Opinion of the Economic and Social Committee on the 'XXVIth Report on Competition Policy (1996)` (98/C 73/06)

On 24 April 1997, the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the 'XXVIth Report on Competition Policy (1996)`.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 3 December 1997. The rapporteur was Mr Simpson.

At its 350th plenary session (meeting of 10 December 1997) the Economic and Social Committee adopted the following opinion by 98 votes to two with four abstentions.

1. Preliminary comments

1.1. The Economic and Social Committee (ESC) has, each year, taken the opportunity to comment on the report prepared by the European Commission on Competition Policy.

1.2. The report on developments in 1996, the XXVIth in the series, was published in April 1997, within days of the separate publication of the Fifth Survey on State Aid in the European Union. The report on State aid, containing information for the years 1990 to 1994, updates the last survey published in 1994.

1.3. Because of the close relationship between the policy questions raised by the analysis in the Fifth Survey and the review of policy and decisions on State aid in the Competition Policy report, the ESC decided to prepare one opinion dealing with both documents.

1.4. These reports offer a valuable insight into many of the difficult questions faced by the Commission in the evolution and promotion of competition policy and the application of State aids.

1.5. The ESC commends the Commission on the expeditious publication of both documents.

1.6. The ESC:

- congratulates the Commission on the clarity of exposition of the general principles of competition policy;

- endorses the methods used to evaluate whether various business agreements are compatible with Treaty obligations;

- accepts the rationale underpinning the review of the impact of State aid; and

- welcomes the measures taken to create an outcome which balances the often conflicting interests of consumers and businesses, or between citizens living in different parts of the Union.

1.7. In later sections of this opinion, the Committee offers comments and suggestions which, it is hoped, will assist the Commission in the further evolution of its competition policies and practices.

2. Principles underpinning competition policy

2.1. Competition policy is a critical component of the range of economic policies affecting the development of the EU. Whilst the practical basis is determined by the content of the Treaties and subsequent decisions, the objective is to try to ensure that economic resources are allocated in the best possible way. This should have as a consequence consumers who gain protection from many business arrangements which might unreasonably prevent or restrict the operation of normal competitive market forces, or where an abuse of market influence could allow consumers to be exploited. In addition, competition policy can be an aid to securing improved business efficiency, better market integration and creating more advantageous trading links between Member States.

2.2. The Treaties envisage possible actions against agreements to fix prices or trading conditions; control production, markets, technical development or investment; market sharing; and actions which are discriminatory between customers or suppliers. Exceptions are possible where business arrangements contribute to improvements in production, distribution or technical or economic progress, provided that the consumer is allowed a fair share of the resulting benefits.

2.3. Comparable actions by a single firm, or a group of firms, holding a dominant position in the markets within the Union, which are adjudged to be an abuse of that position, are also prohibited (Article 86).

2.4. Whilst the objectives as stated in the Treaties are widely supported, in practice the range of activities which can give a cause for concern about unacceptable arrangements is so wide and varied that an adjudication mechanism must be created. As the Commission notes, there is a presumption that 'market forces produce a better allocation of resources..., the principal beneficiary being the consumer, who gets better quality at a lower price.` () However, 'these mechanisms sometimes have their limits; as a result the potential benefits might not extend to the entire population... The public authority must then ensure that the general interest is taken into account.`

2.5. The ESC shares this point of view and considers that on some occasions competition policies must also take account of, or be modified to acknowledge, the need to ensure that identified essential services are made available on a universal basis.

2.6. A further possible consideration for competition policy relates to the inter-relationship of competition questions and those based on environmental considerations. The Commission published guidelines in the 1995 report on the consideration of overlapping environmental and competition issues. Clearly the Commission needs to consider when, and in what circumstances, environmental issues would offer a justifiable case for exemption from the normal competition criteria and when environmental criteria should be constrained by the need to avoid distortion of competition.

2.7. Commission competition policy is aimed to identify where market forces have, or potentially could, lead to barriers to trade which, as a result, affect trade between Member States and adversely affect the smooth functioning of the market. Corporate conduct and State aid policies must be monitored. Judgements are needed to determine when 'market failure` or 'market abuse` need to be addressed. Inevitably, the Commission must continuously ensure that relevant actions are reported and investigated, decisions made on those adjudged unacceptable and enforcement procedures put in place.

