No competition enforcement let-up as Europe exits pandemic, Guersent says

05 Jul 2021 12:15 pm by Lewis Crofts

Mergers

Covid-19 has hurled new challenges at the EU’s competition watchdog and forced it to adapt both its rules and its ways of working, but the authority won’t soften its approach in the medium or long term, says its top official Olivier Guersent.

In an interview with MLex, Guersent said he was thinking about how to move beyond a special regime of subsidies and bailouts that allowed governments to put vulnerable industries on life support during the pandemic. "It's easier to get into the policy than get out of it,” he said.

Nor does he want to see a relaxation of merger rules, including an expansion of the “failing firm” defense that allows a problematic merger to go ahead if one of the parties would otherwise go out of business. Mergers create "permanent market structures” that will outlive any crisis, he says.

The influx of state aid cases under a pandemic-era framework — as well as a root-and-branch review of broader subsidy rules — have in particular pushed Guersent’s staff to the limits, with plenty of late nights and weekend shifts.

The EU’s General Court has overturned several airline state aid approvals after complaints by Ryanair, despite judges agreeing with Guersent’s team on some points of principle. But he looks forward to appeals at the Court of Justice, and insists that the European Commission’s overall record remains solid.

As the emergency draws to a close, it’s not only policy that can return to normal — so too can patterns of enforcement activity, he says. Dawn raids at a clothing company in Germany last month should send a signal that the EU’s cartel enforcers are back, with their full suite of powers.

Emergency aid

In December 2019, Guersent was appointed to lead the commission’s competition department, returning to the sector after a decade’s work on financial services. But as he got his feet under the desk, his department’s work — normally so process-driven — was upended with the pandemic sending shockwaves through markets and industries.

The threats to European public life were severe: shortages of food and medical equipment, and the prospect of whole industries going under. And so the normal rules were adapted: Drugmakers were allowed to share notes on their supply chains; airlines got huge bailouts to stop them collapsing beyond recovery; merger control slowed down as officials struggled to get the necessary information.

But now, Guersent says, the normal application of competition law will be crucial to ensuring that Europe’s economies recover fully from the crisis, avoiding the emergence of “zombie firms” that keep staggering on, fueled by state largesse, long after they should have been allowed to die.

Where that line is drawn is, of course, a matter for debate. Ryanair argues that national airlines have been zombie firms since long before the pandemic, and that a healthy rival like itself could survive the crisis without recourse to handouts. Its partial success challenging the Covid loans to airlines at the EU’s first-instance court suggests that this argument has some traction.

There have been other court defeats, too: against Spanish football clubs, sectoral taxes in Hungary and Poland, and most notably in Ireland over the 13 billion-euro ($15.5 billion) tax break to Apple.

Guersent rejects the idea that the commission is getting sloppy. "There is no statistical evidence that we have a problem of reliability of enforcement," he says. The commission’s success rate remains in step with its historic performance.

"It is a bit early to draw conclusions. I would like to await the decisions of the higher court before having a view of this."

"A lot of decisions had to be made under incredible time pressure," Guersent says. "We are only human after all, as the song goes," he adds, quoting the baritone tunesmith Rag'n'Bone Man.

Failing firms

Still, Guersent is fully aware of the risks of loosening the strings. To prove it, he points to statistics showing there have been fewer bankruptcies in 2020 and 2021 than in previous years.

As the storm passes, the challenge is "being clear on the exit" from this special regime, Guersent says, and historical evidence shows that relaxing competition rules is the wrong thing to do in a crisis. And this goes for mergers as much as anything else.

Authorities around the world may have "collectively under-enforced [merger control] before the crisis," he says. As many industries become more concentrated, now is not the time for a soft touch.

The pandemic brought to the fore a special “failing firm” provision in the EU rulebook that allows the exceptional approval of a merger that would otherwise be blocked, if one of the companies is on its knees and about to collapse. That company would leave the market in either case, the argument goes: better to keep it alive in some form than see it collapse entirely.

