Copenhagen Business School
Perspectives on EU Competition Policy
Perspectives on EU Competition Policy
Table of Contents
Introduction ....................................................................................................................................................... 1
The 1989 Merger Regulation, Neofunctionalism and Spillover ...................................................................... 2
M&As at the National and EC level 1983-1990 ............................................................................................. 5
The Need for an Additional Approach: Regulation 1/2003 and New Institutionalism .................................. 6
Conclusion ......................................................................................................................................................... 9
Bibliography ..................................................................................................................................................... 10
Introduction
Competition policy is a major policy area within the European Union (EU), and it has been a core executive
function for the European Commission1 since 1962. Being an area of exclusive competence of the EU and
with the Directorate-General of Competition (DG Competition) firmly in power, it constitutes an interesting
case for understanding the European integration process and the contemporary consequences for business.
Two major policy changes, in 1989 and in 2003, make it possible to investigate how to accurately explain
the development in the area. I argue that until 2003, neofunctionalism offers the best analytical tools for
understanding the process, as it accurately explains and predicts the expansion of the policy competences
of the DG Competition through a variety of spillover-effects, mainly from the Single Market. But while
neofunctionalism is analytically advantageous at the macro-level, it is applicable only to a point, as it cannot
explain the apparent decentralization of executive power taking place with the introduction of Regulation
1/2003. Here more power was delegated to the national competition authorities (NCAs) at the surface, but
at the same time, the Commission significantly increased their relative power position and policy capacity.
This changing paradigm can only to a certain degree be understood in a neofunctionalist perspective, and
as an additional approach, I introduce New Institutionalism and Rational Choice Institutionalism (RCI) to
investigate the issue further. This chain of reasoning suggests that theories of EU integration and
governance are better used in a complementary rather than a contrasting fashion.
Contrary to what has been claimed by the DG Competition, I argue that the Commission actually
strengthened their position with Regulation 1/2003 by freeing up capacity to pursue important cases and
1
Hereafter referred to as “the Commission”
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Copenhagen Business School
Perspectives on EU Competition Policy
cartels, while still imposing rules making it possible for them to counteract national competition
authorities’ decisions “through the back door”. Thus, we cannot understand the European integration
process merely by applying one set of analytical tools with one area of focus, and a thorough
comprehension requires that the theories are integrated to shed light on all the relative perspectives. Also,
the changes in competition policy seriously affect the conditions for especially transnational corporations
and companies in the EU in regard to business opportunities for Mergers and Acquisitions (M&As) and
other agreements, and thus we can ask the question: How can we understand the major policy changes in
EU competition policy, and what are the consequences for business?
The 1989 Merger Regulation, Neofunctionalism and Spillover
In order to understand how a theoretical addition to neofunctionalism was made necessary by the 2003
policy change, an understanding of why and how neofunctionalism accurately can describe the process of
integration in the EU competition policy area until 2003, must be presented.
The early neofunctionalist approach to European integration drew heavily on the work of Mitrany, Monnet
and Haas (Bache, George & Bulmer 2011 p. 5ff) and it adopted a pluralist approach to explain why in the
post-war era, the European nation states voluntarily surrendered sovereignty. Haas saw the driving force of
integration as nothing less but the “calculated self-interest of political elites” (Bache et al. 2011, p. 10)
which through a variety of spillover-effects would advance European integration. The concept of spillover
arose when national governments in pluralistic political processes, which involved interest groups as well as
bureaucratic actors, took the first steps towards integrating the economy. Once this had happened, a
variety of spillover-effects would further integration. Functional spillover would arise because of the
interconnectedness of modern economies which would prompt technical pressures to integrate more
sectors, in order to achieve the original goal, which would in turn press for integration of more related
sectors etc. Perhaps more importantly, political spillover would be driven by interest groups of newly
integrated sectors, who would need to address their lobbying to Brussels and the supranational institutions
concerned, instead of national governments. Once the interest groups came to appreciate the new
possibilities for lobbying, they would press for political integration of related sectors. Thus the interest
groups become advocates for further integration, as well as they formed an effective barrier against
retrenchment from national governments. Neofunctionalism also speculated in “cultivated spillover” where
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Copenhagen Business School
Perspectives on EU Competition Policy
the Commission2 was said to cultivate contacts and transnational networks to add additional pressure on
national governments for more integration. (Bache et al. 2011, p. 8ff)
