concurrences - european commission...1. t im es o f severe eco n o m ic crisis b rin g ab o u t a...

ConcurrencesRevue des droits de la concurrence

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TTrr eennddss ! Concurrences N° 2-2009

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DDaavviidd [email protected] Chargé de recherches, CNRS

l Associate Professor, Paris School of Economics

AAnnddrreeaa [email protected] Chief Economist’s Team, DG COMP

GGeeoorrggeess [email protected] Chief Economist’s Team, DG COMP, Universidad Carlos III, Madrid, and CEPR

AAnnttooiinnee [email protected] Lawyer, Brussels

FFrraannççooiiss--CChhaarrlleess LLAAPPRRÉÉ[email protected] Lawyer, Brussels

CCaarrllooss [email protected] PSE-ENS, Paris and University of Evry, Paris

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DDaavviidd SSPPEECCTTOORR

Chargé de recherches, CNRSAssociate Professor, Paris School of Economics

11.. Times of severe economic crisis bring about a severe questioning of marketmechanisms with unfailing regularity. The Great Depression is the most tellingexample, as countries, one after another, resorted to protectionist policies, whichfurther aggravated the crisis. However, beyond international trade, the rejection ofmarket mechanisms also affected competition policy. In the country where it could bebelieved to be most deeply entrenched – the United States – it was briefly reversed byPresident Roosevelt through the enactment of the National Industrial Recovery Act in1933, until the Supreme Court reversed these policies in 1935 and widespread publicresentment against the high prices charged by government-sponsored cartels led to acomplete policy reversal in 1936, with the enactment of the Robinson-Patman Act.

22.. In theory, the case for a temporary softening of competition policy in extreme crisistimes is not completely unfounded and it would be a mistake to ascribe this temptationexclusively to a poor understanding of economic mechanisms. For instance, it hassometimes been argued that in times of crisis, the degree of uncertainty faced by firmscompels them to adopt highly flexible technologies, which are not the most cost-effective. According to some authors, cartels may in some circumstances allow stabilisefirms’ environment and thus stimulate the adoption of less flexible more efficienttechnologies, thereby increasing total output.1 The real test is therefore an empiricalone, in order to measure which of the output-reducing or potentially output-increasingeffect of crisis cartels dominates. An answer can be found in a recent econometricstudy of American industry at the beginning of the New Deal: according to theeconomist Jason Taylor, Roosevelt’s forced cartelisation policy caused output to falland delayed recovery.2

33.. Current challenges are somewhat different, especially in Europe where the branch ofcompetition policy most strongly challenged by the crisis is State Aid control,especially in the financial sector. The European Commission can be commended fortreading a fine line between the rigorous enforcement of the relevant provisions of theTreaty and the need for flexibility and a speedy treatment of the most urgent cases.Still, the various cases of aid to the banking sector cast light on the possible tensionbetween the purported goal of State aid control, i.e., avoiding market distortions, andthe need for aid to be efficient by preventing a collapse in the flow of credit to theeconomy. This tension is reflected in some of the early Commission decisions (such asNorthern Rock) in which aid beneficiaries commit not to increase the volume of theirloans above a certain threshold.

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TTrr eennddss

AAbbssttrraaccttIn the past, times of severe economic crisis regularly led to the

weakening of competition policy. In retrospect, this reactionappears to have deepened the crises it was meant to alleviate, at leastin the United States at the beginning of the New Deal. This precedent

suggests that a backlash against competition policy would be a wronganswer to the current challenges, even though exceptional economic

conditions call for flexibility and adaptations. This set of three articlesaddresses competition policy in times of crisis. Andrea Amelio and

Georges Siotis describe the European Commission’s handling ofcompetition cases in the current unusual circumstances. Antoine

Winckler and François-Charles Laprévote focus on State aid, andCarlos Winograd tells the story of the long-lasting negative impact of

the Argentinian crisis of 2000 on the nascent competition policy.

Historiquement, les crises économiques se sont souventaccompagnées de réactions hostiles à la concurrence,

qui ont dans l’ensemble aggravé la situation, du moins dans le cas desEtats-Unis au début du New Deal. Ce précédent suggère qu’une telleréaction constituerait une réponse erronée aux défis actuels, même si

les actuelles conditions exceptionnelles exigent une certaine flexibilitéet des adaptations. Cet ensemble de trois articles porte sur la politique

de la concurrence en période de crise. Andrea Amelio et GeorgesSiotis décrivent l’approche générale des affaires de concurrence par

la Commission européenne dans les circonstances inhabituellesprévalant actuellement. Antoine Winckler et François-Charles

Laprévote abordent plus spécifiquement les aides d’Etat, et CarlosWinograd rappelle l’impact négatif et durable de la crise de 2000 en

Argentine sur la jeune politique de la concurrence.

DDaavviidd [email protected]

Chargé de recherches, CNRSAssociate Professor, Paris School of Economics

AAnnddrreeaa AAMMEELLIIOO*[email protected]

Chief Economist’s Team, DG COMP

GGeeoorrggeess SSIIOOTTIISS*[email protected]

Chief Economist’s Team, DG COMP,Universidad Carlos III, Madrid, and CEPR

AAnnttooiinnee WWIINNCCKKLLEERR**[email protected]

Lawyer, Brussels

FFrraannççooiiss--CChhaarrlleess LLAAPPRRÉÉVVOOTTEE**[email protected]

Lawyer, Brussels

CCaarrllooss WWIINNOOGGRRAADD***[email protected]

PSE-ENS, Paris and University of Evry, Paris

*The views expressed are those of the author and do notnecessarily reflect those of DG COMP or the European Commission.

** The authors thank the research assistance of Clare Moriarty.The views expressed are those of the authors and

do not necessarily reflect those of the law firm or its clients.

*** The author thanks the research assistance and commentsof Matteo Mogliani. He also thanks Paolo Benedetti,

Marcelo Celani, Gabriel Martinez Riva and David Spectorfor their valuable comments.

Concurrences N° 2-2009 l Trends l Competition policy in times of crises 1

1 Kinghorn (1996), Telser (1985), Troesken (1989).

2 Taylor (2002).


44.. The following pieces shed light on different issues raised bythe adaptation of competition policy to severe economic crises.The paper by Andrea Amelio and Georges Siotis, from theChief Economist team at DG Competition, provides theCommission’s view on its role in these exceptional times. Theevolution of the European Commission’s handling of State aidin the financial sector is analysed in Antoine Winckler andFrançois-Charles Laprévote’s paper. Finally, CarlosWinograd’s paper on the Argentinian case shows that the ideaof a temporary softening of competition policies during crisistimes, followed by a swift return to normal enforcement oncethe crisis subsides, might be illusory. As the Secretary forcompetition and consumer affairs in Argentina, CarlosWinograd played a decisive role in developing competitionadvocacy and competition policy shortly before the financialcrisis shattered the Argentinian economy in 2000. As hisarticle explains, the ensuing weakening of competition policywas all but temporary and it resulted in a lasting decline in thecompetition culture that had been developed – at the cost of alot of effort and political capital – in the previous years. CarlosWinograd’s article can thus be seen as a reminder of the needto preserve competition policy even in difficult times, even if itneeds to be adjusted to changing circumstances. !

RReeffeerreenncceessJJ..RR.. KKiinngghhoorrnn (1996), “Kartells and Cartel Thoery: Evidencefrom Early Twentieth Century German Coal, Iron and SteelIndustries”, Essays in Economic and Business History, Vol. 14,339-363.

JJ.. TTaayylloorr (2002), “The Output Effects of GovernmentSponsored Cartels during the New Deal”, Journal of IndustrialEconomics, Vol. 50(1), 1-10.

LL..GG.. TTeellsseerr (1985), “Cooperation, Competition, andEfficiency”, Journal of Law and Economics, Vol. 28, 271-295.

WW.. TTrrooeesskkeenn (1989), “A Note on the Efficacy of the GermanSteel and Coal Syndicates”, Explorations in Economic History,Vol. 18, 595-600.


11.. Economic indicators points to a deep and protracteddownturn. As often in times of a deep recession, some havecalled for a temporary suspension or softening of competitionrules.3 The story is roughly that harsh economic conditionslead to business failures and lay-offs and that relaxingcompetition rules would give companies some breathing spaceuntil the good times return and could also allow firms toorderly re-structure. The wisdom of this policy is particularlystrong, it is argued, when the recession is triggered or at leastconcomitant with a financial crisis as funding for the realeconomy may dry out, even for viable concerns. Under thesecircumstances, it might indeed be tempting to think thatallowing firms to earn rents through the excise of market poweror granting them state support in circumstances that wouldotherwise not be allowed would have to be part of a solution.

22.. However, relaxing competition rules will reduce thediscipline of competition as a triage mechanism betweenefficient and inefficient firms, impeding necessary adjustment.A downturn requires firms to adopt and change andcompetition will provide adequate incentives for this to takeplace. In addition, relaxing competition rules by transferringrents to firms will depress consumers’ purchasing power. Thismight ultimately delay recovery and resumption of trendgrowth. As discussed below, past experience indeed providesimportant insights in this respect.

33.. That is not say however that the competition rules shouldnot be implemented with due regard to the relevant features ofthe current economic environment. As discussed below, stateaid rules in particular need to take into account market failuresthat are specific to the financial and economic crisis. Periodsof recession also call for strengthened enforcement towardscartels and exclusionary conduct.

44.. This short article thus argues that while relaxingcompetition policy during a crisis would be counterproductive,existing rules can and should be implemented in light of thespecific circumstances of the financial and economic crisis. Wediscuss state aid, merger and antitrust rules before turning tothe issue of whether banking might require a specificcompetition regime.

II.. SSttaattee aaiidd55.. Member states can be expected to ignore the consequencesof state support that will take place outside their nationalborders. In the presence of negative spillovers across countries(such that for instance recipients of aids become morecompetitive against foreign firms), one can anticipate thatindependent decisions by member states will lead to anexcessive amount of aid. The purpose of the EU state aidcontrol is then to allow States to intervene when pursuing welldefined objectives of common interest while avoidingdistortions of competition, in particular when these distortionsoccur in other members states. Objectives of common interestscan be considered either in terms of equity or efficiency andthe Commission has operationalized this approach in terms ofa balancing test. Regarding efficiency, the analysis isformulated in terms of the identification of market failures thatcan be addressed by state actions so that the benefits in termsof the alleviation of market failures can be balanced againstdistortions of competition.

66.. In the current context of plummeting growth and increasingunemployment, there may be a temptation to sustain firmsindiscriminately through State support. There is a risk howeverthat injecting public money to sustain concerns that have noviable future in their present form would represents a waste oftaxpayers’ money with no associated long-term collectivebenefits. The support of firms in difficulty will also lead todistortions of competition; first, the provision of aid willinvolve some moral hazard. The recipient’s incentive tocompete and improve efficiency will be impaired as it mightexpect that state aid will be provided again in the future in caseof difficulty. Second, incentives of competitors will also beaffected as rents in the markets are allocated by state supportrather than business decisions and managerial efforts.

77.. Artificially maintaining firms active can indeed havedisastrous consequences. The Japanese experience of a longand protracted “L shaped” recession can be directly tracedback to the existence of “zombie” banks undertaking “zombie”lending (Caballero, Hoshi, and Kashyap (2008)). LargeJapanese banks often engaged in sham loan restructurings thatkept credit flowing to otherwise insolvent borrowers, the so-called “zombies”. This had the effect of dampening theadjustment that would occur under normal competitive

* The views expressed are those of the author and do not necessarily reflectthose of DG COMP or the European Commission.

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AAnnddrreeaa AAMMEELLIIOO*Chief Economist’s Team, DG COMP

GGeeoorrggeess SSIIOOTTIISS*Chief Economist’s Team, DG COMP,Universidad Carlos III, Madrid, and CEPR

Competition policy in times of crisis


conditions, namely that the “zombies” would have shedworkers and lost market share. This led to congestion createdby the zombies, reduced the profits for healthy firms, whichdiscouraged their entry and investment. Empirical evidenceindicates that “zombie-dominated” industries exhibited moredepressed job creation and destruction, and lower productivity.Allowing State support to non-viable concern would createindustries plagued by “zombies” at the cost of taxpayers andemployment growth; this would only serve to push the onset ofrecovery further into the future.

88.. However, some targeted state support could be appropriatein the presence of significant market failures and there are atleast a couple of features of the current financial and economiccrisis that may warrant attention from that prospective.

11.. RReessccuuee aanndd RReessttrruuccttuurriinnggffoorr ffiinnaanncciiaall iinnssttiittuuttiioonnss99.. The failure of financial institutions might involve significantsystemic effects associated with negative externalities so thatthe social cost of a bank failure much exceed its private cost.The negative externalities of a bank failure (or the anticipationof it) arise through various channels. First, as banks haveextensive exposures to one another, losses of one bank will beborne by other banks (in case of failure or through a reductionin the value of their debt), the position of these banks may inturn be weakened and trigger losses for their own creditorbanks. Losses can spread directly through interbank exposuresor indirectly through guarantees, credit lines, or insuranceagainst credit risks (Credit default swaps, or CDS) that arebeing drawn and called. Second, pure informational contagioncan arise such that the failure of one bank leads to anadjustment in the expectations regarding the viability of otherbanks perceived to be similar (even in a simplistic sense).

1100.. The development of negative externalities across banks isalso subject to amplifying dynamics. What can initially appearto be exogenous risk triggers some reaction among bankswhich generates endogenous risk. To illustrate, following therealization of losses on its assets, a bank may attempt to reduceits leverage and indeed will often be compelled to do so bycapital regulation. It will thus sell securities which mighttrigger a fall in the price of these securities, thereby inflicting anew round of losses on securities portfolios of other banks andgenerate the need to deleverage further. Alternatively the bankcan reduce its leverage by restricting its credit to the realeconomy, which increases the probability of default of allother borrowers in the economy, again inflicting a new roundof losses on their credit portfolio and a similar downwardspiral.4 Note that these kinds of dynamics also imply thatactions that ensure the soundness and viability of one bank

(micro-prudential measures involving capital requirements forinstance) may actually not enhance the viability of other banksor that of the system as a whole, so that micro-prudentialmeasures may conflict with macro-prudential measures.5

1111.. In addition, the stability of banks hinges on expectations andmay be subject to coordination failures. Indeed, banks differfrom ordinary firms because their role in the transformation ofmaturity exposes them to relatively high risks of illiquidity.Banks pool and transform short term funds into long terminvestments and liquidity risk materialises when a sudden surgein withdrawals precipitates a premature liquidation of assets atsubstantial discounts. Banks may as a result be unable to meetall withdrawals and become insolvent. However, the anticipationthat some creditors will withdraw funds will give others theincentive to withdraw in order to avoid being exposed to aninsolvent debtor. This will in turn validate the expectation thatwithdrawals will occur. In other words, banks are subject to runson deposits associated with self fulfilling expectations thatwithdrawals will take place. The probability that banks will besubject to runs is naturally also linked to their fundamentals, asweak banks are more likely than others to suffer from abreakdown of trust, leading to a run and self-fulfillingexpectations.6 Still, a change in aggregate uncertainty whichleads to a larger dispersion of risk while maintaining theexpected value constant will also enhance the probability thatruns will take place.7 The occurrence of runs can be thought ofas a market (coordination) failure which can be addressed bygovernment intervention in the form of targeted support,liquidity assistance or deposit insurance protection.

3 See Global Competition Policy, December 2008 issue. The latter providesample evidence that, in times of crisis (economic or otherwise), attempts tosuspend or relax competition rules are a knee-jerk like reaction.

4 Note that the empirical literature shows that leverage even behaves pro-cyclically for investment banks and investment banking arms of universal banks(Adrian and Shin (2009)). This implies that the leverage does not only return toits original level after a loss has been absorbed, but falls below its initial level.Allowing for the fact that lower leveraging may be justified by an exogenousshock, this observation is consistent with the view that banks may actuallyoverreact in their adjustment, which reinforces the downward spirals even more.

5 A prudent shedding of exposures from the point of view of a bank indifficulty may be a withdrawal of funds from the point of view of anotherbank. When a bank faces a credit loss that depletes its capital, amicroeconomic prudent course of action is to reduce its overall exposure,including the lending to other banks. As a result, the other banks face awithdrawal of funds and need to find alternative funding or reduce its assetholdings in turn (curtailing lending or selling marketable assets).

6 Larry Summers (2000) already captured the intuition in a famous thoughtexperiment delivered at the 2000 AEA conference: “Imagine that everyonewho has invested USD 10 with me can expect to earn USD 1, assuming that Istay solvent. Suppose that if I go bankrupt, investors who remain lose theirwhole USD 10 investment, but that an investor who withdraws today neithergains nor loses. What would you do? […] Suppose, first, that my foreignreserves, ability to mobilize resources, and economic strength are so limitedthat if any investor withdraws I will go bankrupt. It would be a Nashequilibrium (indeed, a Pareto-dominant one) for everyone to remain, but (Iexpect) not an attainable one. Someone would reason that someone else woulddecide to be cautious and withdraw, or at least that someone would reasonthat someone would reason that someone would withdraw, and so forth. […]Now suppose that my fundamental situation were such that everyone would bepaid off as long as no more than one-third of the investors chose to withdraw.What would you do then? Again, there are multiple equilibria: everyoneshould stay if everyone else does, and everyone should pull out if everyone elsedoes, but the more favourable equilibrium seems much more robust. […] Ithink that this thought experiment captures something real. On the one hand,bank runs or their international analogues do happen. On the other hand, theyare not driven by sunspots: their likelihood is driven and determined by theextent of fundamental weaknesses.”

7 This is an issue of equilibrium selection in coordination games. If newinformation arrives which increases aggregate uncertainty (i.e. a largerdispersion of risk, not a lower expected value in the good equilibrium), thenpanic equilibria can arise without changing anything in terms of the expectedvalue of the fundamentals. Although expected viability of the system is notchanged, bad equilibria suddenly become much more attractive for individualdepositors from the point of view of strategic uncertainty,i.e., payoffuncertainty seems to create strategic uncertainty in some class of coordinationgames, leading to a higher likelihood of inefficient equilibrium selection.


1122.. Hence, targeted support for banks in difficulty might beattractive as a way of alleviating market failures and achievingfinancial stability. However, these benefits have to be balancedagainst distortions of competition. Indeed, the rescue of banks(or more generally the support of banks in difficulty) mighthave the effect of protecting the providers of funds (owners andcreditors) and the bank managers from the consequences ofpast (excessive) risk taking. This in turn raises the issue ofincentives from the perspective of moral hazard for therecipient of support. Indeed, the rescue measures mightstrengthen the expectation that insurance will be provided infuture cases of distress and provide renewed incentives forexcessive risk taking. Measures aimed at financial stabilityshould thus be designed so as to mitigate problems of moralhazard. The rescue (or support given to banks in difficulty) alsoaffects competitors directly and distorts their own incentives tocompete. Indeed, if banks that have not indulged in excessiverisk taking observe that their competitors are bailed out,incentives for appropriate risk taking will be further impaired.

1133.. Many financial institutions (FIs) are too big to fail (TBTF)or too interconnected to fail (TITF) and therefore requirepublic support in the current crisis, as the existence of systemiceffects results in the social costs of failure greatly exceedingthe private costs to shareholders and creditors. While acceptingthe need for intervention, it is important to minimizedistortions of competition. As discussed above, this involvesreducing moral hazard and making sure that state support iskept to the minimum so that competitors’ incentive to competeare least affected. Particular attention should also be paid todistortions of competition taking place across member states.

