are senior officials and are primarily either lawyers or economists, who make decisions and contribute to policy.
The five main components of EU competition policy include: cartels, or control of collusion and other anti-competitive practices which has an effect on the EU; monopolies, or preventing the abuse of firmsÐ²Ð‚â„¢ dominant market positions; mergers, or control of proposed mergers, acquisitions and joint ventures involving companies which have a certain, defined amount of turnover in the EU; the liberalisation of measures by a Member State to favour domestic utilities and infrastructures; and State aid, or control of direct and indirect aid given by Member States to companies.
This last point is a unique characteristic of the EU competition law regime. As the EU is made up of independent Member States, both competition policy and the creation of the European single market could be rendered ineffective were Member States free to support national companies as they saw fit. Primary competence for applying EU competition law rests with European Commission and its DG COMP, although State aids in some sectors, such as transport, are handled by other Directorates General. Today Ð²Ð‚?competition rulesÐ²Ð‚â„¢ are a dominant regulatory constraint when companies formulate their corporate strategy or consider their competitive behaviour.
EC treaty articles 81 and 82 establish the EUÐ²Ð‚â„¢s competition law regime. Article 81(1) prohibits anti-competitive agreements that have considerable effect on intra-community trade, while Article 82 prohibits the use of a dominant position.
Article 81 is an anti-cartel instrument and is made up of three parts: part one contains the basic prohibitions on agreements and concerted practices between firms that prevent, restrict or distort competition within the Single Market; part two declares the prohibited agreements void; and part three describes the specific exemptions.
Fines of up to 10% of their worldwide turnover may be imposed on the guilty parties. The restrictive practices referred to in Article 81 are collusive arrangements between firms that ultimately aim at price fixing for market exploitation. These agreements are mostly horizontal, that is between firms at the same level of production, or at times there is a vertical element between producers and dealers. The proceeds of the fines are paid into the Community budget, helping to finance the EU and hence reduce the tax burden on citizens.
Between 1995 and 2002, the four leading tobacco processors in Italy colluded on their overall purchasing strategy, agreeing between themselves purchase prices and allocating their suppliers on a preferential or exclusive basis. They also rigged their bids in respect of public auctions organised by public authorities for the sale of tobacco in 1995 and 1998. In 2005 the European Commission fined the four a total of Ð²â€šÂ¬56 million, for colluding over a period of more than six years on the prices paid to growers and other intermediaries and on the allocation of suppliers, constituting a very serious breach of Article 81 of the EC Treaty. The Commission also imposed small fines of Ð²â€šÂ¬1,000 on both APTI and UNITAB (respectively the Italian trade associations of processors and tobacco growers) for engaging in collective price negotiations.
Article 82 of the Treaty prohibits the abuse of a dominant position and governs monopoly powers. Like Article 81, it attempts to achieve perfect competition. It outlaws Ð²Ð‚Ñšany abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it Ð²Ð‚Â¦insofar as it may affect trade between member statesÐ²Ð‚Ñœ. This applies to any firm, not only of EU countries, whose dominant share of the market is within the EU. Dominant position refers to monopoly power that enables the firm or firms to influence, by independent action as a buyer or seller, the outcome of the market.
Certain forms of cooperation agreements between enterprises are deemed not to restrict competition and therefore are exempted. Such abuse may, in particular, consist in: directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; limiting production, markets or technical development to the prejudice of consumers; applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; and making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which have no connection with the subject of such contracts.
A common policy on mergers, empowering the Commission to block or authorise them was approved at the end of 1989. The Commission is empowered but they cannot hear the cases; they must be brought to the ECJ. Now the Commission is authorised to intervene to assess the compatibility of all mergers with a Community dimension of: combined world turnover in excess of Ð²â€šÂ¬2.5 billion; combined turnover in excess of Ð²â€šÂ¬100 million in each of at least three member states; in each of these three countries, the total turnover of at least two of the companies concerned in excess of Ð²â€šÂ¬25 million; and the aggregate Community-wide turnover of each of at least two of the undertakings concerned in excess of Ð²â€šÂ¬100 million. Large companies incorporated outside the EU, but generating at least Ð²â€šÂ¬100 million of their annual business in the Community, are also subject to the EU merger regulation, if a merger between them threatens to distort competition on the Community market.
The Commission aims at ensuring that all European companies operate on a level-playing field, where competitive companies succeed. It ascertains that government interventions do not interfere with the smooth functioning of the internal market or harm the competitiveness of EU companies. The objective of State aid control is, as laid down in the founding Treaties of the European Communities, to ensure that government interventions do not distort competition and intra-community trade. In this respect, State aid is defined as an advantage in any form whatsoever granted on a selective basis to undertakings by national public authorities.