2.8. With the increased globalization of trade, this process is gaining increased significance for all businesses and all consumers. Some of the emerging questions relate not only to competition policy within the European Union but to wider international implications. Where the decisions of a business relate to activities on a world-wide scale, a dominant position within the EU should be evaluated not simply with respect to internal EU market arrangements since the 'relevant market` is an international one. The Commission needs to take account of the global competitive position in the assessment of the actions of large individual firms (as, for example, in the recent consideration of the actions of British Airways or the merger of Boeing and McDonnell Douglas).

2.9. A consequence of decisions relating to businesses which are located outside the EU is that it may be more difficult to monitor compliance with approved arrangements. Receiving monitoring reports, gathering credible evidence, and ensuring that behavioural obligations are observed from organizations based in 'third` countries may pose particular difficulties which require international cooperation (see section 3 below).

2.10. The ESC recognizes the importance attached by the Commission to:

- modernizing the instruments of competition policy;

- developing appropriate analytical instruments;

- improving cooperation with Member States;

- modernizing the legislative instruments and through the WTO, developing an international framework of competition rules.

3. International cooperation

3.1. The ESC has noted with particular interest the recommendation (paragraph 235) that the World Trade Organization should set up a working group to do initial work on the development of an international framework for competition rules. This is a necessary project which is relevant where globalization is increasingly affecting trade.

3.2. Improved relations with the US competition authorities have facilitated, with agreement from the businesses concerned, some exchange of information. The bilateral arrangements with the US antitrust authorities opens up further opportunities for cooperation in the exchange of non-confidential information. Confidential information can also be exchanged but only with the agreement of the business involved. However, there is a concern that the relative openness of investigations by the Commission can be commercially disadvantageous to firms in the EU when competitors outside the EU, possibly in the USA, may obtain competitive data that is not available on a reciprocal basis to EU businesses.

3.3. The recent work within OECD also has enhanced international understanding and cooperation on competition issues. Questions of competition policy at an international level need to be seen as critically linked to developments in international trade policy and will benefit from the highest possible level of organizational links between the relevant Directorates-General in the Commission.

3.4. The ESC regards these steps to set competition policy in a global framework as significant and relevant. Of course, the EU Treaties have been formulated to give effect to competition policy within the Union. Securing global cooperation requires an extra dimension in addition to the internal EU competition policies. As already suggested (paragraph 2.8) a dominant position within the EU should be evaluated not simply with respect to internal EU market arrangements when the 'relevant market` is an international one.

3.5. However, whilst the objective may be easy to express in principle, securing the desirable levels of international cooperation may be difficult to deliver in practice. The ESC hopes that the Commission will further develop its approach, policies and methodology on these global aspects of competition questions. Any enquiries about a firm's competitive position, or that of a specific sector, within the EU should systematically be accompanied by an analysis of the situation in relation to world-wide competition. A similar comparative analysis should be made of financial aid given by Member States and compared with the aid given by other countries to the same sectors.

3.6. There are particular critical opportunities for extended cooperation with countries in Eastern Europe, some of which have an aspiration to become members of the European Union. The ESC welcomes the acceptance by some of these countries of the current EU competition policies.

3.7. The Commission should ensure that the effective implementation of competition policy is part of the pre-accession strategy for the potential new Member States in Eastern Europe. In addition, assistance from the Community will be an important contribution as they prepare for entry and would help to maintain and sustain social, economic and industrial stability during the transition.

3.8. A critical feature in the pre-accession stages is the implementation of national rules on the granting of State aid and the means of enforcing these rules. The ESC endorses the actions of the Commission in its efforts to ensure that appropriate measures on State aids and competition policy are taken in each aspirant Member State at an early stage.

4. Competition policy developments: Articles 85 and 86 - Changes in legislation and interpretative rules

4.1. A key objective of Articles 85 and 86 is to ensure that the different forms of cooperation between businesses should not be disadvantageous to consumers. They should be mutually beneficial. Within the European Union, businesses know that Articles 85 and 86 of the Treaties set the parameters for their actions if they affect trade between Member States. However, the general principles have, over time, been amplified and illustrated by particular decisions which set the framework for more detailed questions.