1144.. The Commission has thus provided some guidanceregarding the most common support measures to the bankingsector, namely guarantees, recapitalization and the treatment ofimpaired assets. This guidance involves in particular indicationson the pricing of guarantees and recapitalization schemes thatthe Commission would consider adequate according to anumber of parameters including the risk profile of the recipient,the type of instrument used and the time profile of the pricingscheme (so as to induce termination of governmentinvolvement). The Commission has also drawn a distinctionamong distressed banks between those that are in distressbecause of a defective business model and those that happenedto be distressed because of the systemic effects, while pursuing afundamentally sound business model. Mandatory restructuringis imposed on the former and the restructuring plans can bedesigned in such a way as to address problems of moral hazardand distortions in the incentives to compete for competitors.

1155.. In particular, restructuring plans need first to ensure that thereis a private contribution to the coverage of the restructuring costsso that past losses can be supported by the owners, creditors, andmanagers of the entity receiving support, to the extent possible.8

Second the plans need to ensure the long term viability of thebank and third, might involve some compensatory measuresaimed at reducing effects on competitors.

1166.. In principle, effects on competitors might not be as much ofa concern for financial firms as it might be for commercialenterprises. In the latter case, competitors are normally hurt bythe rescue, as they would otherwise have faced lesscompetition. Compensatory measures involving asset disposalsand/or capacity reductions can then reduce the extent of thedistortion of competition imposed on competitors. For financialinstitutions, the rescue might actually benefit competitorsbecause of systemic linkages. As a result, compensatorymeasures that benefit competitors may be less of a concern.

1177.. Since the beginning of the financial crisis, the Commissionhas taken about 50 decisions. Half of those concern supportschemes and the other half individual banks. In a number ofinstances, the Commission has imposed modifications of theoriginal plans in order to reduce distortions of competition andensure a level playing field across member states.

1188.. Given the extent of the financial crisis and the scope ofstate support, one can still wonder whether specific regimeswhich grant extensive rights to an administrator to deal withdistressed financial institutions may not be desirable inmember states. Some of them have recently adopted theseregimes but they have been little used so far. Theimplementation of these early intervention mechanisms canpotentially alleviate the dilemma between fully fledgedbankruptcy à la Lehman and a bail-out at taxpayers’ expense.These instruments allow for dealing with systemicallyimportant institutions without endangering financial stability.They also prevent minority stakeholders from impedingprompt and orderly restructuring of the distressed institution.

22.. CCrreeddiitt ffllooww ttoo tthhee rreeaall eeccoonnoommyy1199.. As a consequence of the crisis in financial markets, bankshave become much more risk averse than in previous years, andas a result much less willing to provide financing. Thistightening of credit conditions not only affects weakcompanies, it can also affect healthy companies which findthemselves facing a sudden shortage or even unavailability ofprivate funding, whether loans or risk capital. These heightenedperceptions of risk by financial institutions are all the moreproblematic since these perceptions may become self-fulfilling:lending dries out because the risk of default is perceived to behigher, which in turn leads to actual bankruptcy of initiallysound undertakings and a higher perception of risks. Givenwhat can be seen a temporary mispricing of risk and potentialcoordination failure, state support addressing these marketfailures may thus be appropriate.

2200.. As a consequence the Commission, adopted in December2008 a “temporary framework for State aid measures tosupport access to finance in the current financial and economiccrisis” (the “temporary framework” or TF) in response to thegrowing effects of the crisis on the real economy.9 Theadaptation of rules contained in the TF target the specificitiesand the expected temporary nature of credit tightening.

8 The idea of bank deleveraging through a partial swap of junior debt into equitymay make sense from a state aid control perspective, as it minimizes moral hazardand keeps the state aid to the minimum, but the effects on financial stability areunclear. Hence the need for the different institutions involved to cooperate in thesecircumstances in order to achieve the appropriate calibration of policy measures. 9 Official Journal C 16, 22.1.2009, p. 1.


2211.. In addition to specific initiatives related to “GreenProducts”, the TF focuses on the provision of finance to thereal economy and the new measures explicitly aim to tacklethe current dysfunctional nature of credit markets.

2222.. More specifically, the temporary framework allowsMember States to provide the following types of aid:

– Aid in the form of subsidised interest rates. In particular, theCommission has recognised that interest rate reductions byCentral Banks are not adequately reflected into medium andlong term interbank rates. The Temporary Frameworktherefore allows Member States to grant loans whose interestrate consists of the sum of the central bank overnight rate plusa premium equal to pre-crisis spreads between interbank ratesand overnight rates, plus a credit risk premium correspondingto the risk profile of the recipient with premia calibrated onthose observed pre crisis (as stipulated by the CommissionCommunication on the revision of the method for setting thereference and discount rates).10 This allows States to provideloans that have been constructed on the basis of pre-crisisconditions in credit markets.

– A lump sum of aid up to !500,000 per company for the nexttwo years which can cover investments and/or working capital.By introducing this possibility within the temporaryframework, the Commission has considered that the potentialdistortion of competition that it may create will becompensated by the positive effects of the measure in thecommon market. That is, to facilitate a direct and non-bureaucratic access to finance for companies, in particularSMEs, in a period of financial and economic crisis.

– Subsidised guarantees for loans at a reduced premium. Theguarantee can cover up to 90% of the loan and it may relate toboth investments and working capital loans. Member Statescan grant a reduction of up to 25% of an annual safe-harbourpremium11 to be paid for new guarantees in the case of SMEsand 15% in the case of large companies.

IIII.. CCaarrtteellss2233.. A consistent framework in order to evaluate the impact ofdownturns (and demand cycle) on the ability of companies tocollude has been developed in the economic literature.12

However the results do not point towards a clear-cutprediction. Results are sensitive to the modelling of thedemand evolution and the inclusion of firms’ decisions oncapacity. Thus, the question of whether collusive prices movewith or counter to demand business cycles remains a matter ofdebate.13

2244.. However, a collection of case studies suggest that duringperiods of recession, there is an increased tendency forcompanies to enter into collusive agreements (see Stephan(2009) and OFT (2005)). French Beef, Auctions Houses,German Banks, Carbonless paper, to name a few, are all cartelsthat were formed during downturns. From firms’ perspective,cartels might be attractive as they allow competitors toultimately avoid the risk of bankruptcy by dealing withunexpected drop in demand and resulting industry’s excesscapacity. Thus “crisis cartels” might arise as a response to theadverse conditions. The likely enhanced attractiveness ofcollusion during downturns suggests that it would be unwise torelax competition enforcement on that front.

2255.. Furthermore, from a behavioural point of view, economicdownturns might distort the attitude of business people withregard to competition infringements. More precisely, businesspeople might be faced with the risk of losing job or becominginsolvent and this, in turn, might increase the willingness toexplore a broader range of options to guarantee profitability,including price fixing. Thus the likelihood of creation of acartel might be enhanced by this modified attitude whichmight be common among business people, contributing toalign incentives and facilitating the identification of sharedfocal points. In addition, the expectation of brighter prospectsseems to cement the agreement by reducing the incentive todeviate.

2266.. Past experience is also a useful guide. The pitfallsassociated with lax anti-cartel enforcement have beenidentified during the last great economic downturn. PresidentRoosevelt’s New Deal has been lauded for its contribution toend the Great Depression. However, some measuresundertaken under the broad umbrella of the New Deal werecounterproductive and delayed the recovery. Recent researchhas shown that elements of the New Deal that relaxedcompetition rules delayed the recovery (Cole and Ohanian(2004)). The policies were contained in the National IndustrialRecovery Act (NIRA), which exempted industries fromantitrust prosecution if they agreed to enter into collectivebargaining agreements that significantly raised wages. Byimpeding adjustment, these exemptions from antitrust rulesmay have delayed recovery by years. These policies also led tohigher prices, hurting final consumers. The main lessonlearned from the Great Depression is that anti-slump policiesthat prevent price adjustments are counterproductive;necessary support to demand and output should not interferewith competitive price setting.

2277.. President Roosevelt later recognised that suspendingantitrust rules had been counterproductive. In the late 1930’s,he stated that: “the American economy has become aconcealed cartel system. […] The disappearance of pricecompetition is one of the primary causes of present difficulties”(quoted in Hawley [1966, p. 412]).

10 Available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52008XC0119(01):EN:NOT

11 The safe harbour premiums for SMEs can be found in: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52008XC0620(02):EN:NOT

12 Rotemberg and Saloner (1986), Staiger and Wolak (1992) , Haltiwanger andHarrington (1991) and Bagwell and Staiger (1997).

13 For instance, the inclusion of serial correlation in the evolution of demand(i.e. high demand today creates expectations of a high demand tomorrow anda low demand today generates expectations for future falls, like in a cycle)and the hypothesis that expected demand realization is what matters in cartelstability allow Haltiwanger and Harrington (1991) to rebut the result ofRotemberg and Saloner (1986) that collusive outcomes are more stable inperiods of falling demand.


IIIIII.. MMeerrggeerrss iinn tthhee ffiinnaanncciiaalliinndduussttrryy 2288.. This section focuses on banking mergers, as thespecificities of the financial industry have been invoked toargue for a relaxation of merger control. In particular, theargument is sometimes made that anti-competitive rents couldbe a substitute to State support for banks experiencing distress.Relaxing merger control might, in particular, be considered anappropriate tool to shelter banks from distress. For instance,anticompetitive mergers would allow banks to generate rentsthat would cushion them from adverse shocks, thus reducingthe need for State support. Such policy would appearmisguided for a number of reasons.

2299.. First, it may not work. Whereas State aid providesimmediate support, monopoly rents might take time tomaterialize. Net benefits for the merged entity are alsouncertain. Empirical studies of banking indicate that theminimum efficient size is reached quickly. Given the size ofmost FIs, and in particular the distressed ones, mergers wouldnot deliver the gains derived from economies of scale, as thelatter have been exhausted. One should be equally skepticalabout the potential benefit from exhausting economies ofscope. Indeed, the current turmoil is partly due to the fact thatChinese walls to keep distinct activities clearly separate haveshown to be ineffective, leading to lack of transparency,agency problems, and conflicts of interests. Thus, in appraisingmergers, it should be borne in mind that Chinese walls areeither ineffective, or, if they can be effective, then there is noroom for scope economies. Thus, a merger can not bedefended by a combination of Chinese walls (for prudentialpurposes) and efficiency claims based on economies of scope.

Second, the duration of the stream of monopoly rents thatwould accrue from allowing an anti-competitive merger ispotentially unlimited. By contrast, State support can bedesigned to be temporary and non recurrent (within the limitsof governments’ ability to commit). It can also be tailored tothe specific problems of the bank in distress.

Third, lax merger control would plough the seeds for futuresystemic crises by contributing to create FIs that are TBTF orTITF.

Fourth, merging weak entities with the hope that a strongerone would emerge as result has proved elusive even in the bestof cases. Recent research on Japanese bank mergers that tookplace during the late 1990’s and early 2000’s indicates that theresulting entities did not turn out financially more robust(Harada and Ito, 2008). These findings are consistent with aview that a primary objective of a merger was to takeadvantage of the perceived too-big-to-fail policy, rather than topursue radical restructuring.

Finally, while state aid can be made contingent on financialand corporate restructuring, lax merger control is a license toextract monopoly rents without condition. Rewardingmismanagement by the right to exercise market power wouldcompound problems of moral hazard.

IIVV.. AAbbuussee ooff ddoommiinnaannccee::FFiinnaanncciiaall pprreeddaattiioonn3300.. A recession period can be expected to increase the overallfragility of companies’ balance sheets and increase the needfor outside finance. However, not all the companies are likelyto be affected in the same manner. Companies’ intrinsicheterogeneity in terms of financial structure is such that somecompanies are likely to be in a more fragile condition thanothers and thus more prone to exit. Companies with morefavourable access to finance, in particular large companies forwhich the asymmetry of information may be less severe, canthus take advantage of the situation and tip competitors towardthe verge of bankruptcy.14 Such effects may be exacerbated inthe credit crunch. The current circumstances may thus providea fertile period for exclusionary conducts.

3311.. Predation is likely to become a more attractive strategyduring a sharp downturn as the probability of success ofpursuing such strategies is enhanced. This is becausedownturns decrease the short term expected costs (“sacrifice”)and increase the long term expected benefit, making predationa more profitable strategy. Under these circumstances, theperiod of predatory behaviour is expected to be rather short.Financial weakening of the pray is facilitated leading to timelyexit, which in turn implies that the predator is also sufferinglimited losses. Furthermore, the expectation of an end of therecession makes both the ability to recoup and the length of therecoupment period more favourable.

3322.. Recession periods, however, do not facilitate identification.If predatory prices are already difficult to identify in normaltimes, recession does not make the task easier. Separating theprice effect of a sudden drop in demand frompredation mightbe difficult. Furthermore, courts might be more reluctant toaccept predatory price. The Australian case ACCC v. Boral2003, 195 ALR 574 is one example. The ACCC argued thatBoral’s prices were predatory. However, in the appeal, thecourt accepted that low prices were due to a severe recession inthe building industry combined with overcapacity in theconcrete masonry products industry.

3333.. All in all, cases of financial predation may be more likelyto materialise during downturns and periods of credit crunch.At the same time, establishing the existence of an abuse is alsomore difficult, and thus potentially easier to challenge in court.Both elements call for enhanced, rather than relaxation of,enforcement efforts in that area.

14 The recently adopted “Guidance on the Commission’s enforcement priorities inapplying Article 82 of the EC Treaty to abusive exclusionary conduct by dominantundertakings” (C(2009) 864 final, 9.2.2009) states that (paragraph 68): If the targetedcompetitor is dependent on external financing, substantial price decreases or otherpredatory conduct by the dominant firm could adversely affect the competitor’sperformance such that its supply of further financing is seriously undermined.Available at: http://ec.europa.eu/competition/antitrust/art82/guidance_en.pdf


VV.. CCoommppeettiittiioonn iinn bbaannkkiinngg3344.. In addition to a possible relaxation of competition rules intimes of crisis, some observers have made the argument that aspecific rule should be designed for the banking sector (seeOECD (2009) for a discussion). This argument rests on theidea that the degree of competition might affect the probabilitythat a financial institution (FI) experiences difficulties. Thismay arise in two ways. First, competition affects the value ofbank franchises. Faced with difficulties, banks might, in thepresence of imperfect monitoring by the regulators and themarkets, face the choice of either strengthening their capitalbase or further enhance risk taking, hoping that positiveoutcomes will materialize (this is commonly referred to as“gambling for resurrection”). The relative attractiveness ofthese options depends on the regulatory framework and thescope for moral hazard (i.e. the extent to which shareholdersand managers will lose in the event of failure) but also on thevalue of bank franchises (which would be lost in case offailures). The value of the bank franchise can be seen as thepresent value of the rents that can accrue from pursuingbanking activities and is partly determined by competition.Intensive rivalry might reduce the number of bank franchisesand increase the likelihood that, faced with a shock, banks willchoose to gamble for resurrection.

3355.. One can cast serious doubts on the relevance of this effectin light of existing empirical evidence (see OECD, 2009). Andindeed, to the best of our knowledge, neither banks norregulators have suggested that rents in banking wereinsufficient in the context of the public policy debatesurrounding the financial crisis. In any event, allowing for theaccumulation of rents in banking for the sake of financialstability is a distant second best relative to direct ex anteprudential regulation.

3366.. Second, when faced with insufficient prudential regulation,competition between banks may put pressure on prudent bankseven if they do not face immediate difficulties. If some of theircompetitors take excessive risks to generate high currentprofits, prudent banks may be tempted to gamble in order tomaintain their ability to attract funds.15 But also for thissecond potential impact of competition on risk-taking,competition policy is the wrong instrument. First, even verylax competition policy (e.g., inactive merger control) isunlikely to eradicate the problem due to the existence ofresidual competition in global markets. Second, inactivecompetition policy would bring about unwanted side-effects.Besides the usual monopoly distortions, this policy would alsocreate a banking landscape where “too big to fail” is the norm,thereby exacerbating the problem rather than addressing it.Therefore, if there is recognition that prudential regulation isnot strict enough to prevent excessive risk-taking, the logicalpolicy consequence is not to use competition policy to remedythis, but to adapt prudential regulation itself. This allowsaddressing the root of the problem without being exposed tothe detrimental side effects of indirect regulation via

competition authorities. In short, while situations areconceivable where competition may increase risk-takingamong banks, lax competition policy would more likelyexacerbate than solve the problem.

* * *

3377.. This short article has argued that market discipline has animportant role to play in driving restructuring during periodsof recessions so that relaxing competition policy during wouldbe counterproductive. However, the note also argues thatexisting rules can and should be implemented in light of thespecific circumstances of the financial and economic crisis. !

BBiibblliiooggrraapphhyyAAddrriiaann.. TT..,, SShhiinn HH.. SS..,, (2009), “Liquidity and Leverage”, FederalReserve Bank of New York Staff Reports, no. 328

BBaaggwweellll KK..,, SSttaaiiggeerr RR.. ((11999977)),, “Collusion Over the Business Cycle”,RAND Journal of Economics, vol. 28(1), p/ 82-106.

CCoollee HH..,, OOhhaanniiaann LL..EE..,, (2004), “New Deal Policies and thePersistence of the Great Depression: A General Equilibrium Analysis”,Journal of Political Economy, vol. 112, No. 4.

CCaabbaalllleerroo,, RR..,, HHoosshhii TT..,, KKaasshhyyaapp AA..,, (2008), “ Zombie Lending andDepressed Restructuring in Japan”, American Economic Review, 98:5,pp. 1943–1977

OOEECCDD, (2009), “Competition and the Financial Crisis”

OOFFTT (2005), Predicting Cartels, Discussion Paper (OFT 773)

HHaallttiiwwaannggeerr JJ..,, HHaarrrriinnggttoonn JJ.. (1991), “The Impact of CyclicalDemand Movements on Collusive Behavior”, RAND Journal ofEconomics, vol. 22(1), p. 89-106.

HHaarraaddaa KK..,, IIttoo TT..,, “Did Mergers Help Japanese Mega-Banks AvoidFailure? Analysis of the Distance to Default of Banks”, NBERWorking Paper No. 14518, December 2008.

HHaawwlleeyy EE.. (1966), The New Deal and the Problem of Monopoly:A Study in Economic Ambivalence, Princeton, N.J.: Princeton Univ.Press.

RRootteemmbbeerrgg JJ..,, SSaalloonneerr GG.. (1986), “A Supergame-Theoretic Model ofBusiness Cycles and Price Wars during Booms”, AmericanEconomicReview, vol. 76, 390-407.

SSttaaiiggeerr RR..WW..,, WWoollaakk FF..AA.. (1992), “Collusive Pricing with CapacityConstraints in the Presence of Demand Uncertainty”, RAND Journalof Economics, vol. 23, 203-220.

SStteepphhaann AA..,, “Will the Recession Make Cartels More Likely and CartelEnforcement More Difficult?”, CCP Newsletter #19, February 2009.

SSuummmmeerrss,, LL..,, (2000), “International Financial Crises: Causes,Prevention, and Cures”, The American Economic Review, Vol. 90,No. 2, Papers and Proceedings of the One Hundred Twelfth AnnualMeeting of the American Economic Association, pp. 1-16.

VViicckkeerrss JJ.., “The Financial Crisis and Competition Policy: SomeEconomics”, Global Competition Policy, December, 2008.

15 Clearly, this presupposes that the banks’ owners and depositors can notassess whether the higher returns generated by other banks originate inexcessive risk-taking or whether they are simply managed more efficiently.Otherwise, prudent banks would not be benchmarked with them.


11.. The ongoing economic and financial crisis is putting notonly Europe’s banks, but also its fifty-years old institutionsunder unprecedented pressure. National rescue plans for bankshave been put in place in emergency and with limitedcoordination. The regulation of EU financial institutions, a keyelement of the Single Market on financial services, has beenfound wanting. Tensions have emerged among Member Statesamid allegations of return to “protectionism” and reports ofsevere difficulties suffered by several European countries, inparticular in Eastern Europe. The level and priorities of an EUbudget limited to 1% of its GDP never seemed less adequate todeal with the current economic circumstances. Despite thesenumerous shortcomings, the European Commission, as theexecutive body of the European Union, has tried, in the wordsof its Communication for the 2009 Spring European Council,to find a common approach for “driving European recovery”.

