The European Commission should not be afraid to keep governments in check in cross-border mergers

A number of commentators have recently noted the rise of protectionism within the EU and have concluded that this trend could be very damaging for the union. I agree, but think that the real danger lies in the lack of political will to use rules that are already available, as opposed to any flaw in the EU’s architecture.

The EU’s single market is a remarkable achievement and the very success of the EU in removing virtually all barriers to trade has caused, in part, the use of these more subtle and diffuse measures of protection.

The European Commission now has the power to regulate all large mergers, the power to enforce open and transparent public procurement and to force the liberalisation of certain sectors. It has already done so in telecoms and is starting in the gas and electricity sectors. It has the power to require member states to divest themselves of ‘golden shares’ and to remove restrictions on the free movement of capital. It also has the power to ask the European Court of Justice (ECJ) to impose financial penalties on member states which consistently break these rules. But these powers prompt two important questions. First, what are the boundaries of the Commission’s powers? Second, is the Commission prepared to act at the margin of these powers?
Looking at the first question, the treaty allows member state governments to be investors in private business. When governments do make such investments, they have the right to act like any private investor. Therefore, it is lawful for the French government to use its shareholding in GDF to sponsor a merger with Suez and block the bid by Italy’s ENEL. Clearly the merger favoured by the French government could be blocked by DG COMP as being anticompetitive, but that review normally concentrates on changes in competitive conditions and ignores the role of governments. On the other hand, the French government is skating on very thin ice when its ministers place phone calls to Novartis to tell it not to bid for Aventis, since the French government wants Sanofi to acquire it. The Spanish government is also breaching EU law when it says that it will pass a law blocking the attempted purchase of Endesa by Germany’s E.ON.

Looking at the second question, the Commission has been timid in using its powers to stop member states protecting their national champions. Clearly, some of these measures currently being used by member states are arguably legal, adhering to the letter if not the spirit of EU law. However, failure to act is encouragement to continue. If the Commission was prepared to enforce all available rules strictly against all member states, then arguably no Member State could see any advantage in protection. However, where the rules are only enforced partially, then member states may calculate that there is an advantage to protecting their own markets while enjoying full access to third markets. The Commission should risk the possibility of a bloody nose before the ECJ to limit these attacks on the single market.

So what should the Commission do? First, it should use Article 86(3) more frequently to force liberalisation. When the Commission used this measure in the Terminal Equipment case, France appealed the Commission Directive, but the ECJ backed the Commission.

It could also consider protective measures or a refusal to liberalise a relevant consideration in merger reviews. DG COMP is doing this in some cases involving energy and should consider extending this practice and take account of national policies that protect markets or companies in any review of a merger involving a company that benefits from that protection. This is arguably unfair on the private company that benefits from the protection. However, they are normally the prime movers in the protection and are best placed to persuade their government to give it up.

Finally, the Commission should push actions under Articles 43 and 56 of the EC Treaty. It should undertake a review of the stock of measures retained by member states to protect their markets and draw up a ‘hit list’ of the most egregious. It might put the UK Industry Act 1975 towards the top of that list.