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GCLC's Fifth Evening Policy Talk
Brussels, 19 April 2011
Ladies and Gentlemen:
I would like to thank Bernard van de Walle and Massimo Merola for inviting me to this policy talk.
Today, I would like to touch upon a few topics in antitrust and State aid that have stirred the debate during the last period.
Looking back at how competition policy and enforcement has developed over time, it is a story of resilience and adaptability. The articles of the Treaty remain unchanged but their application, in both substance and procedure, has adapted in light of changing needs. It is that resilience and adaptability that I would like to talk about this evening.
First, I will reflect on the role of antitrust enforcement in light of some of the decisions that have been taken during my tenure, and how I intend to improve the application of these articles in the future.
Then, I will tell you about our priorities in the control of State aid.
Perhaps the greatest change in antitrust enforcement over the years has been the increased focus on the economic effects of the companies' behaviours, specifically in the field of abuses of dominance.
Rather than looking at the form of conduct - is this an exclusive arrangement? is this a particular form of discounting? - our competition analysis then looks more carefully at the potential impact on the market of the conduct in question.
This is a welcome development: cases are not an end in themselves; they only have value if they allow us to improve the operation of markets and the benefits this implies for consumers.
There are three main implications to this development.
First, as I said at the start, an antitrust enforcer cannot look solely at individual cases, but at the market. We have to look at the entire value chain, and identify the most important problems for the industry as a whole. If these problems can be solved in a timely fashion we will be open to accept commitments that can more efficiently prevent competition concerns in the longer term. However, if we see that this is not possible or that the right commitments are not coming our way, we will take our decisions without waiting.
I have made several antitrust decisions over the last year where this issue was at the fore. As examples, I would point to four commitment decisions in the energy sector:
-EON's commitments on the German gas market;
-ENI's commitments on the Italian gas market;
-Svenska Kraftnät’s commitments on the Swedish electricity market; and
-EDF's commitments on the French electricity market.
-In all these cases, we pursued the same objective: opening the national liberalised markets, so as to allow industrial and final customers to benefit from competitive offers.
Looking at the first case, EON agreed to release transport capacity at international entry points into its gas networks in Germany; amounting to around 15% of the total available.
This pledge was quite similar to the one taken by ENI, my second example, which agreed to sell the shares it owned in international pipelines. This remedy quelled our concern that the company could use its influence over these pipelines to keep other companies away from the Italian market.
In both cases we managed, through commitment decisions, to open up cross-border transport capacity, allowing opportunities for new entrants to bring gas into domestic markets. Without cross-border transport capacity there can't be supply, and without supply, there can't be market entry.
The Swedish case was slightly different. Here, Svenska Kraftnät artificially reduced the amount of electricity that could be traded between Sweden and its neighbours. The limit to trade effectively disguised the company’s under-investment in transmission capacity within Sweden, where the real bottleneck lay.
The remedies agreed in that case eliminated the artificial bottleneck and was another step towards the integration of Europe’s energy markets. In general, all operators of electricity grids should avoid creating artificial network congestion problems, at their borders or within them.
The fourth case was not about cross-border connectivity, but about competition within the national market. In the EDF case, our concern was the lack of access by other energy suppliers to large industrial users. The company’s long-term exclusive contracts in effect sewed up the demand so that new entrants had no potential customers.
To keep France’s market open to competition, the restriction on the resale of electricity was removed and customers were allowed to make contracts with EDF's competitors.
We know that removing such restrictions were necessary to allow the very existence of competition in the market. But we also need to ensure that competitors have effectively access to cost-based nuclear generation in order to make competitive offers to customers. This is the objective of the "Loi NOME" but the Law now has to be implemented. We have taken note of the announcement this morning by Mr. Besson of the resale price of nuclear power and will analyse closely its repercussions on the French market.
The second observation that I would like to make is that competition enforcement can achieve other benefits than the efficiency of markets.
In the energy cases that I mentioned our intervention not only improved competition but security of supply as well. A national market with diversified sources of energy is more robust and better protected against disruption.
Indeed, this is not the only case in which competition control, in addition to achieving its primary objective of increasing consumer welfare, can also help achieve other public objectives.