22.. Because financial institutions were largely at the origin ofthe current crisis, they were the first to have been negativelyimpacted and to have needed massive state interventions toensure their survival. The figures are staggering: between mid-2007 and end February 2009, there has been a total of USD293.7 billion in asset write-downs by European-based banks16

and total announced State interventions (including guaranteesand liquidity assistance) in Europe had reached an estimated !3 Trillion in April 2009, amounting to 24% of the EU’s GDP.17

33.. For the European Commission, which the EC Treatydesignates as the watchman in charge of preventing an inter-State race to subsidies, State aid control has been a key tool tointervene in the financial crisis. The fact that Europe is theonly regional organization to control the subsidies granted byits Member States to their companies raises the stakes even

more. Since September 2008 and the intensification of thecrisis following the fall of Lehman Brothers, the Commission(and the EU in general) came under pressure either to bend orto suspend the State aid rules altogether in order to pursueother imperative public policy objectives, such as thestabilization and the recovery of the European economy. Inother words, the watchman was invited to take the wheel of theEuropean economy.

44.. This article shall examine how well the EU, and inparticular the Commission, has been able to reconcile itsvarious (potentially competing) policy objectives in itshandling of financial institutions pursuant to State aid rulesover the last six months. It will be shown that the Commissionhas indeed managed, in an impressive number of decisions, totake into account other public policy imperatives whilemaintaining and respecting essential principles of itscompetition policy (I.). However, the spillover of the crisis intothe real economy and the adoption of more radical stateinterventions are likely to put State aid control under evenmore pressure in the next few months (II.).

55.. In other words, while the Commission has until todaymanaged to clear most state aid decisions to the financialsector, it has done so on an urgency basis: most decisions willthus need to be reviewed by the Commission in the next fewmonths. The real test is still to come and it is unclear how theCommission can continue navigating between the keyobjectives of saving institutions that are too big or tooimportant to fail while saving the key competition and level-playing field principles.

16 Commission Communication on the treatment of Impaired Assets in theCommunity Banking Sector, 25 February 2009, page 2, footnote 2.

17 The Commission reports that the total maximal amount of aid approvedsince the beginning of the crisis reaches !3,000 Billion, out of which! 2,300 Billion for guarantees and ! 275 Billion for recapitalization schemes,see Commission report on State aid scoreboard, Spring 2009 Update, COM(2009) 164 of 8 April 2009.

* The authors thank the research assistance of Clare Moriarty. The viewsexpressed are those of the authors and do not necessarily reflect those of thelaw firm or its clients.

WWHHEENN TTHHEE WWAATTCCHHMMAANN MMUUSSTT TTAAKKEE TTHHEE WWHHEEEELL ––SSTTAATTEE AAIIDD CCOONNTTRROOLL OOFF FFIINNAANNCCIIAALL IINNSSTTIITTUUTTIIOONNSS

AANNDD OOTTHHEERR PPOOLLIITTIICCAALL IIMMPPEERRAATTIIVVEESS DDUURRIINNGG

TTHHEE EECCOONNOOMMIICC CCRRIISSIISS

AAnnttooiinnee WWIINNCCKKLLEERR*Lawyer, Brussels

FFrraannççooiiss--CChhaarrlleess LLAAPPRRÉÉVVOOTTEE*Lawyer, Brussels



II.. TThhee CCoommmmiissssiioonn’’ss rreeaaccttiioonnttoo tthhee ffiinnaanncciiaall ccrriissiiss iinn SSttaattee aaiiddccaasseess:: PPrriinncciipplleess aanndd pprraaggmmaattiissmm66.. Although, in the past, State aid control was founded on thepremise that competition and other public policy objectiveswent hand in hand in the context of a systemic crisis (1.), theCommission has displayed additional pragmatism in order to adaptState aid control principles to the realities of the current crisis (2.).

11.. RReeccoonncciilliinngg ccoommppeettiittiioonn aanndd ootthheerrppuubblliicc ppoolliiccyy oobbjjeeccttiivveess iinn aa ssyysstteemmiiccccrriissiiss

11..11.. CCoonnfflliicctt oorr ccoonnvveerrggeennccee?? PPuubblliicc ppoolliiccyy ggooaallss ffoorr SSttaattee aaiidd ccoonnttrroolliinn aa ssyysstteemmiicc ccrriissiiss 77.. In a systemic crisis, the EU institutions in charge of Stateaid control and financial stability must face severalimperatives. As the executive body in charge of ensuringrespect for the EC Treaty, the European Commission mustapply its relevant provisions on State aid, starting with thegeneral prohibition of State aid (Article 87(1) EC) and thestand-still obligation, which renders any aid implementedbefore the Commission’s authorization illegal. Exceptions tothe prohibition are determined by the Treaty and interpretedstrictly by the Commission. In particular, Article 87(3)(c) ofthe Treaty allows the Commission, under certain conditions, toauthorize certain interventions in favor of companies indifficulty. The Commission determined these conditions in its1999 and 2004 Rescue and Restructuring guidelines.18

88.. EU institutions, including the Commission, must howeverpursue several other public policy goals, most of which alsoderive from the EC Treaty:

! The integration of the Single market is a key goal of the EUthat is, in particular, embodied in the principles of freemovement of services (Article 49 EC) and free movement ofcapital (Article 56 EC). Despite a significant amount oflegislation concerning financial institutions19 and the gradualimposition of the single passport for cross-border institutions,the completion of the Single market remains, to a large extent,an unfinished project, with several sectors (from clearing andsettlement to retail banking) still characterized by highnational barriers.20

! Consumer protection is also an important goal of the EU,and is mentioned in Article 153 EC. Although the Directive onbank guarantees is based on a different legal basis, the idea ofraising the minimal protection on individuals’ deposits duringthe crisis clearly stems from this wider political objective.21

! The wider goal of growth and employment mentioned inArticle 2 of the EU Treaty22 is particularly relevant in times ofunprecedented economic crisis. It explains the numerousinitiatives (not always followed by actions) of the Europeaninstitutions, from the European Council to the Commissionand the Parliament, to foster “European recovery”. In the caseof financial institutions, this objective may justify takingmeasures to avoid a spillover of the crisis into other financialinstitutions or into the real economy through the credit crunch,the breakdown of the inter-bank market or the loss ofconfidence in the banking system.23

! Finally, the stability of the financial system is at the heart ofthe attempts made since October 2008 to repair the worldfinancial system, as illustrated in the EU by the de Larosièrereport’s proposals for financial regulation.24 However, the roleof the EU remains, in theory, rather secondary to the nationalauthorities, as illustrated by Article 105(5) EC which statesthat the ESBC only “contributes” to this objective next tonational regulatory authorities.25

99.. In addition to these goals, the EU has had to take intoaccount two additional constraints imposed by thecircumstances:

! The importance of communication: in a context ofheightened market volatility, rumors or a badly handled pressrelease may, in the space of only a few hours, effectivelydestroy the credibility (and the value) of a share;

! The importance of speed: the reaction of financial markets,but also of banks, and even individual households to the crisishas been much faster than in previous crises. A typicalexample of this is the speed with which, often throughwithdrawals on the Internet, certain banks in difficulty haveseen their deposits basis decrease in October.

18 See Commission Communication, Guidelines on State aid for rescuing andrestructuring firms in difficulty, [2004], OJ C 244, 1st oct. 2004, page 2.

19 See for instance, in the banking sector, the Capital Requirements Directive,actually composed of two Directives: Directive 2006/48/EC of 14 June 2006relating to the take up and pursuit of the business of credit institutions (recast),and Directive 2006/49/EC of 14 June 2006 on the capital adequacy ofinvestment firms and credit institutions (recast). See also Directive 2002/87/ECof 16 December 2002 on the supplementary supervision of credit institutions,insurance undertakings and investment firms in a financial conglomerate.

20 See on this issue the Commission’s horizontal report on retail banking,COM(2007) 33, 31 January 2007.

21 See Directive 1994/19/EC and proposal by the Commission to increase from!20,000 to !100,000 the minimum protection for bank deposits, COM2008/661, October 15, 2008 and IP/08/1508, 15 October 2008.

22 “to promote economic and social progress and a high level of employment”(Article 2 EU Treaty)

23 Commission Communication for the Spring European Council, “DrivingEuropean recovery”, COM(2009) 114, 4 March 2009, volume 1, page 2.

24 Report by the High-Level Group on Financial Supervision in the EU, chairedby Jacques de Larosière, Brussels, 25 February 2009.

25 Article 105(5) EC states as follows, “The ESCB shall contribute to thesmooth conduct of policies pursued by the competent authorities relating tothe prudential supervision of credit institutions and the stability of thefinancial system”.


11..22.. TThhee CCoommmmiissssiioonn’’ss ddeecciissiioonnaall pprraaccttiiccee::RReeccoonncciilliinngg ccoommppeettiittiioonn aanndd ootthheerr ppuubblliiccppoolliiccyy oobbjjeeccttiivveess1100.. A look at the decisional practice of the Commission beforethe crisis reveals how it managed to avoid an open conflictbetween these various public policy objectives. The principalassumption was that these objectives went hand in hand andcould be pursued together. The Crédit Lyonnais decisionprovides a striking example of the defense of this convergencetheory by the Commission in the case of a financial institution.The French authorities, which had poured in a massive (evenfor today’s grandiose standards) ! 40 billion between 1994 and1996, justified their intervention by pointing to the systemicrisk that would have resulted, had the Crédit Lyonnaisinstitution gone bankrupt. The Commission rejected thisargument in the following terms: “The possibility of creditinstitutions which are structurally non-viable being penalizedand, where appropriate, expelled from the market…is afundamental element in ensuring the confidence of economicoperators […] the objectives of competition policy and thoseof prudential banking policy cannot be mutually incompatible,since both are designed to achieve a common end, namely thedevelopment of a competitive, healthy banking sector.”26 Inother words, expelling “bad apples” was (or should be) acommon goal of the prudential authorities and the competitionwatchman.27

1111.. As a natural consequence of this theory, the Commissionconsistently rejected the requests (made, in particular, in theCrédit Lyonnais and GAN 28cases) to apply Article 87 (3) (b)EC to individual banking cases. This provision provides thatState aid is to be deemed compatible with the common marketif it is designed to “ remedy a serious disturbance in theeconomy of a Member State.” In the Crédit Lyonnais case, theCommission justified its rejection of the application of thisarticle on the ground that the purpose of the aid was “toresolve the problems of a single recipient, CL, as opposed to

the acute problems facing all operators in an industry.” 29

Thus, even though this rejection did not entirely close the doorto the possibility of invoking Article 87 (3) (b) in the case of asystemic crisis involving all players, the Commission made itclear that this provision was not intended to prop up “too bigto fail” institutions.

1122.. Between September 2007 and September 2008, theCommission followed the same line of reasoning insystematically refusing to examine State aid measures underthe rubric of Article 87(3)(b). In particular, in three cases

displaying very different individual situations and Stateinterventions (Northern Rock, December 2007, temporaryliquidity support and guarantees;30 IKB, February 2008, riskshield provided by the State-owned KfW31; Sachsen LB,liquidity granted by State-owned Landesbanken andsubsequent sale to another Landesbank32), the Commissionrejected the application, requested the submission of arestructuring plan and opened a formal procedure that lastedseveral months. However, these decisions are also evidence ofsome newfound flexibility adopted by the Commission due tothe mounting crisis. For instance, the temporary authorizationof the liquidity supports to Northern Rock was taken in the(then) record time of eight days.

22.. SSiinnccee OOccttoobbeerr 22000088:: PPrraaggmmaattiissmmaanndd rreessppeecctt ooff kkeeyy ccoommppeettiittiioonnpprriinncciipplleess

22..11.. DDiissppllaayyiinngg pprraaggmmaattiissmm ––TThhee CCoommmmiissssiioonn’’ss aaddaappttaattiioonn oofftthhee SSttaattee aaiidd rruulleess ssiinnccee OOccttoobbeerr 220000881133.. By October 2008 and the fall of Lehman Brothers, thetension between the competing objectives of financial stabilityand State aid had been mounting, with open clashes betweenMember States on the first wide-ranging rescue plans, such asthe Irish plan, and emergency rescue operations being set upover one or two week-ends, such as the Fortis rescue. In anexceptional (and, to this date, unprecedented) meeting, Headsof State of the Euro area stressed, on October 12 “the need forthe Commission to continue to act quickly and apply flexibilityin state aid decisions, continuing to uphold the principles ofthe single market and of the state aid regime”.33 The samestatement however called for the need for Member States “toact in a united manner and avoid that national measuresadversely affect the functioning of the Single market and otherMember States”34 – which corresponds exactly to thejustification of the EU State aid regime.

1144.. Since then, the Commission has adopted three majorCommunications on the application of State aid rules to thecurrent crisis (the Banking Communication35, the

26 Commission Decision 98/490, Crédit Lyonnais, [1998] L-221-28.

27 In contrast, the ECB’s position has rather been to insist on clearly“differentiating between procedures leading to antitrust and bankingsupervision decisions” and on “allocating powers to authorities inaccordance with their respective objectives”- see ECB OpinionCON/2005/58 of December 23, 2005 and ECB Opinion CON/2007/17 ofJune 18, 2007.

28 Commission Decision 98/204, GAN, [1998] OJ, L-78/01.

29 Commission Decision 98/490, Crédit Lyonnais, [1998] L-221-28, section10.1.

30 See Case NN 70/07, Northern Rock, [2008] O.J. C-43/1.

31 Case C 10/2008 (ex. NN 7/2008). An Article 7(4) conditional decision wasissued on 21 October 2008, which has not yet been published.

32 State aid C 9/2008 (ex CP 244/07 and ex NN 8-08) – Germany Sachsen LB,paragraph 75.

33 Summit of the euro area countries: declaration on a concerted Europeanaction plan of the euro area countries, 12 October 2008, paragraph 5,subparagraph 3 at http://www.ue2008.fr. See also paragraphs 5, 6, 8 and 10of Presidency Conclusions of the Brussels European Council, 14368/08,CONCL 4, Brussels, 16 October 2008.

34 Summit of the euro area countries, supra, paragraph 5, subparagraph 1.

35 Commission Communication, 13 October 2008, Application of state aidrules to measures taken in relation to financial institutions in the context ofthe current global crisis, [2008] OJ C-270/8.


Recapitalization Communication36 and the Impaired AssetsCommunication37). It has also adopted close to 50 decisions,including more than 20 decisions on individual rescue plans,which represents an unprecedented level of activity in the areaof State aid for banks.

aa.. TThhee AApppplliiccaattiioonn ooff AArrttiiccllee 8877((33))((bb)) ttoo aa ssyysstteemmiiccffiinnaanncciiaall ccrriissiiss

1155.. The principle novelty of the Banking Communication, andof decisions following its adoption, was the Commission’swillingness to apply Article 87(3)(b) in the name of the currentfinancial crisis and to authorize aid aiming at “remedying aserious disturbance” in the economy.38 The Commission hasread this provision as allowing it, if necessary, to avoid theapplication of some of the conditions imposed by the Rescueand Restructuring Guidelines. Nonetheless, each application ofArticle 87(3)(b) must be examined on an individual basis,taking into account objective criteria, in particular, theevaluations of national authorities responsible for ensuringfinancial stability (in particular the Central Bank of therelevant Member state).

1166.. In practice, all authorization decisions taken by the Commissionsince October 2008 have been based on Article 87(3)(b).

bb.. VVaarriioouuss iinnssttrruummeennttss aauutthhoorriizzeedd bbyytthhee CCoommmmiissssiioonn dduuee ttoo tthhee ccuurrrreenntt ccrriissiiss

1177.. The Euro area summit of 12 October 2008 called ongovernments, central banks and supervisors to use al linstruments at their disposal to solve the crisis. TheCommission’s Communications and its subsequent practiceillustrate the wide array of interventions that may beauthorized under State aid rules:

! Guarantees may cover a wide part of the financialinstitution’s overall liabilities, thus allowing them to berefinanced when inter-banking markets are in effect shut down.Most Member states have put in place such general guaranteeschemes, for instance in the UK39, Germany40, Ireland andFrance. In some cases, ad hoc guarantees were set up forindividual institutions.41

! Liquidity assistance was also largely used at the beginningof the crisis, usually through special liquidity lines provided byCentral Banks. In the Northern Rock case, the Commission setout four criteria that could be used to distinguish State aidfrom other liquidity interventions of Central banks.42

Interestingly, these criteria are convergent with those set outone century ago by the Governor of the Bank of England, SirWalter Bagehot, for rescuing banks.43

! Recapitalization might either be set up in favor ofindividual institutions)44 or in general schemes45.

! The winding-up of financial institutions (and their sale tothird parties) is also a possible State intervention, in particular,if the subsequent sale is made below market price.46

22..22.. MMaaiinnttaaiinniinngg tthhee pprriinncciipplleessooff ccoommppeettiittiioonn1188.. The flexibility permitted by the application of Article87(3)(b) has not, however, called into question the mainprinciples of State aid control, at least in principle. On thecontrary, throughout the present crisis, the Commission hastaken the opportunity to reaffirm the fundamentals of EC Stateaid law.

aa.. TThhee PPrriinncciippllee ooff NNoonn--DDiissccrriimmiinnaattiioonn

1199.. The principle of non-discrimination based on nationality isone of the fundamental freedoms guaranteed by the EC Treaty(Article 12) and the Commission has consistently refused toderogate from its application during the present crisis. Thus, inthe early days of the crisis, the Commission obliged the Irishgovernment to modify its rescue plan in order to ensurecompliance with this principle.47 It follows that, as a general

36 Commission Communication, 8 December 2008, The recapitalisation offinancial institutions in the current financial crisis: limitation of the aid tothe minimum necessary and safeguards against undue distortions ofcompetition [2009] OJ C-10/2.

37 Commission Communication, 25 February 2009, The treatment of ImpairedAssets in the Community Banking Sector.

38 In reality the Commission shifted its approach a number of days prior to the

Communication of the 13th of October, having authorized, on the 10th ofOctober, the Danish support plan on the basis on Article 87(3)(b), see caseNN 51/2008, Guarantee scheme for banks in Denmark, October 10, 2008.

39 Commission Decision, Financial Support Measures to the Banking Industryin the UK, OJ C/290/2008, released 13 October 2008 and published13 November 2008.

40 Commission Decision, German Banks Rescue Scheme, OJ C/293/2008,released 27 October 2008, published 15 November 2008.

41 For instance the Northern Rock or Dexia guarantees.

42 The Commission considered that the emergency liquidity assistance granted bythe Bank of England did not constitute State aid as it was “secured againsthigh quality collateral, to which “margins” (“haircut”) were applied againstthe risk of falls in the price of the collateral, which is assessed on a daily basis,and against a penal interest rate, which was above the rate applied to itsstanding facility”. Also, the measures were taken at a time when the bank didnot have access to its normal resources and when it was solvent. Furthermore,the measures were taken at the Bank of England’s own initiative and were thefirst intervention by the authorities. See Commission Decision, Rescue aid toNorthern Rock, C(2007) 6127, 5 December 2007, paragraphs 32 and 33.

43 See “Lombard Street: A Description of the Money Market”, by Sir WalterBagehot, 1873, Plain Label Books. The entire book can be found online athttp://books.google.ie/books?id=N9BP1uPT-n8C&printsec=frontcover.