Neofunctionalism thus concluded that the integration process evolved unintentionally after the initial steps
were made, undermining the political power of national governments. This statement does not, of course,
stand without criticism, as the supranational/intergovernmentalist debate continues with empirical
evidence pointing in different directions, depending on the policy area described. Indeed national
governments do have power, which is evidenced by e.g. the slowing of the integration process in the 1960s
and 70s and in particular the Empty Chair Crisis in 1965-66. (Gravier 2012, lecture 1) Neofunctionalism as a
purely deterministic theory therefore is not very useful, as the integration process obviously is subject to
other mechanisms than spillover. However, it does offer some of the best analytical tools for understanding
a wide range of changes in major policy areas of the EU, as we otherwise cannot explain how the
integration process, as in the case of competition policy and especially the 1989 Merger Regulation, went
against the specific wishes of the member states, as shall be discussed below. (Buch-Hansen 2012, lecture
10) In regard to competition policy, neofunctionalism sees it as primarily a spillover from the Single Market,
and thus it was first completed after the adoption of the Single European Act (SEA) which came into effect
in July 1987. (Bache et al. 2011, p. 596) Promptly the Merger Control Regulation (MCR) was adopted in
1989 after 16 years of negotiations (Buch-Hansen, lecture 10), and I will show that neofunctionalism
effectively explains this development through a process of functional and political spillover, but the earlier
history of EU competition policy also deserves notice:
Competition policy has been called the “first common policy of the EC/EU” (Bache 2011, p. 359) and it was
part of the Treaty of the European Coal and Steel Community 1951 (ECSC). It was, however, originally
initiated by US officials and implemented through the Marshall Plan, and was thus originally a result of
ordoliberal ideas, as well as the Frenchs’ belief that preventing cartels and collaborative business practice
could keep Germany decentralised. Thus competition policy was not a key interest of the nation states in
the ECSC. (Buch-Hansen 2009, p. 257) The pillars of EU competition policy originally consisted of articles
prohibiting cartels & anticompetitive agreements (Art. 1013), abuse of dominant market positions (Art.
102), state aid (Art. 107) and also imposed obligations to privatize public companies (Art. 106). Regulation
on M&As was not included and it was dealt with in national legislation from the 1970s. (Buch-Hansen 2012,
lecture 10) The enforcement was made possible through Council Regulation 17 in 1962 (Regulation 17/62)
which gave the DG Competition extensive powers to investigate, prosecute, judge and impose fines for
2
In this paper, the Commission is seen as representing the interests of the Community, as well as the Council is seen
as representing the interests of the member states, as is the common paradigm.
3
All article references refer to the TFEU unless otherwise indicated
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anticompetitive behaviour. It established a prenotification system where exemptions to Art. 101 and 102
could be granted if agreements fell under Art. 101(3), stating that anticompetitive agreements could be
undertaken under conditions of e.g. “technical or economic progress”. (Art. 101(3) Buch-Hansen 2012,
lecture 10).Thus companies could obtain legal security for their agreements by notifying the Commission,
which lead to a massive case-overload for the DG in the 1960s and 70s. This resulted in the so-called “block
exemptions” where certain agreements were preapproved if they fell under a specific preexisting ruling,
and EU lawyers become very adept at writing agreements which just fitted into the existing block
exemptions. (Ruttley 2003) There was stagnation in the competition policy area until the late 1980s where
the DG Competition finally managed to expand their policy competence to include Mergers and
Acquisitions (a long-standing wish of the Commission) after failed attempts to reach agreements in 1973,
1982, 1984, 1986 and 1987, because of strong national opposition. (Buch-Hansen 2012, lecture 10)
Several issues can be raised about this policy development. First and foremost it must be asked why a
spillover effect to integrate more sector was not observed after the adoption of the first treaty, as several
related sectors immediately comes to mind, especially the establishment of industrial policies relating to
M&As at the European level instead of the national level. (Buch-Hansen 2009, p. 259) Why did a spillovereffect not arise to integrate national legislation on M&As into EU competition policy? Firstly, according to
neofunctionalism, political spillover arose if, and only if, interest group and political elites saw integration
as the more preferable alternative in their “calculated self-interest”. Secondly, functional spillover would
only occur if technical pressures within industries and sectors made the original policy goal unobtainable
without further integration. But Regulation 17/62 gave European companies (or corporate lobby groups) a
unique legal security for agreements, despite the fact that the Commission often took long to deliver a
verdict. (Buch-Hansen 2012, lecture) But by writing agreements to fit into the existing block exemptions,
there was simply no incentive for companies to lobby for further integration, as M&As primarily were
national at the time. If there are no interest groups prompting integration (because of Regulation 17/62),
there is no political spillover, and if the sector is functional as it is (because of the nature of M&As at the
time) there is no functional spillover. The “cultivated spillover” of the Commission in 1973, 1982, 1984,
1986 and 1987 thus proved insufficient to enhance integration, and correspondingly, the development of
EU competition policies in the 1960s and 70s confirms the working logic of neofunctionalism.