Another example of this is in the pharma sector. Ensuring that generic entry into pharmaceutical markets is not unlawfully delayed, in fact, has a direct effect on the prices that health systems have to pay for vital drugs. In other words, effective competition can also improve affordable access to healthcare to all citizens.
The third point I would like to make in relation to the use of antitrust control as a means to improve the operation of markets is the following: regulation and antitrust enforcement have to be complementary.
As we saw in the 1990s and 2000s in telecoms, it is not enough to remove the legal obstacles to guarantee healthy competition in a market. There is a continued need for keeping trade, and in particular cross border trade within the EU, open.
Our experience in telecoms taught us that liberalisation in theory is insufficient to guarantee competition in practice. So regulation and competition go hand in hand. Regulation opened the telecommunications markets in the 1990s, and competition cases - such as those against Deutsche Telekom, France Telecom and Telefónica - have helped keep telecoms markets open for new entrants to flourish.
That is why our work also continues in this field - the recently opened investigation into Telefónica and Portugal Telecom is just one example of many.
This co-existence of competition and regulation is present in many areas, not only the telecoms sector that I have just mentioned.
Financial services, for example, is an area where I take a particular interest, and where competition cases are vital - but so, as we know to our cost - is regulation.
The issue of a complementary role for regulation and competition underlies also much of State aid control.
This brings me to my second topic for this evening.
State aid control is also a story of resilience and adaptability and these qualities will prove of an utmost value in the present political phase.
Last week, the Commission adopted the twelve key actions to be brought forward under the Single Market Act during the present year. The deepening of the internal market is one of the cornerstones of the Commission and still one of the most effective means of responding to the current economic crisis.
The very idea of an internal market has always rested on two legs: first, regulation to induce Member States to lower their boundaries, allowing the national markets to blend into a Single Market; and, second, State aid control to ensure that Member States do not distort the functioning of this market by favouring some actors to the detriment of others.
But, if State aid control has to continue playing this key role in ensuring the proper operation of this deepening internal market, our action needs to become more targeted.
Let me explain you why.
The articles of the Treaty are still those conceived by the Founding Fathers but policy and enforcement in this area has already changed significantly over the last ten to fifteen years and will need to change even more in the years to come.
The Union has expanded to 27 Member States through several enlargements. The change adds far more complexity than the simple addition of national Authorities, as each Member State has its own diverse organisation of the various levels of government.
Moreover - despite very diverse models of intervention in the economy -, over the last 35 years almost all Member States have substantially expanded their public sector activities as well as the size of their budgets.
The increasing integration and growing complexity of our economies has also necessitated a refinement of our assessment of the effects of Member States interventions in the economy. This in turn has meant a substantial expansion of our rules now contained in some 30 different legal instruments.
Finally, increased awareness of the usefulness of State aid control in preserving a level playing field within the internal market has brought about a steep raise in complaints and notifications.
This has been dramatically true in these last few years, when the crisis has triggered an exceptional degree of public interventions.
This means that, every year, we are asked to review on average well over one thousand new cases. One third comes to us as complaints and the rest mostly as notifications from public authorities.
A considerable proportion of them relate to aid amounts which are very small but the workload they generate is disproportionate to their effect on the internal market. This means that our resources are so strained that little scope is left to initiate ex officio investigations in those areas that are of key importance to the Single Market.
This is why I want to take a more systemic approach to deal with State aid cases, I want to simplify and clarify our rules, and I want to concentrate available resources on the aid that most hinders the functioning of the Single Market.
My goal is therefore clear: we need less and clearer rules and a stronger and more targeted enforcement.
Let me tell you about three areas where I have already started pursuing this systemic and sectoral line of attack: banking, aviation, and postal services.
Three principles guided our control of State aid to banks since the adoption of the exceptional framework we put in place at the beginning of the crisis:
-Returning banks to long-term viability or their orderly resolution;
-Adequate burden sharing by shareholders and subordinated debt holders; and
-Measures to limit the distortion of competition.
Of course, as every case has to be appreciated on its own merit, these principles led to different outcomes in different circumstances.
In some cases, the continuing bank put forward commitments and refocused on its core activities to ensure viability.
In other cases, good and bad assets were split. Here, the viable parts of the business were returned to the market while the bank would wind down the bad assets.