44 For instance in the ING case, where a capital injection of !10 billion wasgiven through special securities issued by ING Groep N.V., CommissionDecision C(2008) 6936, 12 November 2008. See also Aegon N.V., C(2008)7734, 27 November 2008.

45 For instance the French UK or German schemes State aid N 618/2008 –French recapitalization scheme Commission Decision, Financial SupportMeasures to the Banking Industry in the UK, OJ C/290/2008, released13 October 2008 and published 13 November 2008, Commission Decision,German Banks Rescue Scheme, OJ C/293/2008, released 27 October 2008,published 15 November 2008

46 The Commission already authorized winding-up measures, for instance in the caseof Roskilde Bank A/S, Commission Decision OJ C/12/2009, 17 January 2009.

47 Case NN 48/2008, Guarantee scheme for banks in Ireland.


rule, an aid scheme must not include nationality as a criterionfor eligibility. In particular, foreign subsidiaries must, inprinciple, be permitted to apply.48 This is particularlyimportant in view of the absence of an integrated, pan-European, rescue plan for banks.

bb.. TThhee AApppprroopprriiaatteenneessss ooff tthhee AAiidd

2200.. In order to be compatible with Article 87(3)(b) the aidmust be appropriate, that is it must address the difficulties ofthe financial institution receiving the aid. For example, if aninstitution faces liquidity problems, the measure in questionmust aim at facilitating its access to the capital markets. Inpractice, despite the great diversity of measures (guarantees,re-capitalization, credit lines, loans), the appropriateness of ameasure has rarely, if ever, been contested by the Commissionto date.

cc.. TThhee NNeecceessssiittyy ooff tthhee AAiidd

2211.. In applying this principle the Commission aims to ensurethat the aid is strictly limited to what is necessary and that alesser or less distorting aid would not have resolved theproblem in question. Key issues examined under thisassessment are:

! the duration of the scheme ;

! the existence of contributions from the private sector or thebeneficiary and;

! the remuneration of the State intervention by the recipient,where the Commission largely defers to recommendationsof the ECB governing Council.49

2222.. A key parameter in this assessment will be the risk profileof the beneficiary. In its Recapitalization Communication, theCommission drew a clear-cut distinction betweenfundamentally sound banks and banks in difficulty, the latterbeing subject to a more detailed assessment and harshermeasures, in particular, the need to submit a restructuring plan(as provided for in the Rescue and Restructuring guidelines)within six months. As a result, most of the Commission’sauthorizations granted so far have been temporary and subjectto the submission of restructuring, or viability, plans.

dd.. TThhee PPrrooppoorrttiioonnaalliittyy ooff tthhee AAiidd

2233.. Under this heading, the Commission can require that everyState intervention be accompanied by compensatory measuresin order to offset its effects on competition.

2244.. In general, the Commission can require:

! Measures regulating the commercial behavior of therecipient, such as a prohibition on publicity campaigns orlimits on predatory pricing practices.50

! Limitations on the size of the recipient’s balance sheet. Thisrestriction has been widely applied, for instance in the Danish,Irish, Swedish and French guarantee schemes.51 TheCommission, however, seems more recently to haveabandoned such limitations for more targeted restrictions.

! A prohibition on behavior that would not be compatiblewith the objective of the guarantee. This heading can justify,for instance, restrictions on management remuneration.52

! A prohibition on paying the dividend to shareholders otherthan the State. In its Recapitalization Communication, theCommission limited this restriction to the case of banks indifficulty. In most cases, however, and although it hasrepeatedly reaffirmed that there would be no bias againstpublic ownership (i.e. nationalization), the Commissioninsisted it would favour mechanisms that encourageredemption of State intervention.53

IIII.. SSaammee ccrriissiiss,, nneeww cchhaalllleennggeess::ttoowwaarrddss hheeiigghhtteenneedd tteennssiioonnssbbeettwweeeenn SSttaattee aaiidd ccoonnttrrooll aannddootthheerr ppoolliiccyy iinnssttrruummeennttss??2266.. It has been practically six months since the fall of LehmanBrothers and the dramatic global interventions of earlyOctober. Since then, despite signs of easing on the inter-banking market, the situation has shown little signs ofreturning to normal. On the contrary, the financial crisis hasspilled into the real economy, both in the US and in Europe,with unprecedented speed. State interventions are as intense asever, with budget deficits forecast to reach 6% of GDP inFrance, 8% in the UK and 10% in the US. New plans are being

48 It is nonetheless possible to reserve the aid to institutions having a certainlevel of activity in the relevant member state- See Case N 560/2008 Supportfor the credit institutions in Greece; case N 512/2008,DeuthschlandRettungspaket für Kreditinstitute in Deutschland, Case N512/2008, Urgent measures to guarantee the stability of the Italian bankingsystem, Commission Press Release IP/08/1630.

49 For guarantees of less than 6 months, flat rate of 50 basis points, with anadditional premium based on individual CDS spreads above 6 months. Forrecapitalization, the Commission’s rates of 6 to 9,3% for hybrids and morethan 10% in individual cases. See Recommendations of the GoverningCouncil of the ECB on the pricing of guarantees, October 20, 2008;Recommendations of the Governing Council of the ECB on the pricing ofrecapitalizations, November 20, 2008.

50 See supra cases NN 51/2008, Guarantee scheme for banks in Denmark;N512/2008, case N533/2008, Support Measures for the banking industry inSweden, Case N524, G a rantieregeling ten behoove van banken inNederland.

51 See supra Cases NN 51/2008, NN 48/2008 and N 533/2008 andCommission Press Release IP/08/1496 of October 13, 2008.

52 See for the UK scheme, Commission Press Release IP/08/1496, October 13,2008. Commission Decision, OJ C/290/2008, 13 November 2008.

53 See for such a mechanism see ING, C(2008) 6936, 12 November 2008;Aegon N.V., C(2008) 7734, 27 November 2008; and SNS REAAL N.V., Stateaid N 611/2008, press release IP/08/1951, Commission Decision,10 December 2008, not yet published.


drawn up to cure the financial system of its toxic (or“impaired”) assets. While the Commission has had to extendits review to schemes involving the real economy,54 the mostmassive and challenging State aid files are still thoseconcerning the financial sector. In this regard, the Commissionmust deal with increasing tensions between the traditionalobjectives of State aid control and other general policyobjectives (1.). The Commission will have to take significantdecisions on important technical issues, which will certainlytest its political will to face the crisis while at the same timemaintain the EU law (2.).

11.. IInnccrreeaasseedd ssttaakkeess aanndd nneewwqquueessttiioonnss

11..11.. DDooeess iitt aaccttuuaallllyy wwoorrkk?? TThhee eeccoonnoommiicciimmppeerraattiivvee2277.. Six months after the first massive State intervention in thefinancial system, the question of the effect of theseinterventions remains uncertain and politically loaded. Publicopinion is increasingly questioning the bailing out of“bankers” at the taxpayer’s expense, while each day bringsdistressing news of redundancies and growing unemploymentin the real economy.

2288.. For State aid control policy, the question of the efficiencyof the aid is, in theory, a core criterion of compatibility that isrecalled in paragraph 15 of the Banking Communication.55 Inits assessment of aid efficiency, the Commission has, untilnow, mainly focused on the capacity of aid to rescue thebeneficiary and avoid a collapse that could lead to a meltdownof the entire financial system.56 Six months later, the goalappears to have been reached: Europe has so far averted aspectacular bankruptcy similar to Lehman Brothers, althoughcertain institutions have been de facto nationalized (NorthernRock) or partly wound down or re-sold to competitors orprivate investors (Bradford & Bingley’s, Roskilde Bank, IKB).

2299.. A more difficult issue, both in theory and in practice, is toensure that banks receiving State aid end up lending to the realeconomy. In their rescue plans, several Member States haveinserted provisions compelling the beneficiaries to increasetheir overall lending to the economy.57 In theory, assessing theissue under the State aid rules is far from easy: in State aid

control, the rule is rather to require from aid recipients thatthey reduce rather than increase capacity.58 The Commission’spractice in the current crisis reflects this ambivalence. TheBanking Communication (paragraph 27) provides forcompetition safeguards limiting the size of the recipient’sbalance sheet, and therefore the amount of additional loanproduction, although a footnote to the same provision tempersthis recommendation by recalling the need to safeguard “theavailability of credit to the economy notably in case ofrecession”.

3300.. In the Recapitalization Communication, the Commissionwent a step further and recommended the imposition ofsafeguards by States to ensure that the injected sums are usedfor the purpose of lending to the real economy.59 However, thisobjective was limited to “fundamentally sound banks”; incontrast, the Commission continued to insist that distressedbanks should be subject to a restructuring planincluding–presumably–production limitations.

3311.. Despite such encouragement, the effects of these Stateinjections, which are intended to avoid a credit crunch, are stilluncertain. In its Impaired Assets Communication, theCommission recognizes that recent statistics show a sharpdeceleration in credit growth, a key reason being uncertaintyabout the valuation and location of impaired assets in thebanking sector.60

11..22.. WWiillll IItt ssttaanndd uupp IInn CCoouurrtt?? TThhee lleeggaalliimmppeerraattiivvee3322.. Since October 2008, and until very recently, allCommission decisions authorizing aid to banks were takenduring the preliminary procedure (i.e. without an in-depthinvestigation, although most were taken for a temporary periodof six months. Although the appeal period is not yet over formost of them, it is equally interesting to note that, so far, noneof them appear to have been challenged before the CommunityCourts. In February 2009, a Court case in an unrelated matter,Deutsche Post/ Commission,61 served as a reminder that theCommission’s margin for “flexibility” under State aid rulesremains limited by the provisions of the Treaty and thejurisprudence of the Courts. In particular, the Court recalledthat based on settled case law, the Commission is compelled toopen the formal procedure when it faces “serious difficulties”

54 See Commission Communication on investing in the real economy throughcohesion policy, Brussels COM, (2008) 876/3, 16 December 2008; orCommission Communication on the recapitalisation of financial institutionsin the current financial crisis to boost credit flows to the real economy, PJ C10/03, 15 January 2009, pages 2-10.

55 Banking Communication, OJ C 270, 25 October 2008, paragraph 15:general support measures must be “well-targeted in order to be able toachieve effectively the objective of remedying a serious disturbance in theeconomy.”

56 See for instance the case of Aegon N.V., C(2008) 7734, 27 November 2008,where the Commission allowed recapitalization as an emergency measure,not only to support Aegon through the crisis (paragraph 57), but also tostrengthen and restore market confidence in the Dutch financial sector.

57 For instance, the French guarantee scheme, in exchange for the re-financingof the Société de refinancement des activités des établissements de credits(SRAEC), provides for an obligation for each recipient to increase by 3 to4% by December 2009 its overall financing to the French “real economy”.This scheme was considered compatible with Article 87(3)(b) inCommission Decision C(2008) 6617, 30 October 2008.

58 For instance, the Rescue and Restructuring guidelines, OJ C 244, 1 October2004, require capacity reductions, either for loss-making activities (seeparagraph 35 of the guidelines) or as compensatory measures aiming atreducing undue competition distortions (see paragraph 39 of the guidelines).

59 See Recapitalization Communication, supra, paragraphs 5 and 39.

60 See Impaired Assets Communication, supra, paragraph 5: decrease by 0.8%in December 2008 compared to November 2008.

61 Case T-388/03, Deutsche Post AG v Commission, 10 February 2009, not yetpublished.


in its assessment.62 Furthermore, the admissibility thresholdfor a challenge against a decision taken in a preliminary phaseis lower than in the case of a decision taken after a formalprocedure.63 The risk of numerous Court challenges to recentCommission decisions can therefore not be excluded.

3333.. Another legal issue facing State aid recipients is the risk ofchallenges before national Courts against potentially illegalaid. Pursuant to the standstill obligation under Article 88 (3)EC, aid that is implemented before its authorization by theCommission is illegal and may be recovered by nationalCourts. If the illegal aid is, in addition, incompatible with theEC Treaty, its recovery must be ordered by the Commissionand national Courts.64 Thus, given the urgent nature of certainState interventions, it cannot be excluded that the standstillobligation could be invoked against them.65

3344.. The legal issue is particularly sensitive in cases of complexM&A transactions that are implemented following, or inparallel to, State interventions. In such cases (such as Fortis,Dexia, Bradford & Bingley’s), the combined effects of thestand-still obligation and the length of the formal procedure66

are hardly compatible with the requirements of speed in ahighly unstable market environment and legal certaintydemanded by the buyer, who will usually demand a definitivedecision. Put bluntly, an excessive delay in the ECauthorization process might simply turn out to be a deal-breaker.

3355.. In this respect, the recent opening of a formal procedure inthe Dexia and ING cases67 is noteworthy: in both cases theCommission reconciled the need for a more in-depthinvestigation on complex issues (such as valuation of assetscovered and contents of the restructuring plan proposed) withthe requirement for authorization of emergency measures(purchase of toxic assets by the Dutch State in ING; sale of theUS monoline company FSA in Dexia).

11..33.. WWhhaatt aabboouutt tthhee SSiinnggllee mmaarrkkeett??TThhee ccoommppeettiittiioonn iimmppeerraattiivvee3366.. Maintaining competition within the Single Market is at theheart of the State aid regime. However, in times of massiveState aid intervention, the way towards this objective is fraughtwith pitfalls. This is particularly true in the banking sector,which was, and still is, characterized by numerous barriers.68

3377.. A first issue is the handling of complaints by competitorsrelating to the alleged use of State funds for aggressivecommercial expansion at the expense of the complainant’smarket share. In the Dexia and Fortis guarantee cases, theCommission, after receiving such complaints, imposedadditional behavioral constraints on the remuneration offeredby the two banks on certain saving accounts.69 In the INGcase, the Commission imposed on ING an obligation to“ refrain from expansion of its business activities that it wouldnot have pursued if it had not received the capital injection”and to “ refrain from mass marketing invoking therecapitalization measure ”.70 Although these constraints didnot go as far as determining the actual rate served on theseaccounts, this option, as well as the option of price regulation,is expressly mentioned in the Banking Communication.71 In anextreme but not altogether improbable scenario, more State aidwould thus result in more price regulation and, possibly, in thesetting of one single reference price, which would of course beat the expense of competition.

3388.. An even more daunting task will be the preservation of theSingle market amidst numerous and massive Stateinterventions. Even if the Commission successfully managed toavoid the most blatant of discriminations early on in the crisis,European rescue plans remain national by nature and thereforepredominantly benefit the domestic institutions of each of theMember States concerned. In the absence of a European rescuebudget, the principle of “Home country regulation” turned intoa principle of “Home country subsidization”. In the words of alearned commentator, “Banks may be cross-border in health,but they become national again in sickness”. A perfectexample of this phenomenon was the Dutch government’sdecision to take control over ABN Amro and the other Dutchassets of the Fortis group in October 2008, thus leading to apartial dismantling of one of the main cross-border banks inEurope. It is a fact that despite the historically low valuations ofthe sector, very little cross-border consolidation has taken placesince the beginning of the crisis, with the exception of a fewdeals (such as BNP Paribas – Fortis). How can theCommission encourage the integrationist trend? Could, forinstance, a “premium” be applied in examining a State aid casewhere a cross-border solution is proposed?

3399.. A third challenge will be the handling of nationalizationsor quasi-nationalizations. The Commission’s position on thisissue has evolved from simply recalling that Article 295 of the

62 See for instance Cases 84/82 Germany/ Commission (Textiles) [1984] ECR1451;T-73/98 Prayon-Rupel [2001] ECR II-867.

63 See Cases C-198/91 William Cook/ Commission [1993] ECR I-2487;C-225/91 Matra/ Commission (No1) [1993] ECR I-3203.

64 See Case C-199/06, CELF v SIDE [2008], 12 February 2008.

65 For an example of an unsuccessful invocation of the standstill obligation, seethe Fortis decision of the Brussels Appeal Court, R.G. N° 2008/KR/350,December 12, 2009, paragraphs 78-79.

66 A indicative 18 months under Regulation No 659/1999, and in practice, dueto the procedural requirements of OJ publication and third partiesconsultation, a minimum of three to four months.

67 See Commission press releases IP/09/399, 13 March 2009 (Dexia) andIP/09/514, 31 March 2009 (ING).

68 See Commission Communication on retail banking, COM(2007)33,31 January 2007.

69 See Fortis, C(2008) 8085, 3 December 2008 and Dexia, C(2008) 7388,19 November 2008.

70 See State aid N 528/2008– The Netherlands, Aid to ING Groep N.V.,C(2008) 6396 finalcor., November 12 2008, ¶34 and 35.

71 See Banking Communication, supra. See, in particular, paragraph 25 whichstates that Member States have to take appropriate steps to ensure asignificant contribution from the beneficiaries; paragraph 26 which statesthat the exact contribution of beneficiary banks depends on a non-exhaustivelist of factors; and paragraph 27 which deals specifically with the impositionof behavioral constraints in order to avoid undue distortions of competition.


Treaty is neutral towards the property regime in MemberStates to explicitly recognizing nationalization as a possibleoption in its Impaired Assets Communication.72 Indeed, themain issue in the framework of State aid control is whether theState acted as a market operator and, in case the answer isnegative, whether the State intervention is compatible with theTreaty. In particular, the Commission has insisted in its earlierguidelines on sufficiently high levels of remuneration of Statecapital, usually in the form of specific dividends paid out tohybrid equities, as an incentive for the swift redemption of theState presence. It is not entirely clear how this policy offavouring exit mechanisms for the State can be reconciled withthe “neutrality” principle. It is also not entirely clear howpublic ownership can, in the short-term, not give an advantageto institutions over privately owned banks (except maybe inthose countries where the credit worthiness of the State isundermined by the crisis).

22.. TThhee CCoommmmiissssiioonn ffaacceess kkeeyy tteessttssoonn iissssuueess ttoo ccoommee

22..11.. TThhee ddeelliiccaattee iissssuuee ooff iimmppaaiirreedd aasssseettss4400.. Over the past few weeks, the focus of State interventionson both sides of the Atlantic has turned to the much morecontroversial issue of the handling of toxic (or impaired) assetsin the banks’ balance-sheets, that is widely seen as a key pre-condition for re-starting the credit flows to the real economy.Even before the wide-ranging US plan announced on March23, several countries had announced ad hoc toxic asset plansthat consisted in purchasing these assets and placing them inone or several “bad banks”, or guaranteeing their value whilekeeping them on banks’ balance sheets.73 Prior to theseannouncements, the Commission had already authorized muchmore limited schemes under the form of “risk shields” forcertain Landesbanken (West LB, IKB) and a Spanish system ofpurchase of triple-A securities through a mechanism of reverseauction.74

4411.. In its Communication on Impaired Assets of February 25,the Commission laid down new rules on the analysis of toxicasset schemes. A first innovation of this Communication is itsproactive intent: while the Commission, in its previousCommunications, had merely supported the Member States’efforts to rescue their banks, this time it takes a new stepforward by actively promoting the treatment of toxic assetsand their disclosure in all European banks.75

4422.. The Communication itself is structured around five keyprinciples:

! Transparency and disclosure: the Commission calls forbanks to demonstrate openness as to the state of their toxicassets, if necessary by forcing disclosure. A key issue here isthe valuation of the assets in economic terms, based on theDCF76 method. In particular, the Commission will require anextremely detailed valuation for each asset category (ifnecessary by vintage and by seniority group), carried out by anindependent expert using a methodology approved by therelevant regulatory authorities. In principle, the transfer priceshould be the economic value. The amount of aid will be thedifference between the transfer price (in principle theeconomic value) and the market value.

! Burden sharing between the State, shareholders andcreditors : the Communication recommends a first loss rate of10%. The Commission intends to calculate the adequate levelof remuneration of the asset relief scheme by reconstituting theamount of capital or risk weighed assets that have been freedup by the asset scheme and applying to this amount a level ofremuneration that would be higher than for recapitalization.

