EU reaps dividends of market-opening

Date: 04/05/2000

By Bruce Barnard

A 15-YEAR struggle to liberalise the inefficient, heavily-subsidised, state-owned monopolies which were choking Europe's economy is finally paying dividends. And the size of the pay-off has surprised even the most ardent supporters of deregulation.

Things that were unimag-inable ten years ago barely raise an eyebrow today. British Telecom, once a role model for a privatised and open telecoms market, is tipped as a possible take-over target for Spain's once slumbering telecoms monopoly Telefónica. A French electricity company is lighting up the British prime minister's residence at 10 Downing Street. Germany's post office runs the biggest trucking fleet in Sweden. A Spanish-owned utility provides the water supply for the English university town of Cambridge and Mannesmann, a 116-year-old German company famous for its steel tubes, became one of Europe's biggest mobile phone operators - only to be swallowed by the Anglo-American group VodafoneAir-Touch to become part of the world's biggest mobile company.

Europe's monopolies have been broken or are in the process of being dismantled. A few remain, notably postal services, but they too are being dragged into the marketplace. Europe is still awash with state handouts, but the subsidy culture is waning and the days of notorious multi-billion-euro Crédit Lyonnais-style bailouts are numbered.

Airlines, once the most pampered state-owned prestige symbols, are being weaned off the subsidy drip-feed after receiving an estimated €15 billion of taxpayers' cash to engineer a soft landing into a liberalised market. The liberalisation process gathered pace last week when Belgium's Sabena became the first European flag carrier set to be taken over by a foreign company, SAAirGroup, the parent of Swissair.

Rail freight, by contrast, has yet to experience genuine competition and continues to lose business to rival transport modes, particularly trucks - except in the UK, where a privatised industry is boosting its market share in a totally liberalised industry.

The rolling liberalisation process partly explains why the latest World Competitiveness Index has six Union member states in the top ten, headed by Finland in third place after the US and Singapore.

There are still pockets of resistance from the former and existing monopolies, labour unions and some governments, notably in France. However, French resistance is more pragmatic than ideological these days: Prime Minister Lionel Jospin, his eye already on presidential and parliamentary elections in the spring of 2002, was simply protecting his core constituencies in state rail monopoly SNCF and state electricity giant Electricté de France when he refused to agree to target dates for the complete liberalisation of transport, gas and electricity at the recent Lisbon summit.

The political obstacles to liberalisation were highlighted last week when the Socialist government dropped a legislative amendment which would have exposed France Télécom to more competition on local calls at the behest of its Communist Party allies in parliament. Paris backed down on the very day the Commission called on member states to open up to competition the 'last mile' of the telecoms networks still largely controlled by the former monopolies.

Germany, too, has difficulty adjusting to the new ways, underscored by its obstinant refusal to comply with a European Commission ruling last year that it must reclaim illegal state aid to 12 publicly-owned Landesbanks. An exasperated Commission has now referred the case to the European Court of Justice.

The pace of liberalisation has been patchy across the Union, with the northern member states more ready to embrace the market while southern countries with large public sectors are fearful of the consequences for jobs. But as the single market gels and the euro eases cross-border mergers and acquisitions, these differences are narrowing.

Ideology no longer holds sway, with most governments regarding privatisation as a handy way of raising funds. Companies had already factored in foot-dragging by countries such as Italy and France, moving into more open markets first and waiting for the laggards to fall into line.

The upside of liberalisation - lower costs for companies and consumers - has overwhelmed the downside - the loss of jobs for life in protected state monopolies. German companies which once paid the highest energy bills in the Union can now shop around for cheaper supplies, trucks no longer return home empty from foreign trips, airlines have a choice of service firms at airports, and cities and companies will soon be able to buy their gas from foreign suppliers. The benefits can be significant: gas prices have tumbled by 50% since the UK liberalised the industry in the early 1990s.

The quickfire pace of technological change in some industries, notably telecoms, and the emergence of brand new Internet-based businesses, are forcing recalcitrant governments to embrace liberalisation or condemn their domestic firms to lag behind market-driven rivals abroad. Nokia and Ericsson owe their spectacular global success in mobile telephony to an early start to liberalisation coupled with the establishment of a common Nordic standard.

The lesson is not lost on continental European governments. France insists it will press ahead with plans to open the 'last mile' to competition, amid warnings from private operators that any delay will slow the development of an Internet culture.

The late starters are not condemned to play catch up for ever. Germany, which liberalised its telecoms industry more than a decade after the UK, now boasts one of Europe's most competitive and flexible markets, while the UK is falling behind in certain areas: it will only open up the 'last mile' to competition in July 2001 at the earliest, six months after its major European competitors.

Liberalisation is also transforming some sectors, notably energy, from domestic market monopolies into global busin-esses. The partial opening of the electricity market has unleashed a wave of cross-border mergers and strategic alliances as companies seek to establish a global presence.

European utilities were the most active players in the world market, accounting for a dozen transactions worth €6.3 billion in the first quarter of this year, according to consultancy firm PwC. Europe also was the most favoured target for acquisitions, accounting for nine out of 37 power deals over the same period. Yet only five years ago, power supply was a very local business across most of the Union.

Liberalisation is forcing a cultural change on formerly shielded companies. The opening of the gas market in August will boost the fledgling European spot market as firms which until recently traded gas on long-term contracts of up to 25 years participate in the cut and thrust of day-to-day trading.

Some savvy monopolies have moved swiftly to maintain their privileged positions after liberalisation. Germany's postal authority Deutsche Post and its state railway Deutsche Bahn have simultaneously secured their domestic markets and expanded abroad, while Lufthansa has been strengthened by deregulation.

Governments risk squandering the benefits of liberalisation unless they summon up the political courage to complete the supply-side revolution by deregulating rigid labour markets and reforming costly welfare and pension systems.

And they do not need to look to the UK, widely regarded as an economic and social clone of the US, as a role model: the Netherlands' success in reforming its labour market and welfare system without compromising its comprehensive social security largely explains its fourth place in the world competitiveness league. The UK was in 15th place.

The Lisbon summit acknowledged the need to accelerate supply-side reforms, but it is far from certain that Union leaders will turn the hype into reality.

Has the sweeping liberalisation programme made the Union more open to the outside world? Few outsiders believe in Fortress Europe any more, but there are doubts about the depth of Union's commitment to a new round of global trade liberalisation talks following the collapse of last December's Seattle talks. To many, the EU still seems unable to accept free trade in agriculture because of its relatively small but extremely vocal farm lobby.

Meanwhile, the Union appears to be cooling on eastern enlargement as domestic lobbies call for a delay in the entry of former Communist nations whose painful transition to a market economy makes liberalisation in the West look like a stroll.

Article forms part of a survey, 'Industrial liberalisation'.