4.2. To reduce the burden of administrative investigation, to increase the degree of legal certainty to decision makers and to improve transparency, one of the desirable features of Commission policy is that, where possible, further guidelines, or rules, on the form and content of acceptable cooperation in specific circumstances should be prepared.

4.3. During 1996 (and early 1997) the Commission published:

- a new block exemption regulation on technology transfer agreements ();

- a draft notice on cooperation between national competition authorities and the Commission in handling cases within the scope of Articles 85 and 86 ();

- a notice on the non-imposition of fines in cartel cases ();

- a draft revised notice on agreements of minor importance, which do not fall under Article 85(1) ();

- a notice on procedure for processing requests for a right of access to files by firms being investigated for a presumed infringement ();

- a revised policy on SMEs ().

4.4. Each of these decisions, or draft proposals, should help to codify the application of competition policy and reduce the number of notifications which must be processed by the Commission.

4.5. Technology transfer agreements

Whilst the block-exemption agreement is welcome, its introduction was not without problems. The agreement was finalized in March 1996 but the Regulation (EC) No 240/96 did not come into force until 30 January 1997. This created a period of legal uncertainty.

4.6. A more detailed examination of Regulation (EC) No 240/96 suggests that the absence of a severability clause, which would have clarified the treatment of non-exempt clauses, may be a weakness.

4.7. The Commission is invited to consider, for future clarification, a more precise interpretation of the Regulation, in particular the concept of 'ancillary provisions` in Article 10, to ensure that the goals of the regulation are not unduly hampered.

4.8. Role of national competition authorities

The Committee endorses the efforts to ensure that national authorities adopt decisions which are compatible with Community law by introducing national legislation enabling their competition authorities to apply Articles 85(1) and 86 effectively.

4.9. The relationship between the Commission and the national authorities in the application of Competition Law is evolving. With the fuller realization of the internal market and the pending introduction of EMU, this may be an appropriate time to re-orientate the relationships to develop the principles of subsidiarity, ensure greater consistency, share the workload and integrate actions based on common policy decisions.

4.10. The draft Notice on Cooperation with national authorities might be developed by an agreement that Community law should be translated into national law in each Member State and then enforced, in defined types of case, by the national authorities. The Commission would then exercise, in part, a supervisory role, as well as determining those cases remaining within its remit. But, as the Committee suggested recently (), 'an efficient and workable decentralization would require more incisive action, such as a revision of Regulation (EEC) No 17/62;`.

4.11. As an initial pilot project, these principles might be developed to apply to those agreements which are defined as 'vertical` restraints on competition.

4.12. Non-imposition of fines

The Commission now has discretionary power to waive or reduce fines in cases where cartel activities have been voluntarily disclosed. The ESC understands the logic of this change since it may offer an incentive to firms to cooperate in an investigation. Nevertheless, this discretion contains an inherent danger that investigations will produce unpredictable 'plea bargaining` which may damage the perception of the independence of the official investigation. Whilst there are arguments that such bargains should be confidential, the ESC agrees with the Commission notice that where a decision is made that a fine should be reduced, or not imposed, the identity of the offending business should be revealed along with details of the scale of the remission of the potential fine.

4.13. Agreements of minor importance

The Commission has proposed that the de minimis rule, which establishes the turnover thresholds below which agreements are considered to be of minor importance, should be extended to include large firms with modest market shares. This proposal is still subject to wide ranging consultations. However, the ESC would support the removal of the turnover criterion and the increased reliance on the proportion of the market share held by individual businesses. The ESC has already commented on the Green Paper on vertical restraints (). It accepts that a limit of 5 % for horizontal agreements and 10 % for vertical agreements seems appropriate.

4.14. The draft Notice on Agreements of Minor Importance has attracted some criticism in two respects. First, the proposed definition used to determine 'types of agreement` may need to be further refined. Second, the concept of 'serious` restrictions may itself be too restrictive. The Commission should consider how these concepts might be redefined to give reassurance on legal certainty and to give greater clarity to make them more capable of general application.

4.15. The extension of the de minimis rule to include all actions of SMEs is also a welcome recognition both of the importance of encouraging SMEs to engage in intra-Community business as well as a useful simplification of the procedures.

4.16. Access to files

The notice allows firms being investigated to gain access to relevant files held by the Commission in DG IV and this may not be as helpful as it could be. Pending a major review of Regulation 17, the Commission should consider an amendment to the Notice to allow access to relevant files held elsewhere in the Commission as well as in DG IV.

