Welcome abroad

Next year’s European expansion will throw up many challenges for the new member states, not least in relation to EU competition policy. Ulrike Muller reports

“Too late and incorrect” – that was the verdict of the European Commission in July when it discovered that several member states had not done their homework on the implementation of European environmental legislation. The UK, together with Luxembourg and France, was leading the group of countries that were given bad marks.

Other member states will probably have sympathy for them – turning European directives into national law can be a tedious task and can give rise to potential difficulties, be they of a technical or political nature.

Bearing in mind the row that the implementation of a couple of European directives can cause, just imagine for a minute that your government had to implement 20,000 pages of European legislation. This piece of work would affect almost every aspect of your life – you would need to change your business models, contracts and systems to comply with laws covering consumer protection, intellectual property, data protection… the list is virtually endless. What is more important, you can forget about most of the legal expertise you have gained in the past, as only parts of it would still be applicable.

This is exactly what has happened over the last decade in the 12 applicant countries, 10 of which will join the EU next year. From 1 May next year, the countries’ arrival will take the number of member states up to 25 and increase the population from 370 million to 450 million.

Politicians have tried to smooth the process during this marathon to prepare for EU entry. The process of adopting European legislation, the so-called ‘acquis communautaire’, began a decade ago. To give the amount of legislation at least the appearance of being manageable, the acquis has been subdivided into 31 chapters. Following completion of all the chapters, the countries signed the EU accession treaty in April this year.

One major topic for both the new countries from Central and Eastern Europe and the current member states is competition policy, and in particular the issue of state aid. As a number of the accession states are former members of the Council for Mutual Economic Assistance (Comecon), the council that arranged trade between former communist countries, market forces have been a fairly new phenomenon and governments have been rather keen to support their national economies through state aid.

State aid – always a temptation

State aid can come in many different forms – state grants, interest relief, tax relief, state guarantee or holding, or a provision by the state of goods and services on preferential terms. The EC Treaty, however, strictly bans state aid. Exceptions are only allowed where the proposed aid schemes may have a beneficial impact in overall EU terms. The exclusive authority for scrutinising the state aid schemes of EU governments was conferred on the Commission by the member states.

One does not need to be an expert to appreciate the difficulties. Governments in the applicant countries had a strong case for state aid. National businesses have been – and still are – struggling to compete. The high costs of building and sustaining viable market share and a lack of distribution channels form the key barriers to market growth. Cooperation with well-established EU companies has so far not been beneficial either, as margins for non-branded products are low. After entrance, a change in tariff regime might also lead to trade diversion and can have a detrimental effect on the new economies.

This climate has led to some friction, with several of the current member states seemingly losing their patience. For example, the president of Eurofer, the trade association for European steel producers, recently urged EU Enterprise Commissioner Erkki Liikanen to take a “tough line” on accession countries that were “attempting to change, or not even respecting, the terms of the accession treaties” with respect to state aid.

Central and Eastern European heads of government, however, have been determined in recent years to put an end to state aid, and their record has been considerable. The Czech Republic, Hungary, Poland and Slovakia, for example, have reduced red tape, although not as fast as businesspeople would like. For example, they are engaged in tax reforms to reduce rates and simplify complex allowance schemes. Slovakia plans a single 19 per cent income and corporate tax next year, and Poland may follow suit in 2005. Thus, all four countries are willing to give up old practices as they are convinced of the benefits of EU membership and the long-term advantages.

To be fair, all member states have at some point been summoned by the Commission for tax and trade issues. To give just one example, France once put a higher tax on whisky than on liqueur, arguing that the drinks were consumed at different times during a meal, thus falling into different categories and justifying different taxations.

A new challenge for a common competition policy

What does this mean for the overall concept of a common competition policy? For the applicant countries, EU membership implies increased intensity of competition, as companies from EU states are currently better able to serve the market demand.

In addition, for a certain period of time, businesses will also struggle with the financial burden of new EU law. Bringing accession countries into line with EU environmental law costs between e80bn (£56.3bn) and e110bn (£77.3bn). Overall, total conformity requires 2 to 3 per cent of the gross domestic product of candidate countries. Another problem with regard to competition is that applicant countries still operate harmful tax schemes, as the Commission recently concluded. Yet many countries have agreed to phase out special deals for offshore companies or to clear up rules for investment promotion schemes.

Thus, some effort still needs to be put in to achieve real competition and effective market mechanisms. In Hungary, for example, local train operators still offer 27 categories of passenger eligible for reduced rates, among them students, hikers, sportsmen and civil servants. As much as this shows the need for improvement, it demonstrates that European rules and the close scrutiny of the Commission are not able to cover every corner of a country.

Nevertheless, EU membership will surely strengthen the development of market forces (and already has to a great extent). It will also enable the governments of new member states to keep a tighter rein on uncompetitive behaviour. Agreements that currently distort competition will be brought under pressure. It might also result in agreements being prohibited under EU law. As the new member states will be keen to prove that they are ‘good Europeans’, they might be in favour of a stricter application of EU law. As a result, new investors might come under more scrutiny, and will be referred to competition authorities more often.

In this respect it will be all the more interesting to see how the regulation to decentralise parts of competition legislation will develop. Under the regulation, which will come into force in May 2004, the Commission gives up its exclusive rights to enforce competition law. National authorities will play a greater role, and the obligatory notification system will come to an end. Companies will be responsible themselves for assessing whether their agreements comply with EU law. Legal professionals in current, as well as in new, member states are preparing themselves for the new work. It remains to be seen how national judges will interpret and apply new market-orientated legislation. For the judges in Central and Eastern European countries, this means they not only have to learn the necessary competition legislation, but also get used to the legislative culture.

It can be argued that, despite the occasional discontent, the strict application of competition policy by the Commission has helped to strengthen market forces in the applicant countries and helped to set up rules that reduce inconsistencies and risks. These rules, however, are only a framework. While this legislative framework may well be of a pan-EU character, the cultures are not. National customs still play an important role – and that is where good preparation and knowledge of regional circumstances come into their own.

Ulrike Muller is head of research at the public affairs division of McGrigor Donald