In 2010, we also took our only recovery decision in the banking crisis, when the Portuguese authorities failed to notify a restructuring plan for Banco Privado Português and asked too low a fee for a State guarantee.
Our work on banks' restructuring is now concentrated in few countries:
-In Ireland, where we will face a profound restructuring of the whole banking sector, and where State aid rules are applied in parallel and consistently with the macro-financial assistance programme;
-In Greece, where banks' restructuring needs to take place in a difficult context of austerity measures;
-And in Germany, where we face negotiations still going on for the restructuring of four unresolved cases (WestLB, HSH, Bayern, and Hypo Real Estate).
But we expect to see more cases as a possible consequence of the program that is being negotiated with Portugal and the upcoming stress test exercise.
Moving on to the postal sector, after full liberalisation kicked in on 1st of January this year, the challenge is to ensure that State aid is not used to slow down the emergence of a common market in postal services across Europe.
To this end, we are assessing in parallel around ten cases in different Member States - some already open, as in the case of the Belgian Post and of Deutsche Post, others still at an earlier stage -. In almost all of them, we are tackling in a consistent fashion two main issues.
On the one hand, we are verifying that governments do not pay too much for the provision of the universal service or of other public services entrusted to the incumbents, such as territorial presence. When this happens, incumbents have an unfair advantage over their competitors and may cross-subsidise commercial services in unregulated markets such as express mail or parcels.
On the other hand, we are also taking care that incumbents are not disadvantaged by legacy costs such as pensions.
The fair treatment of incumbents will remain our main concern for some years to come. Even after liberalisation - that in some Member States started already a few years ago - we observe that they retain very high market shares in the letters market.
In sum, to ensure a level playing field, we need to strike the right balance between competitive postal markets and ensuring that the public service missions entrusted to universal postal operators are effectively fulfilled.
The third sector I will touch upon today is air transport, a sector that has changed dramatically in recent years, especially because of the spectacular rise of low-cost carriers.
Low-cost carriers have gained substantial market shares, but they have also benefitted from substantial public support. Logically, we have received a relevant number of complaints from their competitors.
At the same time, old incumbents have consolidated and restructured, giving rise to yet more important cases.
The subsidies granted to regional airports are another issue of interest for us. The vast majority of regional airports in Europe are not profitable and can only survive thanks to the subsidies they receive from local authorities.
I am aware that regional airports are often key for local development and can effectively put regions and towns on the map. However, in a sector that has been liberalised for almost 20 years now, it is hard to justify spending on duplicate and non-profitable airports, especially in times of austerity and consolidation of public budgets.
Currently, in the 27 Member States, 77% of airports are publicly owned, 14% are mixed ownership and 8% are private.
State aid scrutiny needs to ensure that this public ownership does not unfairly advantage some airports and airlines to the detriment of others contributing to a correct allocation of scarce public resources.
A number of important judgments in this sector have availed this more stringent role for State aid review. The most recent one, in the Leipzig-Halle airport case, has led the General Court to confirm that the construction of airport infrastructure is subject to State aid scrutiny because part of the economic activity of operating an airport.
By looking at these issues throughout the over 40 cases pending in this sector I’ve come to realise as well that the guidelines we use to check them, which were published in 1994 and 2005, may need reconsideration.
Thus, earlier this month, I have launched a public consultation as a first step in our process of re-assessing our rules for air transport.
Ladies and Gentlemen,
Private as much as public interventions in the economy - especially where key economic sectors are concerned - can give rise to important competition distortions in the internal market.
Preventing these distortions was the intention of the Founding Fathers when - already in the Spaak Report - they foresaw competition as the first chapter of the internal market. This same aim has to be our core business today.
But to continue this long story of resilience, to keep our competition rules to working to their best, these rules need to continue adapting to the changing times.
Let me therefore close by recapitulating what I believe we should improve:
-first of all, competition control - both in antitrust and in State aid - has to play more and more a complementary role to regulation: opening of a market is the first step but its correct functioning has to be ensured as vigorously;
-second, our antitrust interventions need to ensure, if appropriate through effective commitments, that the markets works in a more efficient way;
-finally, our State aid control has to be conducted in a more systematic way, on the basis of rules as simple and clear as possible, concentrating our resources on the aid that most hinders the functioning of the Single Market.
Thank you for your attention.