4.17. The ESC has considered a further suggestion for a possible improvement in the application of the procedures under Article 85. This stems from a concern about the timeliness of the Commission procedures when assessing applications for individual exemption or negative clearance. The existing procedure, using Regulation (EEC) No 17/62, might be changed to add a series of trigger points for the automatic clearance of an application using similar concepts to those already included in the merger control system. If, after acknowledging an application, the Commission has not reacted within, say, four months, then that application should be automatically approved. This might be further supplemented by setting a time limit of, say, one year if the Commission decides that an application should receive a full investigation. (This suggestion is similar to a procedure which is in force in Swedish national competition law.) Provision might be made for cases where a particular application merited an extended period for detailed consideration. A predetermined extended period might be permitted, exceptionally, on the basis of a reasoned statement which could be challenged in the European Court.

5. Competition policy and the Information Society

5.1. One of the sectors of economic activity which is expanding rapidly and is posing opportunities and problems which also affect trade between Member States is the range of enterprises forming part of (what is known as) the Information Society. As the Commission notes, the new and emerging technological developments have not only raised questions about restrictive practices and dominant positions which affect the liberalization of markets but they have also highlighted the need to carefully consider the impact of possible mergers.

5.2. A critical feature of the actions by the Commission in 1996 was the examination of restructuring proposals. In authorizing the Atlas project, between France Telecom and Deutsche Telekom, as well as Global One, a joint venture between Atlas and the Sprint Corporation, the Commission insisted on modifications, including liberalization of the telecoms infrastructure, which helped to ensure that these projects did not eliminate competition.

5.3. Similar conditions were relevant to the Unisource/Telefonica and Uniworld cases for which the Commission was, in 1996, preparing to take a favourable view. This is expected to be confirmed late in 1997.

5.4. A feature of the telecommunications sector across the European Union, and indeed on a global scale, is the need to balance the economic logic of an existing single infrastructure network with the provision of opportunities for service providers to have access to core elements of the network at prices which are determined in a manner which does not attempt, unreasonably, to restrict competition.

5.5. The Commission has shown that it is prepared to intervene if existing service providers reduce tariffs where competition is more intense and cross-subsidize these services by higher tariffs on other services which is effectively a method of unfairly exploiting the consumers.

5.6. In 1998, national operators who still hold a monopoly in the provision of voice telephony will lose the right to a legally protected monopoly. The risk, prior to 1998, is that operators would distort the market place for voice telephony by imposing higher prices, or price increases, for residential customers. The Commission is aware of this threat and will be expected to take appropriate preventative measures.

5.7. The ESC hopes that Member States will be able to ensure that this is not a serious problem but, nevertheless, welcomes the statement of intent by the Commission.

5.8. Because of the international implications of the liberalization of telecommunications, a critical feature is that the conditions of access by one enterprise to the networks of others should be clear and operate to avoid distortion of competition. The Commission is called on to closely scrutinize the most recent merger plans of the German media conglomerates Bertelsmann and Leo Kirch in the area of pay-TV, and to prevent the monopolization of this sector which this would entail. The ESC notes that the Commission has published a draft notice on the application of competition rules to access agreements in the telecommunications sector. The ESC has welcomed this initiative ().

5.9. In other opinions the ESC has drawn attention to the problems of concentration of ownership and growing alliances in the audiovisual sector (which includes terrestrial, satellite and cable services). The Commission needs to be aware of the wider range of policy questions which need to be taken into account, over and above questions of market dominance and adequate access for alternative providers. There are a number of public policy issues, such as ensuring that public service obligations are met and maintaining minimum standards in the content of programmes. The decision by the Commission to conduct a wide-ranging consultation on the application of competition rules to the broadcasting of sports events raises a topic of specific interest to many people. The ESC believes that a solution must be found which allows general public access to an agreed number of major sports events which are of national interest in a Member State(s).

6. Other sectors affected by competition policy

6.1. The Commission report contains a review of developments affecting transport services, including liner shipping consortia, inland rate fixing by liner conferences, price consultations allowed or not allowed, between competitors, and cooperation between airlines.