! Aligning incentives for banks to participate: theCommission recommends an enrolment window limited to sixmonths during which banks would be able to come forwardwith asset baskets eligible to be covered by asset-reliefmeasures and after which no asset relief would be possible.

! Eligibility of assets : the Commission suggests that MemberStates use several asset baskets. While toxic assets strictosensu (in particular, assets linked to the US mortgage market)could usually be considered eligible, Member States could addother categories linked to the specific situation of their nationaleconomy, as well as a “flexibility” basket of up to 10-20% ofother assets.

! Restructuring and return to viability : the Commission willrequire six-month reports by the intervening State on thebeneficiary’s return to viability and an in-depth restructuringplan if the amount of the aid is higher than 2% of therecipient’s risk-weighed assets.

4433.. In its present state, the Communication leaves open anumber of questions that will have to be dealt with in theCommission’s future decisional practice.77 In particular, giventhe sophistication of the products concerned, it might bequeried whether the ambition of determining the “real” valueof these assets (in other words of succeeding where mostbanks have failed so far) is entirely realistic. Secondly, itremains to be seen whether the six-month deadline proposed inthe Communication to deal with the issue of toxic assets iscredible. In particular, the idea that an immediate disclosure ofthe degree of impairment of assets is feasible without anyfuture readjustments might be challenged by the facts. Thechallenge will be to reconcile the constraints of the formal

72 See paragraphs 23 and 38, as well as section 1 of Annex II.

73 Announced initiatives in Europe in particular concern ING (with a Stateguarantee on more than USD 35 billion of assets), RBS (for more than £ 320billion) and Lloyds (for more than ! 290 billion).

74 See State aid NN 54a/2008, Fund for the acquisition of financial assets inSpain, 4 December 2008, not yet published. See press release IP/08/1630.

75 This pro-active approach was repeated in the Commission’s Communicationfor the Spring European Council, supra, page 4, “It is time for action tobreak the cycle of declining confidence and unwillingness to lend…Torestore confidence in the banking sector as a whole, banks with impairedassets should disclose them to the competent authorities”.

76 Discounted cash-flows.

77 At the time of this article, the Commission has applied the Impaired AssetsCommunication only twice, in its Dexia and ING decisions supra.


procedure that will probably be needed for this complexvaluation with the Communication’s stated goal of quicklyrestoring the credit flows into the economy.

4444.. A possible solution to these issues could be for theCommission to relax the rules of the Communication (inparticular on the valuation of assets) when a market-basedauction of the assets78 has been chosen. This solution, inspiredby the auction scheme announced in the US and by theposition taken by the Commission on privatizations79, couldgive some flexibility to the system as well as some incentivesto the private handling of toxic assets.

22..22.. RReessttrruuccttuurriinngg ppllaannss 4455.. The second difficult issue that will have to be tackled bythe Commission will be the submission by several financialinstitutions in the months to come of a number of restructuringplans that will need to be assessed. So far, based on theinformation publicly available, at least 18 restructuring planswill have to be submitted to the Commission in the next fewmonths.80 It is likely that many other restructuring plans willhave to be submitted by beneficiaries of asset relief schemes,as the threshold used by the Commission to requirerestructuring plans in such schemes (2% of the risk-weighedassets) appears quite low. The Commission’s assessment willraise a number of difficult questions.

4466.. First, the Commission has so far contended that only“banks in difficulty”, in contrast to “fundamentally soundbanks”, had to present restructuring plans. However, this clear-cut distinction has been increasingly put under pressure by theworsening of the position of certain “sound” institutions. Forinstance, in the case of Commerzbank, which was initiallyconsidered a “sound” bank, it seems that the Commissionasked the German authorities for a restructuring plan.81 It islikely that other examples might follow.

4477.. Second, a key issue in restructuring plans is the beneficiary’sreturn to long-term viability. This requires a thorough assessmentbased on forecasts that must be based on detailed market studiesand should cover at least five years.82 In the current economiccrisis the establishment of such forecasts will probably bechallenging. The requirement of pessimistic scenarios, whichmight be compared to the “stress tests” currently realized inthe US and in a number of Member States could, taken to theextreme, lead to contradictions with the Commission’s ownforecasts on economic growth in the EU and to the potentiallydestabilizing conclusion that most recipients should be liquidated.

4488.. Third, a key issue will be the one of the restructuring andcompensatory measures to be taken in these restructuringplans. These measures usually consist of asset sales that allowcompetitors to gain market share at the recipient’s expense,thus offsetting the anti-competitive advantage granted throughthe State subsidy. It is however questionable whether thismodel may be applied in a systemic crisis, where all playersmight be forced to sell and few might be able to buy: in thiscase, the requirement for compensatory measures might leadto a further worsening of the valuation of these assets andtherefore of the recipient’s financial situation.83 A possiblesolution would be for the Commission to be more flexible onthe time-scale of these asset sales.

IIIIII.. CCoonncclluussiioonn 4499.. Six months after the unprecedented governmentinterventions, it is probably too early to draw full conclusionson how well the European Union’s State aid regime has beenable to adapt to the circumstances of the crisis and to the otherpolitical imperatives pursued by the EU’s institutions. One factis however certain: by showing some flexibility, and evencreativity, in the application of the Treaty provisions to thecurrent crisis, the Commission has managed to avoid defaultstriggering a major bank failure due to use of the State aidprocedure, while maintaining the State aid rules, despite callsnear the beginning of the crisis for application of the State aidrules to be suspended. The exceptional nature of the legal basisinvoked by the Commission (Article 87(3)(b)) should alsomake it easier to revert to a more orthodox State aid controlregime once (hopefully) the crisis is over.

5500.. In the meantime, however, huge challenges will have to bemet, with the debate moving away from the rescue ofinstitutions and towards the handling of the structural failuresthat caused the crisis and which may hamper the return tonormal market conditions. Dealing with banks’ toxic assetsand restructuring plans will be a daunting task, which theCommission will have to perform in a political climate thatmay turn – just as in the US after the AIG rescue –increasingly hostile to bank rescues. To meet this challenge, incontrast to the US authorities, the European executive bodywill have neither a budget, nor proper regulatory functions todeal with the crisis. In fact, State aid control is, in practice, themain tool at the Commission’s disposal when trying to imposea consistent way of dealing with the crisis. The very nearfuture might test the efficiency of this tool like never before. !

78 Or of the company owning the assets.

79 The Commission considers that an open tender is an acceptable alternative toa detailed valuation of the asset sale in order to consider that the criterion ofthe market economy investor is met, see XXIIIth report on competition policy1993, 1994, p. 270. Commission Decision of 30 April 2008, 2008/719/EC,OJ L 239 Austria–Bank Burgenland, p.32.

80 Based on information released by the Commission, restructuring plans wererequired in the following cases: Sachsen LB, West LB, Bradford & Bingley,Northern Rock , Dexia, Fortis (if the government guarantee is drawn), KBC,Ethias, Hypo Real Estate Holding, Bayern LB, Nord LB, IKB, Bank ofIreland, Anglo Irish Bank, ING, Aegon, SNS Reall, Banco PrivadoPortugues, Carnegie Investment Bank.

81 See Financial Times Deutschland, “Brüssel gegen Berlin, Neuer Streit umCommerzbank-Hilfen” , March 18, 2009.

82 See Commission’s Guidelines rescue and restructuring of undertakings indifficulty, supra, paragraphs 17 and 35-38. Of particular interest in this regardis paragraph 35, which states that, “The restructuring plan, the duration ofwhich must be as short as possible, must restore the long-term viability of thefirm within a reasonable timescale and on the basis of realistic assumptionsas to future operating conditions. Restructuring aid must therefore be linkedto a viable restructuring plan to which the Member State concerned commitsitself. The plan must…include, in particular, a market survey”.

83 For instance, in the Crédit Lyonnais case, the Commission required assetreductions amounting to around 50% of the beneficiary’s total balance sheetsize. Requiring a restructuring of this scale would probably be impracticalor impossible in the current market conditions.


II.. IInnttrroodduuccttiioonn11.. For decades less developed economies confronted the majorchallenges of economic and social development, mainlythrough macroeconomic policies. For many volatile and crisisprone countries monetary stability and balance of paymentsmanagement were the mainframe of the economic policyagenda. The dominant role of macro policies has also shown inmost developed economies until the eighties. In the latter,macroeconomic crisis, speculative attacks on the currency anddeep banking crisis did not disappear but became increasinglyrare events in the economic life of these nations. This was trueuntil very recently when the mature economies haveexperienced the epidemics of emerging markets life.

22.. Over the past decades the dominant view on the agenda fordeveloped and more recently for emerging economies hasmoved gradually from macroeconomic to microeconomicreforms. The former mainly aim at overall stabilisation, whilethe latter focus on the rules and institutional environmentprone to foster market competition, by reducing barriers toentry and enhancing market transparency.

33.. Today there is a wide consensus that market competitionbenefits economic performance in the long run by encouragingefficiency through productivity gains and increased incentivesfor innovation.84 Institutional design and regulatory reformsfocus increasingly on fostering competition in economieswhere privatisation has been a dominant trend as well as incountries where public ownership (control) remains animportant feature (e.g. France and UE competition policy). Inthis framework, competition policy is increasingly understoodas a set of policy instruments rather than the traditional anti-trust approach. Regulatory reform, an intensive area of policymaking in the recent period, has been developed in theframework of a competition policy approach. This trend in thecontent of regulatory reform and practice emerges strongly inEuropean countries.

44.. Does the current financial crisis and the resulting severeeconomic turmoil affect these current trends? Is the recentconsensus on the major role of competition policies infostering collective welfare in question? Will the practice ofcompetition policies in the compact of economic policy beaffected? Will the political arena postpone competition policy

activism and its perceived long term benefits in favour ofshorter run macro sauvetage cum corporatist objectives?Nowadays, when every press report on the current financialand economic turmoil highlights a new rescue package indifferent countries of the globe, the potential collapse of amajor financial institution and the need to save a legendarychampion of a particular industry, these questions seems morethan timely.

55.. A contagion effect of massive interventionist pressure comesfrom the financial sector and contaminates the defensivelobbying activity of one sector after the other? From theautomobile, to steel and in due course the agricultural sectorhave a reasonable argument to queue for public funds? It maybe argued that if financial and banking mismanagement are thesource of the current disorder, being corporate, regulatory orboth compounded; why should the other (productive) sectorsof the economy suffer the destructive damage without stateaction? The most diverse arguments, going from the strategicsector approach to regional employment arguments, seem toemerge and appear potentially valid in the eye of thelawmakers? A dangerous political economy game may bedetonated with uncertain consequences on social welfare.

66.. Are we living the crisis of the hegemony of the market viewon the organization of economic life? Is it the prominent andfinally expected emergence of the massive market failureapproach and the reversion of the market reform approach? Oris it more a show that robust regulation should be fostered witha particular concern on the selectivity of instruments topreserve market mechanisms? We may differentiate betweenthe prevention of potential contagion effects of the financialsector (and interventionism to avoid over-destructive financialcollapse) versus protectionist policies in favour of theincumbents of non financial sectors, in the domestic scenarioor in the international trade arena.

77.. Where can we draw useful lessons for these potentialconflicts in the policy agenda? It has been argued that the BigDepression of the 1930s and the Japanese crisis of the 1990sshould boost pessimism of competition policy activists in theface of the current crisis.85 In this paper we will expose theexperience of Argentina, an eccentric society with a distinctivepreference for chronic crisis.

* The author thanks the research assistance and comments of Matteo Mogliani.He also thanks Paolo Benedetti, Marcelo Celani, Gabriel Martinez Riva andDavid Spector for their valuable comments.

84 Non-linearities in the relationship between competition and innovationhighlighted by Aghion et al. (2002) will be reviewed in the second section.

85 On the Great Depression in the US see Cole and Ohanian (2004), and onJapan in the 1990s Hayashi and Prescott (2002) and Porter and Sakakibara(2004).

AARRGGEENNTTIINNAA IINN TTHHEE EEYYEE OOFF AA PPRRAACCTTIIOONNEERR

CCaarrllooss WWIINNOOGGRRAADD*PSE-ENS, Paris and University of Evry, Paris



88.. This country has entered the group of emerging economiesin recent decades after experiencing one of the mostimpressive development stories in the late 19th century and thefirst decades of the 20th century. Argentina was among the 10richest countries in the world (income per capita) in the 1920s.But Argentina is also known for its institutional instabilitysince the 1930s: political, monetary and fiscal disorder,chronic inflation since World War Two, hyperinflation in the1980s and early 1990s as well as recurrent speculative attackson the currency, balance of payments crisis and debt defaults.

99.. Persistent economic instability showed in a low growth,highly volatile output and employment, as well as in anentrenched political disorder leading to recurrent shifts inpolitical regimes, with a succession of failed democraticexperiences disrupted by ever more violent militaryadministrations. Since 1983 Argentina experienced a democraticregime, but could not end its secular bias to economic crisis.What about competition policies in such an environment offrequent crisis with its disruptive effects of lobbying forsurvival, through corporate and trade union defensive practices?Furthermore, these policies are undertaken in a weakinstitutional set up that facilitates capture and cronyism.

1100.. This paper will present the experience of launchingintensive competition policies in Argentina, including mergercontrol, market deregulation and competition advocacy in thelate 1990s and early 21st century. We will discuss a number ofactions developed in an extremely short span of time and showthat even in the conditions of persistent crisis, competitionpolicy may be politically palatable, despite the defensiveactions and active lobbying of powerful incumbents. Butcreative political economy management is not immune to thelevel of pressure ignited by ever increasing short term losses inthe waiting for the announced (politically sold) longer term(dynamic) gains of competition policy activism.

1111.. Reversion of the leading role of the competition parties is acertain possibility. Then remains the issue of potentialhysteresis concerning the future strength of the procompetition tribe and institutions for the time when the crisisrecedes. This article is divided in 5 sections. The secondsection that follows, briefly discusses the underlyingarguments that explain the trade off between short termbenefits of protectionist incumbents (systematic rescuepolicies) versus the longer term expected welfare gains ofcompetition policies. The third section presents a briefdiscussion of competition policies in times of crisis. The forthsection includes a rapid account of Argentine crisis pronehistorical economic life. The fifth section presents the genesisand experience of competition policies in this country througha set of selected cases in the most diverse areas of theeconomy. The sixth section contains the conclusions.

IIII.. CCoommppeettiittiioonn aanndd eeccoonnoommiiccppeerrffoorrmmaannccee

11.. AA vviieeww ffrroomm tthhee lliitteerraattuurree8866

1122.. While there is broad consensus that competition increasesstatic efficiency, there is an on-going debate on whethercompetition is necessary for dynamic efficiency and growth.Standard microeconomics shows the value of competitionresulting in static allocation and productive efficiencies.However, one of the main contributions of competition todevelopment is the incentive to be dynamically efficient(Bresnahan, 2001; Ellig, 2001).

1133.. Traditionally, efficiency analysis was based on staticwelfare comparisons (Harberger, 1954), showing that resourceallocation is optimal when agents take their decisions usingmarket information. Contestability theory (Baumol et al.,1982) showed that perfect competition efficiency results mayalso be attained under monopoly conditions (one firm). Thekey question becomes the absence of entry and exit barriers,rather than the presence of a large number of small agents.

1144.. The role and effects of competition on static efficiency hasbeen subject to criticism, mainly based on the assumptions ofperfect information (no asymmetries) and costlesstransactions. Vickers (1995) argued that competition underinformation asymmetries is far from being fully understoodand that the results, typically analysed through principal-agents models, are ambiguous. If incentives are misaligned,the cost functions are not necessarily minimised and efficiencymay be harmed.

1155.. Other critics focus on the relationship between competitionand incentives to invest. Competition has usually been seen asan environment where economic rents disappear. In this case,it has been argued, there would be no incentives to innovate.87

Simple models assume perfect capital markets, so that theModigliani-Miller theorem applies and the innovation path isdetermined by the total net present value of monopoly rentsfrom innovating. Product market competition in these modelsis unambiguously negative.

1166.. Recent research, however, challenges these theories.Endogenous growth literature has focused on the effects ofcorporate governance on innovation and growth. Nickell(1996) and Blundell et al. (1999) report positive correlationsbetween competition, productivity growth and innovation.Aghion et al. (2002) have shown an inverse-U relationshipbetween product market competition and patenting activity inthe case of UK firms. Too much competition may harminnovation as much as too little competition may do.88 Carlinet al. (2001), report that growth of sales is related to thenumber of competitors with an ‘elasticity of demand’ indicator.Firms with competitors fighting for a market share have shownfaster growth rates in sales than those with no competitors.This line of research points to more subtle effects that driveinvestment decisions, showing that although some decisionsare positively correlated to competition, the net effect may beambiguous.

86 For links between competition and development, see: Ahn (2002), Lachmann(1999) and Rey (1997).

87 The term innovation is used here as an indicator not only of technologicalchange but also for the introduction of new products (Aghion et al., 2002).

88 In Aghion’s model, competition could finally boost innovation and growthbecause firms are trying to “escape competition”. This effect is more evidentin “neck-and-neck” industries, in which oligopolistic firms have nocompetitive advantages. The point is that competition may reduce currentrents faster (neck-and-neck) than future rents increase incremental profitsthat justify R&D expenditures in order for a firm to become a leader.


1177.. In this new generation of models, innovation depends notonly on future rents, but also upon the difference with pre-innovation rents (incremental profits). Ellig (2001) highlightscomplementary views about the dynamic effects ofcompetition: Schumpeterian, Austrian, evolutionary, pathdependence and the resource view of the firm. All of thesetheories express basically the same idea: market power is notnecessarily a consequence of anticompetitive behaviour, andconcentrated markets may produce efficient outcomes wheninnovation, network effects and specialised resources (likeknowledge) are involved.

1188.. These findings are at the core of the discussion in the anti-trust arena of the United States and Europe nowadays. Manyauthors draw attention to simple rules of anti-trust ortraditional approaches about how markets work in the “neweconomy”.89 In some industries, concentration is a naturalconsequence of technical progress and the way competitionworks, so punishment could be a misleading strategy. Undercertain conditions, like technology uncertainty, firms maycompete for the market through network effects andexternalities.90 Evans et al. (2001) argue that little staticcompetition in industries could hinder vigorous dynamiccompetition.

1199.. This point may be relevant for developing countries.Concentration measures are not a necessary condition forintervention and sometimes are less relevant than mostpractitioners may think. Small markets and scale economiesnaturally admit few players. So the relevant question in termsof competition is whether there are barriers to entry or anyother condition that weaken the minimum threshold ofcontestability in that market. Gal (2002) and Winograd (2003)discuss the case of competition policies and institutionaldesign in small open economies.91

22.. EEmmppiirriiccaall ffiinnddiinnggss2200.. There are many empirical studies linking competition withchanges in productivity. Comparative case studies of selectedindustries in the United States, Japan and Europe (Baily, 1993;Baily and Gersbach, 1995) show that global competition withbest-practice producers enhances productivity. Nickell (1996)and Disney et al. (2000) used several indicators of competitionin productivity regressions and found that competition

increases productivity levels and growth.92

22..11.. CCoommppeettiittiioonn llaaww eennffoorrcceemmeenntt2211.. The negative impact of anti-competitive conduct onconsumers and economic efficiency is difficult to measure.Some crude estimates of the overall social costs of monopolieshave been made (e.g. Posner, 1975).93 More precise evidenceis available for individual cases.