However, two major events in 1987 changed the conditions for European businesses fundamentally. The
1987 SEA establishing the Single Market gave rise to a transformation of the business community itself
(Buch-Hansen 2009, p. 260) with an explosion in the number of M&As taking place at the European level,
while M&As at the national level remained relatively constant, as seen on figure 1.
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Copenhagen Business School
Perspectives on EU Competition Policy
M&As at the National and EC level 1983-1990
300
250
200
150
100
EC level
National Level
50
0
Source: Buch-Hansen 2009 p. 169, Based on data from Commission (1985b, 1988, 1989, 1992), data collected by the
Commission)
The rising number of M&As regulated by multi-jurisdictional authorities resulted in heavy lobbying from
transnational business groups for what was called a “one-stop-shop” where companies would only need to
operate with one set of regulations, instead of several national sets of regulations. (Buch-Hansen 2012,
lecture 10) This constituted substantial political pressure which resulted in a political spillover.
The second event in 1987 that made the MCR desirable was the Phillip Morris case, where the European
Court of Justice (ECJ) by their ruling expanded the scope of the community’s power, by stating that the
authority to prevent market domination could be inferred from other articles of the existing treaties than
those already described. (Bache et al, p. 359f) This created major uncertainty amongst national- and
transnational businesses alike, which prompted technical pressures to integrate all sectors of competition
policy under Regulation 17/62. Firms began to notify their M&As to the DG Competition voluntarily,
essentially resulting in a functional spillover which together with aforementioned political spillover resulted
in the 1989 MCR. (Buch-Hansen 2012, lecture 10)
EU competition policy in the 60s, 70s, 80s and 90s can thus be accurately described by the analytical tools
offered by neofunctionalism, with a specific focus on the various effects of spillover. But also the essential
premise, that in sectors where national governments oppose integration, the pluralist process of modern
politics can create integration anyway, stands, as evidenced by the 1989 MCR. This constitutes a powerful
argument in the theoretical dichotomy between supranationalism and intergovernmentalism, but as we
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Copenhagen Business School
Perspectives on EU Competition Policy
shall see, development in the Competition Policy Area requires that neofunctionalism, with all of its
strengths, must be accompanied by other theories to accurately describe the policy process of competition
policy after 2003.
The Need for an Additional Approach: Regulation 1/2003 and New
Institutionalism
The adoption of the EC Council Regulation 1/2003, which took effect on the 1st of May 2004 (Ruttley 2003),
has been described as the most radical policy change in the history of EU competition policy4. (Wigger &
Nölke 2007, p. 488) And indeed, both procedural and substantial changes were undertaken, fundamentally
challenging the way EU competition policy has been perceived so far in this paper. To show how this
requires a new understanding of the power relations between the Commission and the national
governments, the changes will be described and correspondingly analysed within the framework of New
Institutionalism and Rational Choice Institutionalism and in particular the Principal-Agent model.
With the replacement of Regulation 17/62, the Commission effectively abolished the Prenotification system
and made companies solely responsible for assessing whether their agreements were in conflict with Art.
101 and 102, and correspondingly whether Art. 101 (3) grants exemption. (Wigger & Nölke 2007, p. 496)
This change has raised considerable concerns for business (Economist Intelligence Unit, EIU, 2003)
regarding legal security for agreements, but also for less apparent causes related to NCAs and the way
national courts will act to the new changes. Because with the replacement, the Council also declared the
whole of Art. 101 and 102 directly applicable, meaning that NCAs and national courts are obliged to enforce
EU Competition Law alongside their national legislation which essentially decentralizes the executive
powers of the DG Competition. (Wigger & Nölke 2007, p. 496f) This officially gave the NCAs the power to
enforce rules, act on their own initiative in EC cases and decide on anti-competitive practices. The concern
for business was expressed as a concern for “forum shopping”, where firms would undertake deals in
“lenient” countries, essentially undermining the “one-stop-shop”. (Ruttley 2003) But how can such a
decentralization of supranational power occur, when the neofunctionalist paradigm only predicts
movements towards further integration? To understand this apparent conflicting phenomenon, it is
necessary to analyse the reasons for the introduction of Regulation 1/2003 and the underlying agenda of
the Commission. I will hereby show, that the actual facts of the case do not disprove neofunctionalism, but
at the same time points in the direction of an entirely different phenomenon related to EU governance
4
In the 1990s the DG competition focused on primarily liberalisation of key industries, internationalisation of EU
competition policy as well as intensified the fight against cartels. (Buch-Hansen 2012, lecture 10) The next major policy
change after 1989 happened in 2003
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Copenhagen Business School
Perspectives on EU Competition Policy
which goes further that the neofunctionalist/intergovernmentalist debate and effectively illustrates the
need for additional theoretical tools when understanding EU policy making.