6.2. Two of these topics raise questions which the Commission may wish to further consider.

6.3. Air transport is now of particular interest in terms of competition policy. Since 1987, civil aviation has been progressively liberalized, at least on paper. In reality, the competition between airlines, except on some routes, is limited. A number of features continue to have the potential to constrain the emergence of normal competition. There is provision for a block exemption on tariff consultations (Regulation (EC) No 1617/93); a shortage of 'slots`; further State aid to some airlines; the effects of economies of scale within the industry; the expanding use of 'code-sharing` agreements; and restrictions on the foreign ownership of airlines. The ESC suggests that the Commission should carry out an evaluation study on the effects of deregulation of the European air transport market.

6.4. Similarly with respect to liner shipping, there is a block exemption for some of the actions of liner shipping conferences (Regulation (EEC) No 4056/86). The structure of this sector has changed significantly since this Regulation was adopted. Consortia and global alliances now play an important role. Since this Regulation has no expiry date, the ESC requests the Commission to evaluate the effects of the existing regulations on maritime liner services.

7. State monopolies and monopoly rights

7.1. The Commission has reported on its actions to further secure the liberalization of the traditional state-owned monopolies in services such as telecommunications, energy, postal services, certain transport services, and the state monopolies in Austria (affecting alcohol and tobacco), Sweden and Finland (affecting alcohol sales).

7.2. In many cases, the liberalization measures need to be supplemented by measures to supervise the operations of these enterprises in the wider market place of the whole of the European Union on a competitive basis.

7.3. Reflecting the experience to date on the efforts to liberalize these sectors, the Commission argues that 'the objectives of liberalization and of public service can be kept fully compatible under the existing Community rules. It was therefore opposed to the proposals to amend Article 90 of the Treaty..` at the Intergovernmental Conference.

7.4. The proposals to amend Article 90, considered at the IGC, were, in June 1997, not accepted.

7.5. In principle the ESC agrees that no change in Article 90, which under the proposal to the IGC would have had the effect of protecting some state-owned undertakings in at least one Member State from the disciplines of competition policy, would have been acceptable, particularly if this created unfair competitive conditions between operators in different Member States.

7.6. In a related but wider discussion about the scope for Community policies which specify minimum levels for universal services for all citizens, the Commission suggests that this should be seen in the context of the liberalized public sector services. The ESC has stated its Opinion on the Commission Communication on 'Services of General Interest` and has emphasized the importance of the principle that appropriate measures should be in place to make public services accessible to all consumers ().

7.7. These efforts by the Commission to extend the concept of minimum levels of universal service into a wider setting, including initiatives concerning the environment, consumer policy and trans-European networks, would be underpinned by a Commission proposal to add a new paragraph to Article 3 of the EU Treaties. The new paragraph (u) would add 'a contribution to the promotion of services of general interest`.

7.8. Whilst this precise recommendation was not adopted at the Amsterdam IGC, the intention was fulfilled by a proposed new Article 7d on this topic which is to be inserted in the Treaties.

7.9. In other opinions, the ESC has already commented on the recent legislation on telecommunications () (), energy (), postal services () and airports ().

8. Merger control

8.1. As the Single European Market becomes more deeply embedded in the commercial realities for business enterprises, there is no surprise in a trend for more businesses to see the advantages of integrating their activities to take advantage of the single market. In part this economic process will give an incentive to more mergers and take-overs which have cross-border effects.

8.2. The Commission has the responsibility to ensure, as far as its legislative remit permits, that the economic gains are to the mutual benefit of consumers and businesses. Mergers which affect cross-border trade and have the potential to allow an abuse of market influence by the operator must be notified and scrutinized. The Commission must interpret notifications of intended mergers or take-overs using the 1989 Merger Regulation ().

8.3. A proposal for a review of the Merger Regulation was published in a Green Paper in January 1996. This proposed, inter alia;

- lower turnover thresholds for compulsory notification (ECU 3 billion instead of 5 billion for worldwide turnover and ECU 200 million instead of 250 million for Community-wide turnover);

- lower turnover thresholds for mergers which would require notification in at least three Member States (ECU 2,5 billion and 100 million respectively);

- extension of the procedure to full-function joint ventures;

- simplified conditions for referral from the Commission to a Member State, or vice versa.