2222.. Cartels raise prices above their competitive level, reduceoutput and labour productivity. Consumers pay higher pricesor forgo the cartelised products (see OECD 2002, 2003).94

Resolving other anti-trust torts, such as vertical constraints andabuse of market dominance, also increases consumer welfare,productivity and innovation. For example, following theabolition of resale price maintenance for manufactures ofcertain pharmaceuticals in the United Kingdom, supermarketsreduced prices by between 25 and 50 per cent (OECD, 2002).Competition law enforcement may also prevent damagecaused by abuse of dominance, such as predatory pricing,exclusive dealing and tying which can deter market entry. Itshould be stressed that, except for cartel conduct, a case-by-case approach is needed.

22..22.. RReessttrruuccttuurriinngg mmoonnooppoolliieessaanndd ssaaffeegguuaarrddiinngg ssttrruuccttuurraall rreeffoorrmm2233.. Competition law enforcement can help restructuremonopolies, bring innovations and significative price cuts. Forexample, in the United States the Sherman Act of the 1970shelped restructure the national telephone system. The 1984divestiture initiative separated manufacturing, long distance,and local services operations of the US telephone system.95

Fierce competition may have stimulated further innovations,such as fibre optics.

2244.. Competition law enforcement is also a fundamentalcomponent of successful structural reforms. Co-operativebehaviour or dominant positions induced by regulation will notsimply disappear because of less regulation. Delivering a strictapplication of competition law is very important. Theenforcement of competition law should apply to any anti-competitive action that can undermine reform.

2255.. Competition law should be applied to all sectors of theeconomy. Many sectors claim, however, their own particularset of competition rules or competition enforcement authority,on the grounds of their uniqueness. One should be very

89 Evans and Schamalensee (2001).

90 Competing standards in electronic services or high-tech industries seem toreflect this behaviour.

91 Competition is not necessarily a process entailing a large number of players.This issue is important as regulatory reforms have often been guided by theprejudice that “more is better than a few”.

92 Based on a sample of 676 UK firms over the period 1975-86, Nickell (1996)found strong evidence that competition (measured by increased numbers ofcompetitors by lower levels of rents) led to higher productivity growth.Using a more recent and much larger data set of around 143,000 UKestablishments over the period 1980-1992, Disney et al. (2000) show thatmarket competition significantly raised levels and growth rates ofproductivity.

93 Posner estimated the social cost ratio in proportion to sales turnover in theUnited States around 14 per cent in medical services, 13 per cent in opticalindustry, 19 per cent in transport, 20 per cent in oil refinery, and 20 per centin airlines.

94 Fourteen case studies done by competition agencies in OECD countriesshowed that cartel overcharges varied between 5 to 65 per cent, with themedian being around 15 to 20 per cent (OECD, 2002). OECD (2003)illustrates that the international trade of 16 large cartel cases exceededUSD 55 billion. Historical studies also point to the economic damage causedby cartels. For example, in the United Kingdom price fixing was common inthree-quarters of British industry until the adoption of the RestrictivePractices Act in 1956; these cartels reduced annual labour productivitygrowth by 0.8 percentage point (OECD, 2002).

95 The reforms led to price cuts of long distance toll and international servicesby 17-50 per cent during the 1984-96 period (OECD, 1999).


cautious with the introduction of sector-specific competitionlaws or sector specific enforcement agencies as they mayadopt an approach to competition that is overly congenial tothe industry’s traditional mode of operation instead ofpromoting the competitive regime that regulatory reformtypically aims at. Sector-specific agencies may also resist thepro-competitive thrust of reform because of self-interest.Indeed, an agency whose chief purpose is to regulate anindustry may have incentives to ensure its own survival bykeeping regulation in place.96 Capture problems may also tendto emerge more frequently under these institutionalarrangements. Success and failure in pro-competitioninitiatives highlight the critical role of institutional design andpolitical economy arguments in the development of regulatoryreforms, in particular in the relative political clout ofincumbents (firms and unions) versus potential new entrantsand consumers.

22..33.. CCoommppeettiittiioonn aaddvvooccaaccyy2266.. Many studies on OECD countries illustrate the positiveeffects of competition advocacy leading to more competition,higher efficiency, lower costs of entry and expansion, and morecompetitive and efficient industry structures (Ahn, 2002). TheUnited States has been a leader in competition-based structuralreform (see Annex 5.A1 for more details). Two fundamentalregulatory features of the United States are the pro-competitivepolicy stance of regulatory regimes and the openness andcontestability of regulatory processes.97 Will the stronginstitutional lobby in favour of pro-competition actions andpractices survive the pressures emerging from the current crisiswith the natural aversion to short run economic and social costs?

2277.. Economic reform based on competition enhanceseconomic performance, resulting in gains in labour and capitalproductivity, and lower prices due to lower operating costs.Moreover, labour, capital and total factor productivityincreased. Reforms stimulated firm restructuring which in turnalso improved productivity. It favours the introduction of newtechnology, such as fibre optic and digitalised networks intelecommunications. It forced firms to eliminate excesscapacity, as in electricity.

2288.. Gains in reformed sectors spill over to other sectors, eitherthrough demonstration effects or because the reformed sectorssupply important inputs. Improved, unbundled, and customisedservices permitted customers to improve productivity.Guaranteed delivery time in transportation facilitated moreefficient supplier-producer relationships such as just-in-timeinventories. Development and application of sophisticatedpricing, routing and logistical software in formerly regulatedsectors had important demonstration effects in other sectors.And their pioneering developments reduced the costs andimproved the quality of new technologies, facilitating theiradoption in other industries.

2299.. Regulatory reform by increasing competition alsoimproved the dynamic allocation of resources and investment,possibly also leading to long-term gains in productivity. Pro-competition initiatives in the financial sector have alsoimproved the functioning of capital markets (in less volatiledays), increasing the efficiency of investment.98

3300.. Regulatory reforms also may have significantmacroeconomic effects. They may lower prices, benefitingboth business and final consumers. Lower input prices may inturn lower output prices. Lower prices and greater priceflexibility in turn may have contributed to price stability. Inmost reformed sectors, employment has increased in the longrun after initial declines due to restructuring. Moreover,employment has been reallocated to more efficient firmswithin the sector. Increased output and income in the reformedsectors also may raise output and employment in the rest of theeconomy.

IIIIII.. WWhhaatt aabboouutt ccoommppeettiittiioonnppoolliicciieess iinn ttiimmeess ooff ccrriissiiss??3311.. If competition policies have a positive impact onproductivity, and provide welfare gains why should we beconcerned by the potential disruption of these policies? Asstated in the previous section, the theoretical and empiricalliterature highlights the favourable effect of competition policyactivism on productivity and growth, as well as on collectivewelfare. If certain caveats and controversies have beendiscussed, the general consensus is that competition has asignificant positive impact in the long term. In sectors under aprocess of restructuring non negligible costs may emerge inthe short term. We thus observe a temporal sequence of costsand benefits of competition policies, the former coming firstand the gains later.

3322.. The political economy of competition policies shouldaccount for this temporal profile in order to maximize thesuccess of the policy agenda. In times of deep macroeconomiccrisis the short run economic and social costs for theincumbents are magnified, as well as their lobby for survival.It is certainly harder for the lawmakers and civil society to

96 Transportation deregulation in the US offers examples of sector-specificagencies applying the general competition law inconsistently. Thoughoriginally charged with ensuring competition, the US Interstate CommerceCommission and the Civil Aeronautics Board became a means formaintaining cartels. For several years after the US airline industry wasderegulated, jurisdiction over airline mergers remained with the Departmentof Transportation, rather than the anti-trust agencies. The Departmentapproved several combinations leading to significant market power in severalcity-pair markets despite vigorous objection from the anti-trust authorities.The same recently happened in the case of a railroad merger approved by aspecial Board within the US Department of Transportation. In Australia, thegeneral jurisdiction competition agency is slated to become the residual“regulator”, in order to avoid the problems inherent in relying on sector-specific enforcement bodies.

97 Until the recent financial and economic crisis the pro-competition policystance in the United States ensured that regulations are based on marketprinciples. Regulation has usually been used to establish conditions forcompetition rather than to replace competition. Pro-competition policieswere based on strong competition institutions. The openness andcontestability of regulatory policies weaken information monopolies and thepowers of special interests, while encouraging entrepreneurship, and thecontinuous search for better regulatory solutions.

98 In the US case, the combined size of reformed sectors is relatively small– 5 per cent of GDP – but the benefits of productivity growth in those sectorsmay have contributed to improvements in productivity performance in theeconomy as a whole.


discriminate the compounded cost of the crisis cum thetransitory costs of competition policies. Furthermore, the shortrun aggregate costs may be politically non manageable. Andthe role of competition policy may then be severelyquestioned, the CP actions subject to stronger politicalinterference and eventually the institutional set up may bereversed.

3333.. In times of financial crisis one essential issue should beborne in mind: in a nutshell crude proposition, competitionpractice has to account for the basic difference of the financial(banking) industry, from the other sectors of the economy. Thebankruptcy of a bank due to a fundamental businessmismanagement or due to a run (panic) does not affect onlythe institution in question. It may also produce an extensivecontagion onto other originally sound financial firms, now alsoin risk of bankruptcy. In turn, liquidity freezes and the rest ofthe economy will be facing severe losses.

3344.. If an incumbent firm of another industry fails, itscompetitors will not be affected, and well on the contrary theymay benefit absorbing the market left by the bankrupt player.If the firm exiting is relatively inefficient compared to the restof the industry, the consumers may benefit from the resultingreallocation. In the case of the financial industry, a run on thebanking sector may kill more efficient players as well as lessefficient.

3355.. This fundamental difference between the financial industryand other sectors of the economy may justify state interventionand public policy may disregard relative efficiency of thefinancial firm. In the face of a run and the resulting liquiditycrunch, a more efficient bank may face a higher risk ofbankruptcy, relative to a less efficient institution, due to atemporal profile (maladjustment) of its credit flows.Furthermore, the public agencies may not dispose of preciseinformation of the relative efficiency of financial firms indistress, and the risk of contagion with the potential costs forthe rest of the economy overpower these considerations.

3366.. Accounting for the risks in times of crisis and theparticularities of the banking industry should not deter theexercise of competition practice by the concerned agencies. Inview of this, it would be better to concentrate public initiativein the resolution of the financial distress to alleviate theliquidity squeeze falling on the rest of the economy. The latterpolicy should be favoured relative to the desperate easing ofstate aid to business and the passive acceptance of anti-competitive mergers (ACM) across non financial sectors of theeconomy. But a reasoned degree of flexibility and political earshould be present when economic distress and social anxietyabound. Beyond the schumpeterian arguments of creativedestruction and potential efficiency gains in contractions, anti-competitive initiatives will have to be discussed by thecompetition policymakers trying to bias the choices towardsthe less damaging.

3377.. Direct aid (DA) may be preferred to bad mergers directedto save firms due to regional concerns or arguable strategicconsiderations. The losses to consumers coming from anti-competitive mergers may give rise to more permanent effects(market power and rents) than direct aid that could have atransitory character. The DA may set limits in time and extract

restructuring concessions from the receiving firm enhancingless distortions to the competition game. However, thisfavourable aspects of direct aid relative to ACM do not alwaysprove true: very often the aid extends in time and givesincentives for the beneficiaries to invest heavily in thelobbying industry. Inefficient firms may be benefitted andefficient ones handicapped. Furthermore, a bad demonstrationeffect may arise inducing a contagion where one sector afterthe other will be queuing for public funds.

3388.. Political economy arguments should not be neglected inthe road to foster competition policies. This is all the more truein times of deep economic distress. The winners of directedaids and subsidies are concentrated in sectors and regions andinvest strongly in voicing their interest, whereas the losers tendto be more passive and their costs less visible in the short run.The battle of the competition agencies for public support is notobvious. A mandatory assessment on the competition impactof the DA or parent initiatives will be a good instrument tofoster the public debate. The potential costs of anti-crisismeasures (welfare losses in the longer term) may be discussedin the political arena and reach the general public. Preferredoptions may thus be considered.

3399.. But when political and social distress prevail thecompetition tribe should beware of crusaders inflexibility. Itmay put in risk the whole agenda and the institutional set up ofcompetition policies. This is the more true in countries withsevere institutional fragility. Not an easy game, but whothought it should be easy?

IIVV.. AArrggeennttiinnaa iinn hhiissttoorriiccaallppeerrssppeeccttiivvee:: CChhrroonniicc iinnssttaabbiilliittyyaanndd ccrriissiiss4400.. The long period of the history of Argentina spreading fromthe end of the 19th century to 1930 is known as the “GoldenAge”. The country showed a rapid development, regularelections even if democratic institutions were not consolidateduntil 1916, improving social indicators and low illiteracy,massive immigration and a high level of financial developmentas well as a strong integration to world markets (finance andtrade). These features were the premises to promote Argentinaamong the richest countries in the world in these days.99

4411.. Nevertheless, history may teach the hard way that goodinitial conditions can revert into deceiving outcomes in thelongest run. Figure 1 reports per capita GDP for Argentina incomparison with industrialized and emerging economiesbetween 1900 and 2006. The picture is striking: until the 40s,the Argentinean growth was sustained and income per capitaeither higher or very close to the most developed economies ofthe time. In 1910 the income per capita of Argentina wasaround 25 per cent lower than that of Australia and the UnitedStates, and 20 per cent lower than the United Kingdom, the

99 For a detailed account of Argentine economic history see Diaz Alejandro(1970), Mallon and Sourrouille (1975), Véganzones and Winograd (1994,1995, 1997), and de la Paollera and Taylor (200..)


richest economies of the time. GDP per capita was then similarto Canada, 15 per cent higher than Germany, 25 per centhigher than France, 60 per cent higher than Italy, twice that ofSpain, three fold the income per capita of Japan and Portugal,and five times that of Brazil.

4422.. These numbers remained barely the same up to the lateforties (the US diverged upwards relative to the rest), butthereafter, as shown in the figures below, these comparativeeconomics show a fundamental change. Argentina was notable to follow the virtuous growth pattern of European andthen booming countries, such as Japan and Brazil. In 2006 theincome per capita of Argentina was 30 per cent of that of theUnited States, 40-50 per cent of that of Western Europe,Australia, Canada and Japan, whereas still 60 per cent higherthan that of Brazil (against a fivefold multiple in 1910).

Figure 1.aPer capita GDP (international 1990 million dollars), 1900-2006

Source: Historical Statistics of the World Economy (Maddison, 2009)

Figure 1.bPer capita GDP (international 1990 million dollars), 1900-2006

4433.. This puzzling process of relative decline has a counterpartin chronic political and economic disorder. In 1930, in theideological mood of the European political scene, the first militarycoup of modern Argentina takes place disrupting democraticinstitutions. Thereafter 6 military coups – and a number of armyrebellions – ever more violent, were undertaken until 1983with the return to durable democracy, starting with electedPresident Alfonsin and regular elections for the last 25 years.

4444.. Military regimes will alternate with democratic ones, in thebackstage of persistent monetary and fiscal disorder, chronichigh inflation, balance of payments crisis, speculative attackson the currency, debt defaults and short lived stabilizationprogrammes. The alternance between military and democraticregimes is in general detonated by situations ofmacroeconomic distress. The armed forces are called to restoreeconomic and political order, and in due course the failure ineconomic management opens the road to elections and the turnto a democratic time. The latter will again be interrupted by aneconomic crisis and the return of the military party of order.

4455.. A durable democratic regime and regular elections did notdissolve the bias towards economic instability of Argentina,that experienced two bouts of hyperinflation in 1989 and 1990.Table 1 below presents a summary of the main political andeconomic events of the last hundred years, showing intensevolatility in the last 60 years.

Table 1Political, Economic and Financial Crises in Argentina

Political Regimes and Crises Economic and Financial Crises

Date Event Date Event

1900-1930 Democracy 1912-1914 Bank Crisis

1930-Sep Military Coup (Uriburu) 1930-1932 World Crisis

1930-1943 Military Regime

1943-Jun Military Coup (GOU)


1946-1955 Democracy 1952 Inflation -Currency Crisis

1955-Sep Military Coup (Leonardi)


1958-1962 Democracy 1959 Currency Crisis

1962-Mar Military Coup (Guido)


1963-1966 Democracy

1966-Jun Military Coup (Ongania)


1973-1976 Democracy 1975-Mar Speculative Attacks

1975-1985 High-inflation

1976-Mar Military Coup (Videla)

1976-1983 Military Regime 1980 Bank crisis

1978 Quasi-war with Chile 1981-Apr Currency Crisis

1982 War with the UK 1982-Jul Speculative Attacks

1983-today Democracy 1989-Jun Hyperinflation -Currency Crisis

1990-Feb Hyperinflation -Currency Crisis

1995-Mar Currency Crisis –Bank Crisis

2001-Dec Presidential turnover 2001-Dec Currency Crisis –Debt Default


4466.. Table 2 reports some key statistics, such as inflation, GDPgrowth and financial intermediation as measured by M3 toGDP, for Argentina and the United States, from 1960 to 2005.These figures highlight a comparative view on the degree ofvolatility of the Argentine economy in recent decades. Threesub-periods were selected: 1960-1983, i.e. from the aftermathof a balance of payments crisis cum military rebellions untilthe end of the last military regime; 1984-1991, i.e. the highinflation and hyperinflation period; 1992-2005, i.e. from thelast stabilization plan (convertibility plan) to the aftermath ofthe 2001-2002 deep economic crisis.

Table 2Comparative figures of the Argentina and USA economy, 1960-2005

Source: IFM – International Financial Statistics.

This table reveals the extreme instability of Argentina, thatshows in low and volatile growth, skyrocketing inflation andthe experience of hyperinflation as well as a process offinancial destruction (disintermediation).

11.. TThhee 22000011--22000022 ccrriissiiss:: CCuurrrreennccyyccoollllaappssee,, ddeebbtt ddeeffaauulltt aanndd ppoovveerrttyy4477.. The benefits of stabilization brought by the Convertibilityplan, launched in 1991 after the second hyperinflation episodeexperienced in Argentina were gradually reverted during the90s. Under the policy of a currency board monetaryarrangement, an economic cycle of boom and bust willdevelop: a first phase of price stability, strong growth andfalling unemployment cum political support for the incumbentadministration of President Menem will take place. A secondphase, of economic contraction, rising unemployment,growing fiscal deficits and rising public debt as well asdeteriorating external conditions, will follow.

4488.. Starting from 1995, a series of emerging economiesfinancial crises (Mexico in 1995, Asia in 1997, Russia in 1998and Brazil in 1999) drought out foreign capital in?ows toArgentina, the current account de?cit increased fueled by theovervaluation of the peso and persistent deficits in publicfinance. Market confidence receded and speculative attacks on

the currency became a persistent threat to financial stability. Asevere fear to float the currency, coming from the long livedtrauma of inflation and hyperinflation, of voters and thus ofpoliticians led to a policy trap. With a high level of debt, acontracting economy, an overvalued currency and adverseinternational conditions, limited instruments to respond to theeconomic challenges of the time were left. Under thiseconomic straightjacket, a new government headed byPresident De la Rua was elected in 1999.

4499.. Figure 3 reports the quarterly values (in dollars) of fiscaland current account deficits of Argentina since the early 90s.The combined effects of external and domestic pressures areresumed in Figure 2, representing key macroeconomic data forthe 1992-2008 period. The plot reports quarterly values forGDP and the inflation rate: the economy entered a recession inthe third quarter of 1998 and experienced a deep depressionbetween the fourth quarter of 2001 and the second quarter of2002. Between 1998 and 2002 output per capita fell by over 20per cent (12 per cent between 1998 and 2001). At the peak ofrecession, price levels skyrocketed to a 2-digit quarterlyinflation rate, with market analysts discounting a possiblereturn to frightening hyperinflation.