The two-tier aspect of Regulation 1/2003 was the result of several related problems which the Commission
struggled with especially in the 1990s, but also since the adoption of Regulation 17/62. (Buch-Hansen,
lecture 10) Firstly, the Prenotification system caused a considerable case overload of “routine notifications”
for all sorts of agreements, and block exemptions were widely used for a range of agreements (e.g.
agreements on common premiums in the insurance sector) which constituted a functional problem.
(Ruttley 2003) But by shifting the burden of proof to companies undertaking agreements, by abolishing the
prenotificiation system, the DG Competition freed up capacity to investigate and pursue cartels and highprofile cases. (Ruttley 2003) Secondly, the DG faced a problem of being repeatedly accused of exercising
uncontrollable Commission power and of being a directorate with little to no credibility or legitimacy. By
making Art. 101 and 102 directly applicable, an apparent decentralization of power to the NCAs and
national courts should satisfy critics of the directorate as well as appearing as if decisions were taken closer
to the actors concerned. (Wigger and Nölke 2007, p. 502f) This is reflected by the fact, that the Council
accepted the proposed Regulation 1/2003 without any major modifications. (Wigger and Nölke 2007, p.
506) However, it can very much be argued that the Commission did not give up any executive power at all,
since the NCAs and national courts were made subject to a far-reaching control by the Commission, as
determined by Art. 16 of the regulation. The Commission was given the right to intervene and withdraw
cases from national authorities, in cases where “decisions running counter to the decision adopted by the
Commission” (Wigger and Nölke 2007, p. 502, line 31-32) should occur, essentially imposing forced
convergence of national- and EU competition law, because no variations were allowed when Arts. 101 and
102 were made directly applicable. To add to this point, concern was raised as to whether national judges
possessed the competences necessary for economic and legal analysis at this level, (Ruttley 2003) resulting
in either the withdrawal of a case if it appears the “wrong” decisions is about to be made, or that a
Guidance Letter be issued from the DG Competition, which was expected to be a strong persuasive
authority. (EIU 2003)
The adoption of Regulation 1/2003 can thus be said to be a curious mix of apparent decentralization and a
new burden of proof placed on companies undertaking agreements. However, the obvious victor of this
policy change must be said to be the Commission who achieved a remarkably increase of capacity in the
competition area, as well as established incremental convergence of national competition law towards the
EU model. Also, the Commission acted against the wishes of businesses and corporate lobby groups when
abolishing the prenotification system, something not very likely in the neofunctionalist framework. Such an
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Copenhagen Business School
Perspectives on EU Competition Policy
independent and resilient position of a supranational institution was never part of the neofunctionalist
logic and in order to understand and explain it, we need to move beyond the dichotomy of
supranationalism and intergovernmentalism which has dominated the EU Integration debate with their
constrasting approaches. Because the dichotomy offers little to no help when it comes to the actual
political functioning in major policy areas, and several theories concerned with EU governance, as opposed
to theories only concerned with integration, can instead enlighten and explain this development. By
approaching Regulation 1/2003, whilst still accepting the basic supranational premises of neofunctionalism
because it has been shown that the integration process indeed goes beyond the wishes of member states,
in a new framework concerned with the EU as an existing polity, it is possible to obtain an accurate
understanding of the policy mechanisms.