8.4. The ESC issued a broadly favourable opinion on the proposals ().

8.5. The Council of Ministers was unable to completely endorse the proposals, which required a qualified majority, insofar as they suggested reduced turnover thresholds for notification to the Commission. However, new criteria on Commission competence have been agreed (see Regulation (EC) No 1310/97) which extend the competence of the Commission to analyse the implications of a wider range of merger proposals at lower thresholds and also where three, or more, Member States could be involved.

8.6. Since some critical aspects of the original proposal to amend the Merger Regulation did not secure ready agreement from the Member States, the ESC suggests that the Commission might now undertake a more fundamental review of the balance between agreed EU policy and appropriate national responsibilities. In this setting, a reconsideration of the appropriate mechanisms to make decisions on a revised merger regulation could be combined with the consideration of proposals on competition policy as summarized (above) in point 4.8 et seq.

8.7. The ESC has reviewed the summary reports of various merger proposals (paragraphs 140-157) considered by the Commission and welcomes the availability of this information in this summarized form and notes that the decisions taken, when merger proposals are evaluated, have had particular regard to the interests of consumers.

8.8. The ESC is pleased to note the action taken to examine mergers which, although outside the EU, could severely affect competition within the EU (as in the case of Boeing-McDonnell Douglas). As this opinion has already noted (see point 2.8) such action needs to be followed by arrangements to oversee the compliance with any stated conditions (for example the avoidance of exclusive supply agreements by Boeing with clients).

8.9. When merger proposals are examined in detail by the Commission, the ESC is concerned that this procedure can sometimes be unduly prolonged. The Committee considers that the Commission should accept that decisions should be within (as far as possible) predetermined time limits.

9. State aid: overview

9.1. Within the European Union, state financial and/or fiscal aid to enterprises in different sectors is not uncommon. The provision of State aid is regulated particularly by the terms of Articles 92 and 93 of the Treaties. However, in an integrated Single Market, the existence of State aid can potentially distort competition and create a perception of unfairness between firms, some of which receive aid and others do not.

9.2. Whilst there is a major concern, underlined by the most recent Commission survey (see Section 10), that the scale of State aid is too large, a revision of the rules to regulate State aid depends on a clearer understanding of the circumstances in which State aid can be justified and the scale on which it might be available. Achieving this consensus will necessitate a re-examination of some difficult questions.

9.3. One of the simplest principles to endorse is that State aid might be justified where the adverse social, or environmental, impact of normal economic (or market) forces outweighs the effects of the possible distortion of competition which the aid may cause. In turn, this principle opens the possibility that State aid may help to maintain or create employment in areas of high unemployment or facing restructuring as a result of other changes. State aid may also be introduced in circumstances where the objective is to speed up the development of an industry, area, or type of business (e.g. to assist with the development of SMEs).

9.4. Whilst there is a shared interest in minimizing the scale and cost of State aids, at levels which are proportionate with the agreed objectives, within the EU there is also a shared interest in avoiding undesirable distortions to competition by an inappropriate use of State aid in some countries, industries or regions. The need to harmonize the permitted scale and circumstances for the provision of State aid is accepted. The Committee has a growing concern that in a reconsideration of the impact of State aid, account should be taken of fiscal differences as well as the other forms of more direct financial support.

9.5. The Commission proposed to the Council in November 1996 which accepted that it should prepare proposals for two regulations on the basis of Article 94 of the Treaty: the first one shall codify procedures in the field of State aid; the second one shall enable the Commission to exempt certain types of aid (environment, SME, R& D, training and employment aid) under certain circumstances from the notification obligation, since such aid can be considered as compatible with the common market, as long as certain criteria are fulfilled.

9.6. The ESC welcomes this review and wishes to be consulted about proposals to amend the framework of State aid both in the context of proposed formal decisions from the Council (which normally are addressed to the ESC for an opinion) and in the adoption of formal procedural rules and guidelines which will be used by the Member States (which might otherwise not be subject to scrutiny by the ESC). This debate will also need to examine the relationship of State aid to the role and operations of the Structural Funds and the Cohesion Fund which are themselves currently under review.

9.7. The essential objective is that the review should reinforce the means available within the European Union to assist the less prosperous regions, and regions affected by deep recessions in key sectors, to generate improved living standards and employment prospects for their residents.

10. The Fifth Survey on State Aid ()

10.1. The Fifth Survey on State Aid is a comprehensive assessment, as far as can be achieved by the Commission, bearing in mind the problems of obtaining data from Member States and the further problems of quantifying indirect, or fiscal, aid. The ESC congratulates the Commission on its completion, even though some of the evidence is not as reliable as would have been wished.

