Kroes has economic history lesson for patriots

Date: 09/03/06

Economic patriotism risks "taking Europe into a 1930s-style downward spiral of tit-for-tat protectionism". This is the stark warning from European Competition Commissioner Neelie Kroes about the dangerous lure of protecting national companies. But interestingly, the commissioner made her concern known back in September last year, before the recent outbreak of moves by governments to defend or bolster their firms against the approaches of foreign capital.

Kroes warned that short-term gains tended to obscure the real price of protectionism: competition encouraged firms to innovate, make the most of their people and resources, raise quality and lower prices.

The speech was prescient because it will be Kroes's performance as competition commissioner which will be crucial in fighting back the tide of economic patriotism.

The Commission is faced with a welter of threats to the principle of free movement of capital: Poland's blocking of the merger of HVB-Unicredito because of the impact on the Italian bank's Polish subsidiaries, threats by the Spanish government to keep energy giant Endesa 'Spanish' at all costs by blocking a bid by Germany's E.ON, or France's list of 11 strategic sectors that it wants to protect from foreign takeover.

While Kroes shares competence for many of these issues with Internal Market Commissioner Charlie McCreevy, it is the competition commissioner who has the most powerful legal tools at her disposal. McCreevy can haul member states before the European Court of Justice. But he has to go through lengthy infringement proceedings with a formal procedure of warning letters and opportunities to respond before even getting to court. The process can take years and in the meantime companies would have had a breathing space to consolidate whatever market position protection from competition had given them.

The competition rules, on the other hand, allow the commission to issue a decision directly against a member state for blocking a merger of a European dimension asking it to "desist" from measures blocking a merger. That decision can be invoked by an interested party in a national court. The Commission can also refer a member state to the European Court of Justice and apply for interim measures.

The weak deal struck on the takeovers directive in 2001 (which has to be implemented by member states by this May) permits many of the defence mechanisms being discussed by governments, such as allowing the management of companies which are the subject of hostile takeovers to take steps to defend themselves without securing their shareholders' approval.

The test for Kroes - and for the political courage of Jos�anuel Barroso's Commission to ensure competition - will be whether the Dutch commissioner carries through her threats to use her powers to ensure there is proper liberalisation of the energy sector. In her presentation of the results of the sectoral inquiry in February, Kroes highlighted a number of problems including the continuing dominance of the incumbents of nominally liberalised markets, the barriers to new entrants as well as a lack of transparency on pricing.

It is no coincidence that it was the energy sector that was Kroes' priority for a sectoral inquiry.

Next year's deadline for liberalisation of the market for household suppliers is driving a wave of consolidation among the EU's energy giants. Cheap capital, thanks to low eurozone interest rates, is also encouraging the trend in merger and acquisition activity.

The results of the sectoral inquiry show that there is a problem. EU competition law would give Kroes the power to take decisions against member states that are blocking mergers of a European dimension.

In deciding to launch proceedings against Poland for blocking the Unicredito/HVB deal under the merger regulation (while McCreevy simultaneously started infringement proceedings against Warsaw on the same issue), Kroes has given the first encouraging signs that she is prepared to be tough to protect the Commission's power to rule on mergers which affect the single market.

Proof of the willingness of this Commission to go head-to-head with large member states on crucial matters would do much to establish Barroso's credentials as a pro-growth, pro-reform president and dispel impressions that the better regulation agenda means the Commission is going into legislative shutdown for the rest of its mandate.

Major analysis feature in which the author suggests that the European Commission could raise its profile if it remained insistent in protecting the principle of free movement of capital against the recent wave of protectionism in EU Member States.

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