The EC Treaty, under articles 87 and 89, pronounces the general prohibition of State aid. However, in some circumstances, government interventions are necessary for a well-functioning and equitable economy. In essence, Article 87 prohibits State aids, subject to certain exceptions; Article 88 sets out the role of the EC and of the Member States, and Article 89 enables the Council to adopt Regulations for the implementation of Article 87 and 88. Although State aids are in principle banned under the treaty, Article 87 provides for a number of exceptions.
The three categories of aids that are considered to be compatible with the common market and are exempt from this general ban are: aids of a social nature; aids related to the damage caused by natural disasters; and aids to parts of the Federal Republic of Germany affected by the division of Germany. According to Article 87, the forms of aid prohibited, of which any government can be penalised for, include direct subsidies, tax exemptions, preferential interest rates, guarantees or loans on especially favourable terms, acquisition of land or buildings either gratuitously or on favourable terms, or indemnities against losses and other means having equivalent effect. Governments are required to report any plans to introduce new aid schemes or alter ones to the Commission. The Commission then decides whether they are acceptable under the Treaty. If the aid is found to be incompatible the Commission has the power to ask the member state to amend or terminate it.
An exception to this general State aid prohibition occurred in 2007 when the European Commission, under EU rules, approved rescue aid given by the UK government to stricken mortgage lender Northern Rock PLC. Northern Rock is the UK's fifth largest mortgage bank whose core activity, residential mortgage lending, represents more than 90% of all outstanding loans made by the bank. Due to instability in the worldÐ²Ð‚â„¢s financial market, a significant rationing of funds in the sterling money market occurred in August and September 2007, which created severe liquidity problems for the bank whose business model is particularly reliant on frequently raising finance in these markets.
The Commission, which received full details of rescue measures, said the terms of the package - whereby the bank received emergency liquidity assistance from the Bank of England in September, secured by "sufficient collateral and was interest-bearing" - complies with the bloc's rules. The commission said the guarantee on deposits granted by the UK Treasury in September, as well as the measures granted the next month, do constitute state aid but were cleared in line with EU rules for rescuing and restructuring firms in difficulty. Under these rules, rescue aid must be given in the form of loans or guarantees lasting no more than six months, although there are certain exceptions to these rules in the banking sector, in order to allow for prudential requirements, which "have been applied in this case".
Services such as transport, energy, postal services and telecommunications have not always been as open to competition as they are today. The European Commission has been instrumental in opening up these markets to competition, a process known as liberalisation. Consumers can now choose from a number of alternative service providers and products. In the railway, electricity and gas industries, the network operators are now required to give competitors fair access to their networks. In these industries, monitoring fair network access by all suppliers is essential to allow the consumer to choose the supplier offering the best conditions.
In the EU Member States, these services were previously provided by national organisations with exclusive rights to provide a given service. By opening up these markets to international competition, consumers benefit from lower prices and can choose from a number of alternative service providers and products that are usually more efficient and consumer-friendly than before. This helps to make our economy more competitive. Opening up new markets requires additional regulation to ensure that public services continue to be provided and that the consumer is not adversely affected. When applying competition law, the European Commission always takes account of the special obligations placed on any organisation benefiting from Ð²Ð‚?monopoly rightsÐ²Ð‚â„¢. This approach ensures that there is fair competition without handicapping the State-funded provider, which is obliged to provide services in the public interest even where this is not profitable.
One of the primary aims of the European Community was the establishment of a Single Market. To achieve this, a compatible, transparent and fairly standardised regulatory framework for Competition Law had to be created. With increasing globalisation in recent years, more and more companies, mergers and cartels are international. As a result, the activities of companies based outside the EU may affect competition within the EU. This has made international cooperation on competition policy essential. Competition Policy has also been a key element of the enlargement negotiations with candidate countries. The European Commission has played a very important role in fostering competition policy in these countries. Ultimately, the main goal of EU Competition Policy is to increase the economic welfare of the consumer. Competition policy contributes to ensuring the competitiveness of European industry by implementing competition regulations as recorded under Articles 81-89 of the EC Treaty.
EC2171 Lecture Notes, Jane Power UCC.
Clarke and Morgan. Ð²Ð‚ÑšNew Developments in UK and EU Competition PolicyÐ²Ð‚Ñœ, Edward Elgar Publishing Ltd., 2006.
Motta, Massimo. Ð²Ð‚ÑšCompetition Policy: Theory and PracticeÐ²Ð‚Ñœ, Cambridge University Press, 2004.
The Treatment of Efficiencies in Merger Review: An International Comparison 2007
Brussels, Europa Press Release 2005.
http://www.logon.eu/ceec_logon_net/study_visit_brussels/pucinskaite.ppt#276,3,Why do we need competition policy?