10.2. The Fifth Survey includes State aid for manufacturing and certain other sectors and estimates that the Member States in 1994 (twelve members at that time) spent more than ECU 95 billion a year in public assistance to manufacturing, agriculture (excluding the price guarantees of the CAP), transport, fisheries and coal mining. Manufacturing alone received ECU 43 billion a year.

10.3. Whilst the quality of the information in the Fifth Survey has improved on earlier surveys, because of the value of a study of this type in framing future policy, the ESC hopes that the Commission will continue to undertake this work on a biannual basis in a standardized format and that Member States whose data sources are incomplete or inadequate will be required to improve the quality and quantity of the data available.

10.4. Of course, the cost of some forms of aid, such as loan or interest guarantees, equity investments and more favourable tax regimes, is inherently difficult to quantify and must always be a more subjective calculation. This is, of course, indirectly a further argument to ask Member States to make offers of aid in more transparent form ()

10.5. The estimated cost of State aid as assessed in the Fifth Survey is large. The Commission has commented on its size, concentration, distribution by sector and country, and the overall trend which, it believes, is not showing the reductions which the Commission thinks are desirable.

10.6. Whatever the qualifications, the Fifth Survey confirms that, for manufacturing industry alone, nearly ECU 43 billion was made available in 1994, at 1993 prices. This was the equivalent of 3,8 % of the value added by manufacturing industry, ECU 1 472 per person employed and 20,7 % of the value of intra-community exports. Aid on this scale obviously has a potential to affect trading conditions between Member States.

10.7. The qualification which can be added is that these global indicators, which are available for each Member State (12) as well, show how significant State aid is, but do not illustrate its impact in particular regions or sectors. For example, State aid was the equivalent of 3,8 % of value added in all manufacturing industry. Whilst it may not yet be possible to prepare refined calculations it is obvious that this figure would be higher if it measured the value of State aid as a proportion of value added in the enterprises which received State aid. This is particularly significant where only some regions (or some sectors) of a national economy are eligible to receive State aid.

10.8. Some of the aid to other sectors is determined by criteria relevant to the sector concerned. For example, State aid to the railway sector is heavily influenced by the fulfilment of public service obligations and social obligations by the operators and accounts for over ECU 32,6 billion on average each year. Aid to the coal mining industry cost ECU 13,2 billion. Both of these might be regarded as based on justifications which are conceptually different from that to manufacturing industry.

10.9. Almost half of the total State aid, 45 %, is targeted in the manufacturing sector. In terms of industrial, regional and competition policy, the aid to manufacturing is the most critical area of debate for future policy.

10.10. The evidence in the Fifth Survey on the trend and amount of aid to manufacturing industry is not as clear as the ESC would have wished. For example, whilst the Commission concludes that for the period 1990 to 1994 'the gradual downward trend observed in the past appears to have come to an end` (paragraph 9), this conclusion is reached without making explicit allowance for the additional expenditure directed to the 'new` Lander in Germany. If these amounts are excluded, as introducing a big non-comparable element in this decade, the annual cost in 1993-1994 was lower than in 1990-1992. The known annual value in 1993 prices was just under ECU 29 billion in both 1993 and 1994, compared to over ECU 40 billion in 1990. However, this takes no account of the probable re-allocation of aid within Germany in favour of the eastern Lander.

10.11. Whilst the concerns about the merits and scale of State aid are an important part of Commission thinking, if the total for manufacturing industry is, on a comparable basis, continuing to decrease, then this suggests that some progress has been made and this may have some influence on the policy prerogatives.

10.12. The impact of the new Lander also affects other parts of the analysis. One of the stark conclusions (paragraph 38) is that 'ad hoc` aids have increased from 7 % of the total in 1990 to 36 % in 1994. This would suggest a major policy change in this period but for the next comment that this consists in 'the main of aid granted for rescue and restructuring of companies together with aid granted by the Treuhandanstalt (in the new Lander)`. The Commission could have been expected to offer this evidence in a more helpful way. To draw any conclusions, some evidence is needed of the allocation of «ad hoc» aid in each of the Member States and with particular information on the impact of the German changes.

