The UK in the EU

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EU Competition Policy

Competition among enterprises is one of the driving forces of modern economies – it gives the consumer choice, it puts downward pressure on prices, it rewards innovation, it attacks inefficient use of resources and it helps to create jobs. In the words of a Commissioner formerly responsible for competition policy, it ensures that: "European businesses and consumers are provided with the best possible services at the lowest possible prices".

In order to make the Single Market a truly level playing field, the founding treaty laid down tough legal procedures to ensure that competition is fair. These measures give powers to the European Commission because an independent body is needed to prevent governments from interfering in the market with state subsidies (or other aids) to companies or to protect national firms from mergers or takeovers. The Commission also has powers to ensure that companies do not stifle competition through cartels and that major EU-wide mergers are not anti-competitive. Smaller-scale decisions are taken by national competition authorities in accordance with the agreed EU procedures.

EU competition policy has been a major success story but has come under attack as a result of a surge in economic nationalism, itself a by-product of globalisation (see our separate paper, The EU and Economic Nationalism). While it is understandable that in times of economic instability countries should seek to defend national champions and to prevent the sale of key businesses to overseas investors, history shows that in the long-term state aids and protectionism weaken and not strengthen economies.

Removing barriers to competition in the Single Market has been good for consumers and good for jobs. Telecoms prices have fallen by about 35 per cent since liberalisation. Air fares have fallen dramatically since the relaxation of route and price controls. Trade between EU nations has increased as a result of the development of the Single Market; it has been estimated that the single market has added more than €800 billion to EU prosperity and created 2.5 million jobs. The European Commission demonstrated its determination to maintain these gains by launching tough action against 17 Member States in 2006 for allegedly protectionist policies in breach of the Treaty, particularly in energy.

State Aids

A Single Market cannot work effectively if businesses in different parts of it receive subsidies from public funds. State aid would give them an edge over their competitors in other parts of the Market. The effect is similar to the protection of domestic business by tariff walls, which were dismantled in the Common Market, and by other barriers which the Single Market pulled down. State aid can be legitimate, for example in support of regional development or where a new investment might be lost to the Union through incentives being offered by non-members, but only if it is authorised by the Commission under the Treaty.

The control of state aids is in the hands of the European Commission, without Member States’ participation in the decision; an unusual delegation of power in the EU. This is to ensure that there is an independent body to look at what a Member State is doing in the form of state support to business, to detect any breaches of the rules and to require the repayment of any monies which a state has wrongly disbursed to an enterprise. The benefits are not necessarily cash grants. They can be in the form of fiscal exemptions or phoney loans; all are affected. If the Commission decides that an aid granted by a state is not compatible with the internal market, it can require the state concerned to alter or abolish the grant. Should a Member State refuse to comply, it can be referred to the Court of Justice either by the Commission or by another Member State which is affected (Article 88).

If the Commission proposes to ban a state aid, that country can take the issue to the Council, but any decision to overrule the Commission and say that the aid in question is admissible can only be taken by unanimity.

Monopolies & Cartels

The abuse of dominant position in the market is expressly prohibited by the Treaty. Anti-competitive agreements among enterprises, for example price-fixing, market sharing and discriminating against particular outlets are likewise prohibited. There are some exemptions, where the practices can benefit consumers.

A number of actual or potential monopolies have been prohibited by the Commission, for example the block exemption in favour of agreements between car makers and their official distributors. The bloc exemption enables suppliers to support their dealer networks in different ways, for example through discounts and by granting exclusive sales areas. The rules were considerably liberalised by a 2002 directive with the aim of making car dealing more competitive and thus cutting prices to the consumer.

Mergers & Acquisitions

The third branch of competition policy is the area of mergers and acquisitions. Proposed mergers above a certain size of asset value and market share must be referred to the Commission, which has the power to block them or impose conditions on the deal. The merging of two ex-competitors into one business raises questions about the effects on consumers and the dominance of the new enterprise in the market. These questions have become particularly relevant with the rising tide of mergers and acquisitions which has followed the introduction of the Single Market, the adoption of the single currency and the increasing pace of globalisation.

The rules relating to mergers have been revised within the last five years, with a new Council regulation governing the process in force from May 2004. These reforms included a substantial rewording of the assessment test for mergers which clarified the law so that it was clear that all post-merger scenarios posing a threat to competition are covered by the test. Whilst that aspect of the law was toughened, other aspects were streamlined to reduce the burden on business and to make it possible for companies to seek Commission approval for a proposed merger without a binding agreement to proceed.


The Treaties are sometimes criticized for giving the Commission the role of prosecutor and judge at once. Although it takes the initial decisions on breaches of competition law and imposes the penalties, the Commission operates within a legal framework, which is itself carefully controlled.

An action which the Commission intends to take against a firm or group of firms can be stopped in its tracks by the Hearings Officers, officials independent of the Commission’s Directorate-General of Competition, who report directly to the Competition Commissioner. A Commission finding and the imposition of a penalty on an enterprise can be the subject of an appeal to the European Court of Justice, which will scrutinise both the alleged facts and the procedure used. Decisions of the Commission have quite often been set aside by the Court but in notable cases like that of Microsoft they have been upheld.

The competition rules under the Treaty and the powers given to the Commission are quite similar, but not identical, to the powers of the competition authorities in the US and in some other advanced economies.

Prepared April 2006; revised September 2007.

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