Long-protected sectors hit by shock of freedom

Date: 31/10/1996

By Tim Jones

POLITICIANS are sometimes taken aback by the European Union's liberalisation 'crusade'.

This was not the intention of the Community's founding fathers back in the Fifties, complain a sprinkling of socialists and dirigiste conservatives, often but not always French.

When Jean Monnet and Robert Schuman came up with the idea, they insist, they had in mind a far loftier notion of a Europe free from the threat of war and protective of its unique social model.

The upheavals caused by the promotion of free markets in civil aviation, telecommunications and electricity supply and those which are to follow in the gas, post, rail and government contract sectors, must have them spinning in their graves, cry the anti-liberalisers.

But although they may not like it, it should not have come as a shock.

It may have been the Single European Act of 1987 which introduced the uncomfortable heat of liberalisation to long-protected sectors of the EU's economy, but those who drafted it were simply activating dormant parts of the 1957 Treaty of Rome.

It was the Rome treaty that included the infamous Article 90, which permits the European Commission to take unilateral measures to ensure that public-sector enterprises granted special monopoly rights also comply with the Union's competition rules.

But the bandwagon did not get rolling until Jacques Delors arrived in Brussels in 1985 to take over as president of the Commission and began pressing for the Single European Act (SEA) and, together with Sir Leon Brittan, for airline liberalisation.

Even though former UK Prime Minister Margaret Thatcher now says she was wrong to sign the SEA, it has been instrumental in realising a public-sector restructuring of which she should be proud.

Inspired by former President Jimmy Carter's fundamental overhaul of the US internal market in aviation in 1978, the Commission forged a ten-year programme to open up the European skies to internal competition. From April next year, the final piece of the legislative jigsaw will be in place and any EU airline will be able to offer cabotage services within another member state.

But the story is far from over. While the skies over Europe may be open, the ground is not. Germany and France fought a successful battle to slow down the phase-out of airports' monopolies on baggage handling, catering and refuelling operations. Exemptions remain and the prospect of competing with established groundhandlers is not attractive.

The behaviour of the electricity suppliers as they prepare for liberalisation of less than half of the market in 2003 demonstrates equally how reluctant incumbents are to give up their monopolies. Attempts by Belgium's Electrabel to 'persuade' municipal distributors into exclusive contracts of up to 30 years tell their own story.

'Liberalising' countries (who often vary according to which sector is being liberalised), as well as Competition Commissioner Karel van Miert, have worried about these trends which underline, they say, the importance of ensuring compliance with new market rules by tough regulatory bodies.

Unfortunately for them, securing agreements on these issues has so far meant accepting second best. In the utilities sector, for example, all member states will be obliged to set up a regulatory authority independent from the relevant industry. But, despite agreement on sets of principles, the precise scope and nature of these agencies has been left to the good intentions of national administrations.

Van Miert has relied on the powers he has to vet mergers and take-overs to try to ensure that none of these markets is closed before it is even created (so-called 'foreclosure'). This has led him into numerous high-profile battles with major industrial players.

Every time he has the opportunity to squeeze firms such as Deutsche Telekom and Spain's Telefonica where it hurts, Van Miert turns it to the advantage of free competition.

So far - whether approving of his methods or not - nobody could say he has not played a skilful game in obliging member states to put into practice agreements they have struck in the Council of Ministers.

This has often infuriated politicians, but it has been a useful stick with which to hit their monopolies and strong labour unions. Governments have always found it easier to take unpopular decisions if they could blame an outside body for making them do so. The International Monetary Fund is used to playing this role and now the ogres of the Breydel building and particularly the 'evil' Van Miert are getting used to it.

The Belgian socialist rejects claims that his liberalisation drive leads to lost jobs and wrecked lives. He argues that workers can be and should be coaxed out of obsolete jobs with attractive voluntary redundancy packages if possible, and those who are still of working age should be retrained and counselled to help them find new ones.

Bringing down phone charges and energy prices and improving information infrastructure will actually create more net employment, claim the liberalisers.

This argument is a common one, but difficult to substantiate or refute, although many point to the UK - which has been liberalising and privatising since the early Eighties - as providing the best evidence of what happens in practice.

Between 1990 and 1995, British Telecom's workforce fell by almost 100,000. While the company is convinced that a large proportion of its staff have found new jobs in the expanding and newly-innovative telecoms sector, the unions believe two-thirds of them have not.

It is no wonder that scepticism remains about the whole thrust of the European liberalisation programme. Not only are jobs lost but, once the profit motive becomes central to public service provision, there are no guarantees that everyone will get the same service wherever they are in the country.

The sceptics now have lobbies producing research and propaganda of at least as high a quality as the aggressive private-sector firms they eye with suspicion.

The European Centre for Enterprises with Public Participation (CEEP) has taken the role of acting as the conscience of the public sector, sometimes criticising the Commission's liberalisation policy for looking like a 'privatisation mission'.

Instead, it wants companies providing public services to be protected by that often ignored part of Article 90 of the Treaty of Rome, which allows them exemption from normal competition rules so long as they do not go beyond the mission given to them.

'Universal service' needs to be enshrined in the EU's rules and principles just as strongly as the requirement to promote competition and free markets, it says.

But should this allow for any extra charges for supplying expensive services to remote parts of the country? Should new entrant companies be allowed to come into markets and pick off the most attractive cherries in the orchard?

These questions are still unanswered and provide the backdrop for the unfinished business of the EU - liberalisation of the gas and postal services markets. Both have been hanging around for years waiting for the completion of market-opening in other sectors.

It now looks likely that just one-fifth of the EU's postal services will be opened to competition by the end of the century, while the gas market negotiations are going more slowly than had been anticipated despite an imaginative compromise proposal from the Irish presidency.

Yet the much greater test of the experiment will be how the newly-opened markets - telecoms and aviation - work in practice, rather than how quickly officials and politicians can get an agreement on gas and post down on paper.