Figure 2GDP (billions of pesos at 1993 prices) and CPI quarterlyinflation (right axis)


Figure 3Current Account and Fiscal Balance (million dollars)


Argentina USA

1960-1983

1984-1991

1992-2005

1960-1983

1984-1990

1992-2005

InflationRate (CPI)

Mean 97.59% 928.59% 6.78% 5.48% 3.99% 2.61%

SD 112.68% 1131.28% 9.14% 3.62% 1.04% 0.57%

GrowthRate (GDP)

Mean 2.84% 0.76% 2.95% 3.36% 3.34% 3.15%

SD 4.43% 5.83% 6.49% 2.40% 2.05% 1.07%

M3/GDP

Mean 26.67% 18.53% 25.87% 68.91% 75.44% 71.94%

SD 5.04% 5.16% 5.65% 4.21% 2.97% 5.65%


5500.. A severe credibility crisis was in motion, speculativeattacks on the currency and skyrocketing interest ratesdistressed the economic life of the country. Capital out?owswere out of control and the Central Bank currency reserveswere depleted, generating pressures over commercial banks’liquidity. A run on the banking sector developed and financialcollapse became inevitable. At the end of 2001 the governmentresponded to the critical situation with a freeze of bankdeposits to stop the run on the financial system. The popularresponse to these measures was a wave of civil disorder.President De la Rua resigned after two years in office, and inthe midst of severe political turmoil 4 interim Presidentsfollowed in a few weeks. Finally President Duhalde (Governorof the Province of Buenos Aires), was appointed by theParliament to conclude the mandate of President De la Rua.

5511.. In January 2002, President Duhalde was forced to abandonthe fixed parity with the dollar as well as the currency boardregime, and let the currency float. The peso devalued 400 percent in a short span of time and inflation skyrocketed from lowlevels of 1-3 per cent per year to 40 per cent in 2002, leadingto sharp reductions in real wages of 20-40 per cent dependingon the sector of the economy.

5522.. The financial distress had a devastating impact on the realeconomy of the country, showing in rapidly risingunemployment and poverty reaching very high levels. Figure 4reports the data of unemployment, poverty, and extremepoverty rates from 1988 to 2006.100 All the indicators show apattern of deterioration at the end of 90s, exploding in late2001 and 2002: after the highs of the hyperinflations of 1989-90, from levels of unemployment and poverty of 5-7 per centand 13 per cent, respectively, in 1993-94, to around 15 per centand 20 per cent in the period going from 1998 to the first halfof 2001. In the period extending from the end of 2001 and2002 in the height of the economic collapse unemploymentexceeded 20% and poverty spread to 40% of households.

5533.. Starting from 2003, and propelled by an extremely favourableinternational environment cum robust public finance policies ofsustained fiscal surpluses, Argentina entered a period ofremarkable recovery. GDP showed rapid growth of 7-9 per centin the years 2003-2008, while inflation stabilized at a higher levelthan the pre-crisis pattern of 8-20 per cent, and unemploymentand poverty rates reverted slowly towards the pre-1998 level.What comes next in the volatile path of this nation?

Figure 4Unemployment , Poverty, Extreme Poverty Rates

Source: INDEC – Encuesta Permanente de Hogares.

VV.. CCoommppeettiittiioonn ppoolliiccyyiinn AArrggeennttiinnaa5544.. Developing countries, even those with a relatively small privatesector, may benefit from the enactment of anti-trust legislationand the creation of a competition agency in various ways:101

! A competition agency may become a centre of expertise inanti-monopoly policy and can help to develop deregulation,privatisation, and restructuring plans that could improve theperformance of the market economy.

! Competition law enforcement improves the businesspractices of state enterprises by subjecting them to clearlydefined principles concerning avoidance of abuse, dominantposition or other anti-competitive actions.

! Competition law enforcement can help the state agencies– procurement – to obtain better goods and services at lowerprices while compelling enterprises to strive for greaterlevels of efficiency.

! Competition law enforcement can fight guild-type policiesprevalent to local service, which resist social and economicchanges thus leading to enhance competition and efficiency gains.

5555.. In developing and emerging economies, althoughprogress has been made through reforms during the pastdecade, competitive market structures still have to beimplemented through competition policy. In Latin Americamost countries have had legal frameworks since theseventies (Chile), or eighties (Argentina, Brazil, amongothers). But they lack the insti tutional strength andreputation that characterise these instruments in OECDcountries. The process is difficult and needs a betterunderstanding of the challenges involved. Moreover,excessive distortionary regulation still persists in LatinAmerica. In what follows we will discuss the case ofArgentina and competition policies in the midst of a chronicbias to scenarios of economic crisis.

11.. FFrroomm aannttii--ttrruusstt ttoo ccoommppeettiittiioonnaaddvvooccaaccyy5566.. Argentina set up a Competition Law and a specialisedcompetition agency (Comisión Nacional de Defensa de laCompetencia, CNDC) in the early eighties. In the mid-90s,competition policy started as a policy tool. The most salientcase of this period was related to the country’s biggest firm,the oil company Yacimientos Petrolíferos Fiscales (YPF).However, even though extensive privatisation took place in the

100Data on “Gran Buenos Aires” region.

101Since the early 1990s, there has been an accelerated world trend toward theadoption and strengthening of legislative measures designed to create andpromote a market economy. The four key policy measures have beenprivatisation, restructuring, deregulation (including elimination of pricecontrol) and adoption of competition legislation.


1990s,102 competition policies (CP) were not a fundamentalelement of the political agenda, and effective initiatives wererare and non systematic. Under the new government takingoffice in 1999, competition policy acquired more importance,becoming a first order tool of economic policy aimed atenforcing better market regulations. Furthermore, under thefixed exchange rate regime (Convertibility Law) established in1991 – and, hence, the low degrees of freedom to respond tochanges in relative prices – the role of competition policybecame crucial: it was one of the few policy instrumentsavailable to gain efficiency and international competitiveness.We should recall that the economy had entered a phase ofeconomic slowdown and growing financial stress since the endof 1998.

5577.. The need for a better institutional framework incompetition policy prompted the government in 2000 toevaluate the preferred design in an environment with structuralinstitutional fragility. A decision was taken to develop amultiple agency model in regulation with the objective ofinducing a certain degree of competition for reputationbetween regulators aimed at reducing the incentives forcapture.

5588.. The immediate antecedent of legislation regardingcompetition policy in Argentina is Law 22.262 (August,1980).103 This norm established that all conducts that limit,restrict and distort the normal functioning of markets are to beanalysed by the CNDC. This law mentions, but does not define“general economic interest”, a concept linked to whateconomists refer to as total surplus. The law that created theCNDC failed to define the proper place of this agency in theinstitutional hierarchy and the necessary degree ofindependence. Moreover, the legislation did not regulatemandatory ex-ante mergers and acquisitions control.Nevertheless, the CNDC decisions contributed to the growth ofCP as an instrument.

5599.. A new law passed in 1999 (Law 25.156 and Decrees1019/99 and 85/2001) introduced ex-ante control of mergerand acquisitions. Further provisions defined more precisely thelimits of the legislation and made possible its application(Resolution 40/2001). This law was complemented in 2001 by

a Decree (396/2001) establishing limits to economicoperations that needed ex-ante control. The latter piece oflegislation was aimed at a more focused use of the existingresources on highly relevant M&A, excluding second orderoperations that drain scarce human capital and unnecessarilyincrease transaction costs (and opportunities for corruption).

6600.. In 1999 the newly elected government created a higherinstance, the Secretary for Competition and Consumer Affairs– Secretaría de Defensa de la Competencia y Del Consumidor(SDCyC). The CNDC was made dependent on this agency,thus establishing a clear hierarchy. The multiple agencyscheme was developed by the creation of the Tribunal ofCompetition – Tribunal de Defensa de la Competencia (TDC).This tribunal was endowed with financial and jurisdictionalautarchy, as well as autonomy. The CNDC later to become theindependent the TDC, was assigned to investigate and punishconduct that could damage general welfare. In this newinstitutional design, SDCyC could operate as a complement tothe TDC (in line with the UK model). This “double agency”model has several advantages over a single agency scheme, ifhigher aggregated administrative costs. First, each agencyexerts control over the other. It is expected that the SDCC willact like an attorney and the TDC like a judge. This scheme hasproved to work well in many countries, including the UnitedStates. Second, a two-agency scheme minimises theprobability of capture, by increasing the cost of capture andbenefiting from competition in the reputation of the regulators.Third, both agencies work towards similar goals and can, in away, “compete” for better results.

6611.. Until the reform of the legislation instituted in 2001, toomany operations had to be revised by the CNDC. Thisproduced a congestion of administrative procedures that endedup in some operations being approved tacitly or stuck in themiddle of the process. Furthermore, less operational time wasleft for the relevant M&As. With the new scheme, the TDCdoes not have to deliberate ex-ante on operations that are notof prime economic importance. Thus, the government expectedthat the CNDC would become more efficient.104

6622.. The experience of Argentina reveals two main stages inestablishing a functional CP. The first lasts until 1999 when CPwas limited to react to private claims. For instance, actingagainst anti-competitive behaviour occurred only after aprivate company raised the case against another company, andnever ex-officio. The second stage started at the end of 1999.The newly established SDCyC decided to press ahead withintensive and pro-active competition policies, i.e. decidingex-officio. After the 1999 reform of the legislation, regulatoryissues were tackled more efficiently. This is well illustrated bythe case of Endesa in electricity as well as other technically– and politically – complex anti-trust and regulatory initiatives(see below).

102During the 1990s, the government undertook an extensive and rapidprogramme of privatisation of state firms, in a large number of sectors of theeconomy such as, electricity, oil, postal services, telecom, transport, waterdistribution, etc. The political economy of these reforms and its popularsupport in the 1990s can only be understood considering the previous historyof state provision of services in Argentina. The decades’ long experience waspredominantly unsuccessful with severe deficiencies of governance, lowproductivity, overstaffed firms and serious problems of corruption and capture.State-owned companies’ huge structural deficits had a significant negativeimpact on the macroeconomic performance of the country. Given the initialconditions, thus, privatisation rapidly improved performance and services in anumber of sectors of the economy, such as energy and telecom. In certaincases, such as electricity, the reduction of prices was also significant,contributing to lower input costs and thus to competitiveness. See Larrain andWinograd (1996) and Celani and Winograd (2003, 2005). In other sectors,such as highways, postal services, and transport, the results of privatisationwere not satisfactory. In the privatisation of airports, no consideration wasgiven to the rationale of potential competition in the industry.

103There were two previous laws passed by the Congress: Ley N° 11.210,(1923) and Ley N° 12.960 (1946). The first one was intended to fight againsttrusts integrated by meat processing firms and the second was a review of theformer.

104It should be noted, however, that given the fact that the thresholds for M&Acontrols are fixed in nominal pesos, the inflationary burst experienced sincethe collapse of the convertibility regime and the sharp devaluation of 2002have progressively increased the number of operations subject to officialreview. To address this problem, the adjustment or indexation of thresholds’values could be envisaged.


6633.. With the successful intervention of the SDCyC in the caseof electricity companies, this agency became crucial in settlingregulatory issues regarding public utilities, as well as manyother instances (telecommunications, postal services, airportsand ports).

22.. CCoommppeettiittiioonn aaddvvooccaaccyyaanndd rreegguullaattoorryy rreeffoorrmm6644.. With the creation of the SDCyC and its active role,regulatory reforms in electricity, credit card systems, football,postal services, telecommunications, were quickly approved.The following is an overview and a brief summary of actionsdeveloped in the years 2000-01.

22..11.. EElleeccttrriicciittyy ddiissttrriibbuuttiioonn6655.. The Argentinean energy market was privatised andmodernised in the early nineties. Reforms in the electric sectorincluded the vertical separation of generation, transport,distribution and commercialisation. As transport was dividedinto regional monopolies, distribution was structured in thesame way. In distribution, by regulation, the metropolitan areaof Buenos Aires was divided into two halves and independentmonopolies were established using a yardstick competitionapproach. The two privatised companies were named Edesurand Edenor, for the southern and northern areas respectively.

6666.. The Spanish firm Endesa was a major shareholder ofEdenor in partnership with the French company EDF andAstra, an Argentine oil company later sold to Repsol-YPF.Edesur was controlled by the Chilean energy conglomerateEnersis. In 1997 Endesa bought Enersis, inheriting the controlof Edesur. The latter company thus turned into a majorshareholder in both distribution companies of the metropolitanarea of Buenos Aires.

6677.. In 2000 the competition authority, the SDCyC, decided tolaunch an active competition initiative to separate Endesa’sproperty in the two firms through a disinvestment operation.When Endesa became a major shareholder in both companies,the fundamentals of the regulatory framework based onyardstick competition were jeopardized.

6688.. How would economic interests be affected by theconcentration of control in the distribution andcommercialisation markets? This operation raised issues suchas access to the distribution network for third parties, and thereinforcement of the proper incentives for the sustainability ofthe electrical sector. After an investigation, the SDCyCrecommended that Endesa’s property be separated, leaving itto Endesa to decide in which company it would keep itsparticipation and in which company it would sell.

6699.. This recommendation initiated a new phase in regulatoryreforms in Argentina giving rise to a new approach inregulation and competition policy, as well as bringing asignificative gain in reputation for the newly created agency.Since then, most regulatory reforms required the participationof SDCyC and increased the chance of applying CP principles.The SDCyC’s participation in regulatory reform policies has

transformed the way most people involved understand thescope for CP. Regulatory reforms in the postal sector illustratethis point.

22..22.. PPoossttaall sseerrvviicceess7700.. The public postal operator in Argentina was privatised in1997. The privatisation process consisted of a concession witha universal service obligation covering the whole nation and afew regulated prices like simple letters and small packets.

7711.. One of the main concerns in the sector was the emergenceof growing competition in the ultra-rapid services likemessengers and corporate segments given the absence of (legaland technological) barriers to entry. This competition erodedpart of the financing mechanism implicit in the universalservice obligation and the tariff structure of the new privateoperator.

7722.. In 2000 the discussion concentrated on setting up a newregulatory framework that could be consistent with the needsof the official operator and the main competitors. The mainoperator Correo Argentino alleged that the situation was notsustainable and proposed the establishment of entry barriersthat would limit the work of small companies in messengersmarkets as well as more rigorous controls over the rest of thecompanies. Additionally, the main operator lobbied forrestrictions imposed on the rest of the operators (its maincompetitors) and the setting up of reserved areas of business(stamp emission, for instance) for the main operator, whereregulatory (legal) guarantees would be established. All thesearguments were based on a very ambiguous and debatableregulation framework. The other operators competing directlywith Correo Argentino also lobbied for entry barriers but triedto avoid restrictions in the competition arena with the latter.Indeed, a very natural political economy of market regulation.

7733.. By mid-2000 Correo Argentino announced a merger withOCASA, the second company in the market. This initiativewas the result of a financial crisis of the main operator whosedebt to the government amounted to more thanUSD 200 million. Correo Argentino and OCASA submittedthe operation to the CNDC as required by the prevailing Lawof Defence of Competition.

7744.. The CNDC rejected the merger based on welfareconsiderations. The operation would have reinforced a positionof market dominance, and the CNDC argued that thecompanies had not given evidence that the merger wouldproduce any efficiency gains. Market information did notsupport the thesis of ruinous competition. As Table 5.1 shows,after privatisation production expanded almost 30 per centbetween 1997 and 2001 and prices declined (Table 5.2). Thecontraction of activity in 2001 was due to the economicslowdown (CNC Annual Report, 2002).


Table 5.1Postal services in Argentina – Physical output

Note: items do not add up to totals as minor services are not shown.Source: CNC (2002).

Table 5.2Postal services in Argentina – Prices

1. Calculated by CNC as an average of certain types of standardservices. Nominal prices are in pesos. Recall that from 1991 to 2001the exchange rate parity was fixed and constant.

2. Deflated by the CPI.

Source: CNC and authors’ calculations.

7755.. The SDCyC argued that erecting barriers to entry meantregulating through instruments independently of results. Thisapproach was an important break-through that challenged theestablished consensus. In contrast with SDCyC, the regulator(Comisión Nacional de Comunicaciones) was inclined toaccept a heavier regulatory burden, a classical reaction ofsectoral regulators and potential vested interests in the process.A more complex and somehow arbitrary (discretionary)regulatory framework enhances the role and legitimacy of thesectoral regulator. The SDCyC proposed a competition-basedneutral approach to universal service financing. The regulatoryframework developed by the SDCyC addressed thecompulsory universal service and its costs – leading tointensive lobbying for distortionary barriers to entry-basedregulation – through the design of a fund with contributionsfrom all players proportional to their income as is currentlyapplied in the telecoms industry. This proposal of regulatoryreform did not reach the approval stage in Parliament, but theconsolidation of excessive market power in the hands of oneplayer was avoided by refusing the merger.

7766.. To sum up, the interventions of SDCyC and CNDCcontributed to improving the debate as to what should be thebest regulatory policy for the postal sector. First, argumentsleading to stringent (distortionary) regulations to improvebusiness performance of the main operators were defeated.Second, the proposal to impose entry barriers restrictinginformal and illegal operators was rejected. The SDCyCargued that increasing the barriers to entry would onlyaggravate the problem of informality in the market. Thesolution was to improve the regulatory technology to controloperators without lessening competition. Years later CorreoArgentino was nationalized, but had to continue thecompetition game established by these agencies practice.

22..33.. TTeelleeccoommmmuunniiccaattiioonnss7777.. The role of SDCyC in the telecom reforms was differentfrom that in the reform of postal services. In the former theregulator incorporated several tools of competition policy inthe regulatory framework (mainly essential facilities use). Therole of SDCyC was to strengthen and drive the reform processwhile promoting a rational use of pro-competitive instrumentsto attain dynamically efficient regulation.

7788.. Decisions that affect economic interests should beappreciated beyond their mere economic purpose (Noll, 1989).In telecommunication, as in other sectors, all parties try toprotect their own interests. During regulatory reform, lobbyingmay be very intense as reforms may affect the future marketstructure and thus expected rates of return of incumbents andpotential entrants. Reforms in well developed political systemsneed to be based on negotiations and public discussion tosustain the whole process. The telecommunications reform inArgentina is an illustration of this case. Its main objective wasto eliminate all entry barriers and to stimulate the erosion ofmonopoly rents by implementing the essential facilityprinciples. The SDCyC focused on the analysis of the long-runeffects of the reform, bringing international experience intelecoms liberalisation from a competition policy perspective,as well as inducing all parties to engage in transparentnegotiations.

Services

Number of units (000s)

1997 1998 1999 2000 2001

Postal services

Letters 611 090 651 255 750 508 772 648 750 183

Corporateservices 149 263 166 365 204 956 223 390 195 487

Credit Cardsdispatches 2 297 3 570 4 406 5 355 4 737

Legal letters 5 261 5 676 6 080 7 026 7 034

Banking clearing 4 165 4 048 2 964 3 126 2 735Newspapersand magazines 21 006 27 089 45 209 33 104 23 138

Parcels 4 832 6 068 5 109 7 005 7 958

Couriers 1 330 1 649 1 629 1 188 1 179

Total 801 814 868 767 1 021 512 1 052 945 992 457

Telegraphic services 7 287 7 809 7 620 6 843 6 741

Monetary transactions 3 472 3 630 3 280 3 254 3 153

Total 812 373 880 199 1 032 962 1 063 043 1 002 351

YearAverageprice $1

Variation(annualchange

in per cent)

Consumerprice index

(annualchange

in per cent)

Average real price(1993=100)2

1993 1.28 7.4 100.0

1994 1.33 3.9 3.9 100.1

1995 1.23 -7.5 1.6 91.1

1996 1.18 -4.1 0.1 87.3

1997 1.07 -9.3 0.3 78.9

1998 1.11 3.7 0.7 81.3

1999 0.96 -13.5 -1.8 71.6

2000 0.84 -12.5 -0.7 63.1

2001 0.82 -2.4 -1.5 62.61993-2001 -35.9 9.9 -37.4


7799.. While the shared goal of the reform was to open themarket, the Communications Secretariat and the SDCyCdebated on the use of instruments. Many regulators viewmarket liberalisation as an instrument to maximise the numberof operators rather than welfare.105 From a competition policyperspective, this approach is questionable as the number ofplayers is endogenous and the objective function shouldmaximise aggregate welfare (Kahn et al., 1999).