"Because of the crisis, it is perhaps likely that we will see more cases in which the conditions are met. We shouldn't shy away from accepting the failing-firm defense," Guersent says — but adds that the commission will continue to insist on a high standard of proof.

Merger rules

More broadly, Guersent voices his support for the EU’s merger rules, which have come under pressure both for allegedly prohibiting the creation of “European champions” able to compete globally — the blocked Siemens-Alstom rail merger being the most prominent example — and for allowing tech titans to gobble up fledgling competitors in “killer acquisitions.”

Guersent points out that these two criticisms are asking for opposite things. The commission can’t be tougher on some mergers and softer on others, he insists: "It would be unlawful.”

He also flags the political and legal challenges of changing the rulebook, and notes that there is no consensus for change in either direction. In early 2020, in the wake of the Siemens-Alstom bust-up, Guersent received a letter from several large countries including France and Germany, urging the commission to change the regulation. Two weeks later, he received a counter-letter from 15 other EU countries, saying the law should be preserved.

"When you see that the merger regulation is decided by unanimity [among EU governments], you see that this subject is not right for a legislative proposal," he says. A more devious director-general might have made a proposal nonetheless, Guersent jests, but that would have been "very divisive."

He notes that while some were asking for more leniency on Siemens-Alstom, others wanted a tougher line on Google’s purchase of Fitbit. On the latter, Guersent stressed the commission was the “only authority in the world to act, with the authorities in Japan and South Africa essentially accepting our remedies,” imposing a decade of commitments on the US company.

Putting the two deals side-by-side, he says it is obvious that any proposals to handle them differently would create a “double standard.”

But one area where he sees new rules might be needed is for entrenched markets.

Last year, the commission flirted with asking legislators for a law to crack open stagnating or tipping markets. But in the end, it decided instead against a broad tool, and limited itself instead to the most pressing issue of tech markets.

“It was maybe more appropriate to start focused and scale up once it proves effective,” he says.

Guersent’s personal view is there is a still a case for having a broader tool, noting that many regulated industries, such as financial services, display the kind of characteristics that catch investigators' eyes.

Carry on cartel-busting

One subject that is rarely in the headlines is cartels. Most activity on that front concerns follow-on damages claims — for instance in the trucks cartel — years after the commission issued its fines.

Lawyers argue that it’s precisely because of those huge damages actions that cases have dried up. Companies get let off their EU cartel fine if they blow the whistle on the misconduct, but they’re still liable for damages claims. With those claims now often dwarfing the original fine, executives’ risk-reward calculation shifts sharply away from owning up and seeking leniency.

The implication of this argument is that cartels are still happening; they’re just not being detected. The commission has grown too reliant on whistleblowers coming forward, and is unable or unwilling to go hunting.

Guersent, who early in his career was a cartel investigator in France before moving to DG Comp, rejects the criticism and takes a longer view. "We need to diversify and that work is underway. We are working on detection; we are working on prosecution; we are working on the efficiency of the Leniency Notice," he says.

"We are working on new IT tools to better identify and detect and prosecute cartels," he says. He hints that staff have new tech wizardry to uncover market abuse in online markets, but revealing such juicy morsels to the public would defeat the point of clandestine detection.

Guersent says there is a "lag" between such projects and the results they produce. The whistleblower regime introduced in the late 1990s took four years before it started to spit out cartel fines, he notes.

"Cartel enforcement is like a garden," Guersent says. "If you stop taking care of it, stop putting fertilizer and removing weeds, it will be less productive."

Of course, Covid-19 presented a much more immediate challenge to cartel enforcers, by curbing their fearsome power to turn up unannounced at a corporate HQ and rifle through filing cabinets and computers for evidence of dodgy deals.

It was the right decision to suspend operations, Guersent says: "the first thing is the health of my colleagues."

But last week’s raids in Germany suggest that those days are over. If executives can go to bars and restaurants, then cartel enforcers can come knocking at their corporate premises.

"You saw rightly," Guersent says. "We are back."

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