With the obvious strengthening of the Commission it is interesting to apply New Institutionalism (NI), which
stipulates that institutions are not neutral actors in a political process, but have the potential of becoming
autonomous political actors in their own rights. (Bache et al. 2011, p. 22f) NI emerged as a reaction to the
strongly behavioural focus in the 1960s and 70s, and stressed that neither was the overly formal
institutional analysis previously used, nor the entirely sociologically/behaviourally tendency of the 60s and
70s, accurate. They both overlooked key aspects of the EU policy process, respectively the informal
patterns of institutions, as well as the fact that institutions actually do shape group behaviour and establish
rules and recognized points of access to the political process. Several subtypes of institutionalism emerged
with a variety of applications, but they overlap rather than contrast each other. Especially Rational Choice
Institutionalism (RCI) has contributed to understanding how supranational institutions can evolve and
become autonomous political actors by approaching national governments as principals, and supranational
institutions as agents in a principal-agent framework. (Bache et al. 2011, p. 22ff) The process starts when
agency relationships are created and principals delegate responsibility for functions to agents, normally in
order to lower transaction costs. However, agents may in many cases acquire more information in the field
and an asymmetric distribution of information arises in favour of the agent. (Kassim & Menon 2003, p. 122)
The agent can then, and often does, engage in opportunistic behaviour which can be directly against the
wishes of the principal, but can be very difficult to detect. And while the agents cannot be effective if
monitored and controlled too closely, an agency loss can cause delegations (or institutions) to obtain a high
degree of political autonomy. (Kassim & Menon 2003, p. 125f) This model has been used to analyse
relationships in the EU, and a common conception is that the “autonomy of a given supranational
institution depends crucially on the efficiency and credibility of control mechanisms established by members
state principals, and these vary from institution to institution”. (Kassim & Menon 2003, p. 125f, line 41-42,
1-2)
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Amalie Korning Wedege || International Business and Politics || Summer 2012
Copenhagen Business School
Perspectives on EU Competition Policy
In the case of EU competition policy, it can be observed how the Commission(the agent) through the DG
competition and a partnership with the EJC has expanded their capacity and worked for further European
integration in e.g. the Phillip Morris case (Buch-Hansen 2012, lecture 10), acquired authority over the MCR
in 1989 against the wishes of member states and NCAs, and finally with Regulation 1/2003, established
themselves as a strong, autonomous actor in the EU system, out of the control of member states (the
principals). Applying RCI, one can even speculate as to whether the principal-agent relationship has
developed in such a way as to be reversed, so that former agents can become principals, as suggested by
the fact that with Regulation 1/2003, the Commission instead of the Member States was the institution to
formally delegate authority. If the agent continually increases its power at the expense of the principals,
can the roles then be reversed and the process started over?
Interestingly, the recent case of Tele2 Polska, where the ECJ in May 2012 ruled that the NCAs cannot state
that there has been no breach of EU competition law, and companies under investigation can thus never
obtain legal clearance from NCAs, has proved the dominance of the Commission in the new “decentralized”
system. As consequences of the ruling, the NCAs will not be able to issue binding decisions about breaches
of Art. 101 and 102, and also, the NCAs are barred from issuing individual exemptions under Art. 101 (3).
(MacGregor 2012) This ruling has created major uncertainty, as all NCAs decision in the period 2004-2012
can be called into question. The development since 2003 tends to confirm what the analysis predicts – that
the Commission is enhancing its power. The case of EU competition policy and the major policy changes
thus cannot be explained effectively and comprehensively by neofunctionalism, nor by New
Institutionalism and RCI alone, but perspectives and theories must be combined in order to describe and
understand the process of European Integration, predict its developments and identify new areas of
interest for scholars.
Conclusion
The aim of this paper has been to show how the case of EU competition policy can be used to illustrate why
the interaction between a theory of EU integration and EU governance can be necessary, as well as
determine the consequences for business. While neofunctionalism as a theory of European integration can
be applied until a certain point, a deeper understanding of policy changes is achieved when using theories
in addition to each other, instead of to falsify each other. One can ask: If theories only arise with the
mission of disproving each other, do they actually portrait the world as it is anymore? In the case of
competition policy, neofunctionalism effectively describes the development of the policy area through
functional and political spillover in the 60s, 70s, 80s and 90s. In 1989 the Commission expanded their
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Copenhagen Business School
Perspectives on EU Competition Policy
powers as a result of a political spillover from the single market, and a functional spillover from the
problems created by the Phillip Morris case, and the spillovers increased the already great legal security for
European companies. However, with Regulation 1/2003, the opportunities for business rapidly
deteriorated, as the burden of proof was shifted to the companies themselves. The lacks of legal security
and experience of national judges created an insecure business environment where firms probably will
have to allocate greater expenses to legal services, and with the Tele2Polska case, the authority of NCAs
and previous decisions made, have been called into question. However, in time the effects may not all be
negative if corporate lobby groups manage to address both the Commission and the NCAs appropriately
and make use of the new access points to the policy making process. The one indisputable observation that
can be made is that the Commission has expanded its capacity greatly, and as it was stated: “Were Member
States given the choice today, they would probably not delegate the same powers to the Commission as
they did 40 years ago”. (Smith 1998 in Bache et al. 2011, p. 359)
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Amalie Korning Wedege || International Business and Politics || Summer 2012
Copenhagen Business School
Perspectives on EU Competition Policy
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Amalie Korning Wedege || International Business and Politics || Summer 2012