8800.. The international experience in the telecoms industrysuggests that an aggressive use of the essential facilitiesdoctrine may not lead to better market outcomes (NERA,2000). In Argentina, the sectoral regulator expected lowerconcentration ratios and larger participation of small playersthrough the elimination not only of legal entry barriers but alsoof economic and structural barriers. The first proposal in placedeclared almost all network elements as essential facilitieswithout carrying out a rigorous market analysis.106

8811.. In the face of this initial approach of the sectoral regulator,the SDCyC intervened favouring a regulation that would besustainable in the long run. The trade off between maximumcompetition in the short run (sectoral regulator’s approach) andlong run efficiency (competition policy approach) needed to becarefully considered. Under the regulator’s approach, instantcompetition would erode rents and make the industry moreefficient. But in presence of economies of scale and scope thenumber of players is finite and the market characterised by anon-atomistic industry structure.107 It should be noted that theinstant erosion of rents may foster exit, but not necessarilyentry.

8822.. Despite the political need and pressures for a swift reform,the development of a regulatory framework required aconsistent microeconomic foundation. The latter would takeinto account both the need for opening the market in the shortrun (lowering prices as an immediate effect) as well asconsidering the incentives to invest in the long run, using theessential facility principle correctly.

8833.. The implementation of the essential facility propositionscontributes to the proper understanding of the economics ofregulation in practice. The owners of the network try to blockthe use of its facilities by third parties (the so called openaccess scheme), based on property rights and investmentincentives arguments. But access is rather a matter of use thana problem of property. The main argument for open access isthat social benefits from competition cannot be internalised bythe firm acting as a profit maximiser. Competition leads tolower prices but also provides variety, thus improving welfare.

8844.. If regulation favours unbundling, the question remains as to howfar the regulator should go. In telecoms, international experienceshows that regulators went as far as they could (European Union,United States, and small economies like Australia and Argentina).The implementation required intensive political, technical andlegal resources since the incumbents reacted strategically bydelaying implementation. In all these countries, regulatoryreforms in telecommunications were very time consuming.

8855.. The fact that parts of the telecommunications network maynot be economically duplicable is not a sufficient condition toimpose the essential facility rules. A market definition problemneeds to be solved first (see ITU, 2002 and Gual, 2002). Theenforcement of the unbundling of parts of the network shouldbe based on economic foundations rather than legal arguments.

8866.. The competition approach emerges as the best tool torespond to the fundamental questions of regulation in practice:CP integrates demand and supply conditions, with both sidesof the market being relevant for a proper design of open accessrules. This procedure prevents policy makers from making twotypes of errors. The first one is to overshoot: declaringessential facilities where market conditions suggest thatdemand and supply substitutability are present, for examplethrough alternative technologies. This consideration could bevery important in corporate markets. The second type of erroris that of not declaring essential facilities where competition isimpossible and anti-competitive behaviour may emerge. Intelecommunications, the second error has been less frequentthan the first one. The SDCyC did not succeed in incorporatingthese criteria into the Decree 764/2000 of telecom regulation.

22..44.. NNeewwssppaappeerrss aanndd ppuubblliisshhiinngg8877.. In 1945, newspaper and magazine distributors in Argentinawere assured territorial exclusivity of their shops – the Law12.921 prevented competition in the same region or area.Moreover, this Law established a set of regulatory restrictionslike a margin over the total shop sales or revenue. This type ofanti-competitive regulation had been popular in manycountries in the post-war period. In the metropolitan area ofBuenos Aires the wholesale distribution of magazines andnewspapers was concentrated in an independent private bodycalled Magazine Distribution Centre (MDC) comprised ofpublishing companies along with representatives of the twostages of distribution in this market – distribution networksand shops or retail “kioskos”. The distributors (each supplyinga number of shops or retail stores) acted as monopolists in agiven area, supplying final stores, the latter with a certainmarket power depending on the size of their area. Licences forentry were jointly regulated by the MDC and the Ministry ofSocial Security and could not be cancelled. The MDC hadwide powers, including that of restricting the circulation of amagazine. The latter was a credible threat when an editordeveloped an alternative retail distribution scheme or asubscription system that led to bypassing the establishednetwork. The MDC could also manage the allocation of riskamong the different participants by implementing the rule ofplain devolution of unsold newspapers and magazines. Theeditors had to run all the risk of unsold stock. Concerning thedistribution of business margins, according to industryinformation, editors got half of the final price, and the otherhalf was attributed to the distribution network.

105The use of the unbundling obligation is interesting in this regard. For acritical assessment of the US Federal Communications Commission’s(FCC)’s regulation and its likely impact on welfare see Hausman et al.(1999) and Jorde et al. (2000).

106For adequate application of pro-competitive measures intelecommunications, see ITU (2002), Jauk, (2000), and AustralianCompetition and Consumer Commission (1999). Recently the FCC changedsome the requirements of unbundled network elements for local carriers(FCC 03-36, August, 2003).

107For a discussion of creating effective competition in telecom markets, seeShepherd (1998).


8888.. The regulation then in place for the retail stores or“kioskos” granted a perpetual right of operation to anindividual (not a company) with no right of transfer to thirdparties, whereas no individual had the right to run more thanone store. Thus, regulation simultaneously forced an atomisticmarket at the retail level, while guaranteeing a cartel in theupper stages of distribution. The number of stores was close to5 000 in the metropolitan area of Buenos Aires and La Plata(population, 5 million). Entry restrictions at this end of thesales market were decided by an entity under the direct controlof the shop owners. As in the upper stage of distribution, theincumbents were regulating entry.

8899.. The regulatory framework established in 1945 prohibitedmagazine and newspaper retailers to develop other activities.Customers could not buy at night because retail regulationimposed a closing time of 8 p.m., except for a few shops in BuenosAires. But in spite (or because) of the heavy regulatory burden,high levels of informality and illegal sales points developed.

9900.. In 1999, a regulatory reform, aimed at fosteringcompetition and greater transparency, was undertaken:108

! Elimination of entry restrictions;

! Elimination of privileges such as territorial exclusivity andprohibition of multi-purpose shops including magazine andnewspaper retail;

! Assessment of possible anti-competitive behaviour.

9911.. The underlying principles of these reforms were thatcompetition increases welfare, and that entry barriers generateinefficiencies and do not prevent but increase informality. Thebenefits of the reforms were:

DDiirreecctt aaddvvaannttaaggeess::

! Modernisation of distribution and retail channelsincorporating supermarkets, gas stations, small business andother types of distribution induced by competition,including automatic machines;

! Wider coverage areas for distributors and the elimination ofsale time restrictions;

! Lower retail costs due to economies of scale and scope.

IInnddiirreecctt aaddvvaannttaaggeess::

! Creation of new job opportunities, including forautonomous workers wanting to become retailers;

! Development of a transparent (costless) market for thetransfer of property rights;

! Better environment for tax auditing by the stateadministration;

! Improved opportunities for independent editors openingaccess to a larger client base at lower cost;

! Increased freedom of expression and diversity of opinion.

9922.. The case of the newspaper industry shows that theapplication of CP principles in regulatory reforms may inducelarge benefits. Initially both entrepreneurs and trade unionsfeared that competition would cause the loss of market shareand jobs, but in the course of reform strong argumentsemerged that deregulation would promote the expansion of theretail sector, broaden the freedom of customers and thusimprove welfare. The resistance of incumbents to reform basedon the rationale of CP is not unusual and should not beneglected. The political economy of successful reforms needsto anticipate the reactions of the relevant players. Whilederegulation may hurt some businesses, it improves theconditions for others, and creates room for new entrantsleading to welfare gains through product variety.

22..55.. CCoonnddoommiinniiuummss iinn BBuueennooss AAiirreess

9933.. The administration of condominiums is carried out byindependent companies or by the proprietors in the building.The parties agree by contract to delegate some authority to theadministrator or manager. This relationship has many featuresof a typical principal-agent problem. The manager possessesrelevant information on costs and the incentive to carry out thejob, while the neighbours lack the same set of informationwithout incurring sizeable costs. The condomini, the principal,are represented by a Council or a collegial body who is incharge of auditing the manager’s activity.

9944.. As the principal-agent theory suggest, the asymmetry ofinformation may cause market distortions due to misalignedincentives. Managers may not be as efficient as they should befrom the point of view of the Council. A typical example ofpotential dispute is the level of monthly maintenance expenses.

9955.. In Argentina, the SDCyC noticed that consumers’representatives – as well as non-governmental organisations –complained against significant and unexplained differences inthe level of maintenance expenses between condominiums.

9966.. A project was launched to study the determinants of theexpenses of the condominiums in Buenos Aires. The SDCyCset up a web-based system aimed at weakening the informationasymmetry by comparing different parameters considered“reasonable” explanations of “true” expenses levels. The firststep was the determination of these parameters. Using officialinformation on the location and characteristics of buildings ofmore than five floors, the SDCyC used a randomly generateddata base of 1 035 cases. The second step was to estimateeconometrically the relevance of every parameter and then toselect the most relevant and statically consistent estimators ofa hypothetical expense, given some characteristics.

9977.. The study revealed a very significant dispersion in thelevels of expenses and – as expected – the particular relevanceof a certain number of variables. These results could be usedfor a manager or a Council participant to estimate how far theexpenses were from the “standard level” predicted by themodel. The simple model was freely accessible for thepopulation on the web and produced an intense debate with thealmost furious reaction of the incumbent condo administrationfirms.108Resolution MEyOySP N°416/99.


9988.. Competitive systems are based on information symmetriesand on the wide access at low cost of this information for largenumbers of decision makers. This study revealed that there isroom to improve the supply of relevant information and thusmarket transparency simply by choosing the correct variablesand showing the results appropriately.

33.. CCoommppeettiittiioonn PPoolliicciieess,, CCrriissiiss aanndd HHyysstteerreessiiss9999.. The set of selected actions presented here show a diversityof initiatives in a country without a previous long experienceof competition policies. These policies go from regulatoryreform, to competition advocacy, and consumer policies. Acombination of a new legal framework, the development of theappropriate institutional set up, a strong commitment with theagenda of the team in charge of competition policies, and aparticular focus on human capital (in economics and the legalprofessions) contributed to the success of these policies in theadverse economic and political conditions confronted. Weshould also highlight the crucial role of the choice andsequence of the actions engaged. In view of the extremelyfragile financial situation of the country strong initiatives inthe banking industry were left aside and mergers wereanalysed having in mind the potential disruption (panic andcontagion) that could be provoked in the economy.

110000.. Initiatives such as the condominiums information andtransparency project, do not represent a solution for astructural problem in heavy sectors such as infrastructure ortelecoms, neither a fundamental regulatory reform. However,these actions may have a strong impact on the reputation ofthese agencies showing closeness to the common citizensneeds. In this case, the positive effect shows in the short runbenefits, contrary to most actions in the field of competitionpolicies where the perceived welfare gains tend to beconcentrated in the longer run. The explosive reaction ofadministrators only reinforced the credibility of these agencies.The reputation building benefit has a positive contagion effecton other more classical actions that may require trust tosmooth the waiting for future gains. Other actions of the sorthave been extremely helpful to get the agency agenda closer tothe general public and gather public support. In turn,politicians and members of the Executive become moreattentive to other technicalities and longer term gains of the CPagenda. The CP institutions became increasingly asked foradvice and participation by other government agencies.

110011.. The dialogue and persistent pedagogy, on the fundamentalsof competition policies and its objectives, with the members ofParliament and the heads of departments of the executive branchhave a relevant place in explaining the resilience of thesepolicies. In a country with an extremely weak tradition in thecompetition policy culture, fragile institutions, as well as asecular practice of intensive lobbying, capture and cronyism, acontinuous interaction with the representatives of civil society,consumer associations, the corporate sector as well as with thepress is certainly required for potential success. Underconditions of economic crisis and political pressure on thispolicy agenda, building the reputation and credibilitynecessitates a good balance of flexibility and policy consistency.

33..11.. EExxttrreemmee ccrriissiiss,, ppoolliittiiccaall ssttrreessssaanndd hhyysstteerreessiiss110022.. If the activism of competition policy compensated thethreat to this agenda posed by the protracted macroeconomiccrisis faced by the country since mid 1998, the extreme stressresulting from the financial collapse of 2001-2002 willseverely disrupt these policies. Massive macroeconomicdisorder, popular distrust, social and political anxiety led to acascade of macro- policies that tended to disregard thecompetition agenda. The pathology of the invasive short runviews, all the more natural in such an environment of collapseafter years of crisis, became hard to resist for the fragilecompetition institutions.

110033.. The teams in charge of the competition agencies changed.Voluntary resignations and changes brought by the newnational authorities produced a gradual loss of precious humancapital that was later hardly replaced by newcomers.Eventually, a symbolic measure will reveal the preferences ofthe new incumbents: the Secretariat of the Defence ofCompetition was named Secretariat of Internal Trade. Thelatter was the previous name of the department of theExecutive coming from the forties, an expression of a schoolof interventionist views alien to the regulatory culture andpractice introduced in the recent period.

110044.. Various factors explain the decline of the existing skillsdeveloped by these agencies: on the one hand, the wages of thehigh skilled members of the agencies suffer a sharp decreaseas the rest of the public sector employees. But even moreimportant was the loss of the motivation previously engrainedin the belonging to the competition agencies. If the heads ofthese agencies are less committed to the CP agenda, anddespite the difficulty to recruit knowledgeable professionals inthe field, a number of well intentioned and trained officialswork in different levels of these institutions.

110055.. The process to establish a fully independent Tribunal thatshould replace the existing CNDC, started in 2001 has beenstalled and does not show progress. On the positive side, weobserve that the Law of 1999 and the reform of 2001 are stillin place, and attempts to reform the Law introducing importantrestrictions in its scope, such as the notion of strategic sectorswhere the rules of competition regulation would not apply, didnot prosper.

110066.. Were the negative consequences of the economic crisison the competition policy agenda and institutions transitoryor rather more permanent? May the disruptions and pressuresbrought by the extreme distress produce a phenomenon ofhysteresis in the path of competition policy making? If theanswer to this question cannot be definitive, we observepersistence in the relative decay of the practice andreputation of the CP institutions. A basis for this propositioncan be obtained through the rankings of the competitionauthorities recorded by the Global Competition Review. Ifsomehow subjective this information seems certainly ofinterest.

110077.. In 2001 Argentina was around the middle of the ranking(performance), better placed than Brazil and Mexico, and closeto Spain. In 2003 the country was last in the record of 26m


authorities showing a sharp deterioration of its position in termsof credibility and practice coherence. This situation did notshow changes since then and Argentina was placed in the lastposition of 38 institutions ranked in 2007. We should highlightthat in the period 2003-2008 the economy showed a GDPannual growth rate of 7-9 per cent per year, as well as a sharpreduction of unemployment and poverty. The improvement ofthe general economic conditions did not bring a reversion of thepath divergence in competition policy practice ignited by theextreme stress of the times of severe crisis.

VVII.. CCoonncclluuddiinngg rreemmaarrkkss

110088.. In this paper we discuss the conduct of competitionpolicy, as well as the institutional resilience of the concernedagencies in times of crisis. The interest on the lessons that canbe drawn from Argentina hinges on the chronic and variedhistory of economic and political crisis of the country. We havereviewed the two main policy areas, namely competition lawenforcement and competition advocacy, and stated the currentconsensus on the temporal sequence of costs and benefits ofcompetition policies.

110099.. The empirics on the impact of competition policies oneconomic performance shows a consensus on the positive effecton productivity and growth in the long run. In the short runcompetition policies may bring the costs due to restructuring. Intimes of crisis, social and political anxiety tend to overprice theshort run, leading to high pressures on competition institutionsand its practice. Lobbying for survival of incumbents, firms andunions, may become an hyperactive industry and thecontainment of the push to distort competition policies is a hardtask. The voice of active short run losers may dominate therather silent and diffuse legion of long term beneficiaries.Furthermore, things will be even more difficult whereinstitutions are weak and the practice of capture more viable.Investing in lobbying may thus turn into a high yield industry.

111100.. There is an essential argument to be borne in mind whendesigning CP in the midst of economic turmoil: the bankingindustry is critically different from the non financial industry.In the case of the former, the collapse of a firm may lead tocontagion and contaminate the whole industry. Massiveeconomic and welfare costs for the economy may result. Onthe contrary, in the latter non financial industries competitorsmay benefit from the exit of an incumbent. A careful handlingof competition actions focused on the banking sector should becalled for in times of crisis.

111111.. A brief account of the secular crisis prone behaviour ofArgentina was then presented, with recurrent economic andsocial disturbance, extreme monetary disorder, speculativeattacks on the currency, debt defaults as well as politicalinstability. The experience of Argentina with the institutionbuilding of competition agencies and the conduct of CP wasthen analysed. Active competition policies were only developed10 years ago in an extensive range of markets and resorting to adiverse set of instruments. The initiatives extended frominfrastructure sectors to more unusual markets such asnewspaper distribution and expenses of condominiums. The

infrastructure sectors (airlines, energy, railways, telecom, tollhighways, water distribution, etc), were privatised in the 1990s,but in many cases the regulatory frameworks were deficient andrigorous competition policies were not adopted. Under a regimeof fixed exchange rates with reduced degrees of freedom torespond to sharp changes in relative prices, the role of activecompetition policies gained particular relevance.109

111122.. But the development of effective competition policies anda competition culture leading to sustainable long term welfaregains require skilled human capital as well as credibleinstitutions. The political will to develop both is a necessarycondition. A long term effort is required to establish robustcompetition as a fundamental given of the businessenvironment. The threat of competition or its effective actiontends to bring innovation and greater efficiency as well as acontinuum of business changes that produce losers andwinners in the market place. It is thus clear that the politicaleconomy of competition policies cannot be neglected if onewants to maximise its probability of success.

111133.. Argentina experienced a protracted period of recessionand political frustration since 1998, followed by an extremeeconomic and financial crisis in the years 2001-02. In anenvironment of high macroeconomic instability the conduct ofcompetition policies, that inevitably requires systematic andrigorous fine tuning, is a difficult challenge. The urgency ofstabilisation drains most of the political energy and whenexcessive conflict of objectives and interest emerge,competition policy may loose the battle in the policy arena.This is more likely to be the case when institutions are weak.

111144.. To increase the probability of survival of CP through timesof severe economic distress, creative policies are required. Thepolitical scene should not be neglected and the practice, as wellas the rhetoric of competition policies, should account for thestrain that permeates the political decision making process. Thetask of systematic reputation building, and a practice thatcombines flexibility and coherence, should be fostered. A rigidcrusader approach should be tempered in times of crisis,because it can prove extremely damaging for the institutions ofCP. Competition policy initiatives that transmit short runbenefits to the citizens (voters) may be crucial for the legitimacyof CP, and the continued support of incumbent politicians.

111155.. However, as shown in this paper, despite the investmentof well targeted political and technical capital, the success forthe CP in times of crisis cannot be guaranteed. Extreme strainmay derail the practice and the return to a prominent role ofthe competition policy culture may be jeopardized. The loss ofcompetition policies and the decay of its agencies may not be atransitory effect of the crisis and become a more permanentphenomena. A syndrome of institutional hysteresis could thusemerge and the return of bonanza may not be enough to bringback CP to the forefront of the economic agenda. !

109The growing role of competition policies in Europe in the recent period mayalso be linked to the restricted set of macroeconomic policy instruments atthe national level that prevail in the euro zone.


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