A credible competition process

The European Commission's handling of competition policy is facing a crisis of credibility. In the last six months, the Commission which had never previously lost a merger case has suffered three reversals in the European Court of Justice. In each case, the Court has accompanied its judgement with scathing criticism of the quality of the Commission's economic analysis.

The Commission has responded by pointing out that these three cases represent a tiny fraction of the 2,000 examined in the last 12 years. Moreover, the Commission has only ever blocked 18 mergers outright. The Commission's workload has also increased substantially in the last few years making it inevitable it would lose a case at some point.

But the Commission must accept that its merger work is now coming under unprecedented scrutiny. Indeed, there is a risk that the Court's intervention could cause the Commission to lose its nerve. A further 22 appeal cases are still pending, including the Commission's controversial decision to block the merger of US firms GE and Honeywell in 2001.
Claus-Dieter Ehlermann, a former director-general for competition, has suggested that the Commission's decision to clear the merger of Carnival and P&O Princess cruise lines despite the Commission's strong initial reservations might be a sign of faltering confidence. The Commission is also under intense pressure to conclude swiftly its anti-trust investigation into Microsoft.

Mario Monti, the competition commissioner, has proposed a number of reforms designed to restore confidence in Commission merger policy. Monti and Philip Lowe the newly appointed competition director-general have said they will adopt a more hands-on approach to merger cases, to help improve the quality of Commission decisions. In future, the judgements of the teams of officials which prepare merger cases will be subject to an internal process of peer review.

In the Schneider/Legrand merger case, the Court claimed the Commission was guilty of 'several obvious errors, omissions and contradictions' in its economic reasoning. Businesses have long complained that Commission lawyers, rather than economists, take the key merger decisions. The Commission has responded by announcing that it will recruit a chief economist for the competition directorate.

The recruitment of a respected chief economist should help the Commission refine its theoretical approaches on issues such as 'bundling'. The Commission has blocked a number of recent mergers on the grounds that the merged companies could squeeze competitors out of the market by selling customers a portfolio of related products. For instance, the Commission blocked the Tetra/Sidel merger a decision overturned by the Court because it claimed the merged group would use its ability to supply both paper and plastic drinks packaging to take a stranglehold on the market.

However, Monti's plans for reform do not address the central concern of businesses and competition lawyers, which is that the Commission acts as prosecutor, judge and jury in merger cases. An internal peer review system may improve the quality of Commission decisions, but is unlikely to convince all companies they receive a fair hearing. Businesses can seek redress only through appealing to the EU's Court of First Instance. Although the EU has introduced a fast-track procedure for some appeal cases, the legal process is still often too slow to permit companies to revive a previously blocked merger.

Critics contrast the EU system with that of the United States, where the competition authorities must convince the courts of the merits of a case against a merger. Bo Vesterdoff, president of the Court of Justice, has suggested that the EU should consider a similar system, whereby the Court would pass judgement on mergers.

Nevertheless, US-style reform would undermine many of the better features of the EU's existing system. In particular, the EU competition authorities offer a far quicker, and in many ways more transparent merger review process than their US counterparts. In the US, companies normally do not learn of objections to their merger plans until their case goes before the court. In contrast the Commission, must inform companies of any difficulties at least twice during the review stage. If the judges took over the Commission's competition powers the result could be more uncertainty over EU merger cases, at least in the short term, while the Court struggled to build up a body of case law.

Instead, the EU should introduce reforms which preserve the speed of the existing system, while enhancing external checks on merger decisions. It should set up a new competition agency, with responsibility for the day-to-day enforcement of the merger and anti-trust policy. The agency would be independent, although the Commission would retain responsibility for setting the overall framework for competition policy. The Commission would also offer a 'fast-track' appeal process to any company that believed it had been unfairly treated by the agency. The Commission would of course have to explain its reasons for over-turning a decision of the agency.

Equally, the creation of an independent agency would diminish the risk that a future elected Commission president could intervene in merger decisions for political reasons. The EU's current constitutional Convention may decide that the next Commission President should be elected, either by the European Parliament or by a new Congress of national and European parliamentarians. Several businesses and international competition authorities (including those in the US), are concerned that an elected president may use his power to intervene in competition cases. Even a suspicion of such interference could damage the credibility of EU competition policy.

The Commission has admitted that some of its mistakes stemmed from a lack of resources in the competition directorate. That directorate reviews nearly five times as many cases each year as it did in the early 1990s. A new agency, freed from the Commission's constraints on staffing policy, could more easily recruit badly-needed specialists in anti-trust law and economics from the private sector. A properly managed 'revolving-door' would improve the quality of decision-making. For years, the Commission has fended off criticism of its competition powers by pointing to its strong track record. But it can no longer ignore the need for radical change. Instead, the Commission should use the opportunity presented by the EU's constitutional Convention to propose a reform that would restore the prestige and credibility of its competition policy.