11. Policy questions arising from the Fifth Survey

11.1. Arising from the Fifth Survey and other evidence available to the Commission, the following policy conclusions are highlighted in the published reactions of the Commission:

a) dialogue with the Member States is needed to establish precise targets and a timetable for the reduction of aid budgets alongside actions to be taken by the Commission itself;

b) steps are needed to counteract the damaging effects of national aid policies on economic cohesion in Europe. The rich central regions receive 85 % of the total aid while the share of the cohesion countries, excluding Ireland, is shrinking;

c) the Commission is proposing new guidelines for the regional aid granted by Member States including, it is expected, a proposal to reduce the permitted ceilings on maximum financial aid by one-third;

d) the Commission intends to propose a simplification of procedure for the approval of aid schemes which contribute to EU objectives;

e) the Commission proposes to tighten even further the rules on aid towards the rescue and restructuring of enterprises in difficulty;

f) the Commission intends to propose a set of across-the-board guidelines which will allow it to vet individual cases in which large amounts of aid are to be paid and which may cause serious distortions in competition.

11.2. Each of these suggestions raises questions which need to be examined in detail before decisions are made on the direction and scale of changes in the application of State aid.

11.3. The Fifth Survey helps to place these questions in a factual perspective of the division between the responsibilities of the Member States (and their sub-national administrative structures) and those of the Community as represented by the Commission.

11.4. It also helps to give cogency to a debate about the scale of spending on State aid and to examine the suggestion by the Commission that it is too large and not falling fast enough.

11.5. Critical, and implicit to the policy questions, is the debate about the scale and sources of funding for the 'poorer` Member States for whom, for example, budgetary constraints are more important than permitted maximum levels of State aid. In this context, the EU will need to have clearer policies on the allocation of funds from the Community budget, whether through the Structural Funds or the Cohesion Fund, or through redesigned financial instruments.

11.6. The recent Conference on Cohesion Policy was a useful introduction to some of these questions. The publication of Agenda 2000 has provided an immediate opportunity to reconsider them.

11.7. The ESC hopes that each of these topics will form a part of the review which the Commission has now launched on the policy constraints on State aid. In addition, the ESC, as possibly the most broadly representative body of the citizens of Europe, alongside the European Parliament, is willing to contribute to this debate and expects to be consulted at an early stage by the Commission.

11.8. At this early stage in the review, the ESC suggests that the Commission should identify a number of principles which should underpin the policy decisions. In particular, the ESC reminds the Commission of the relevance of the First Report on Cohesion Policy which was published in 1996 and on which the ESC has expressed an opinion ().

11.9. In addition, the ESC would commend a clear distinction between (1) the role of the Community in setting guidelines for State aid in the context of regional policy or of industrial policies and (2) the role of the Community in providing financial resources to support acceptable policies in Member States, or their regions. The former is critical to the coordination of policy across the Community and, especially for the richer Member States, is important in the context of the subsidiarity of actions. The latter is a core element in the debate about the reform of the Community budget.

11.10. When the Commission proposes revised guidelines on the permitted levels of State aid for individual business projects, the ESC recognizes the conflicting tensions between ensuring that (1) aid is only permitted for enterprises (whether newly formed or subject to rescue arrangements) which have the prospect of viable operations and avoid the need for continuing aid, (2) aid can be large enough to offset the scale of initial disadvantage in an industry or region, (3) maximum aid levels are gradually lowered and (4) the outcome of making aid available is that the economic and social disadvantage of defined regions or industries is reduced.

11.11. There is a particularly pressing need for the Commission to publish proposals on future policies on the use of aid for the rescue and restructuring of firms in difficulty. The present guidelines expire at the end of 1997. The ESC acknowledges that there is a balance to be struck between avoiding job losses at firms in difficulty and the safeguarding of the competitive position of enterprises. Whilst the aim must be to maximize durable employment in viable projects, the risk to be avoided is that short-term expediency should over-ride longer term objectives.

11.12. The ESC recommends that, where large amounts of financial assistance are likely to be needed to launch a new enterprise or maintain an existing enterprise, the assistance should be scrutinized by the Commission to test the potential for the survival of a competitive entity. This market study, conducted by the Member State, on the basis already used in the Commission's merger control procedures and in some specified sectors, should apply to businesses in all sectors and should include an examination of the effects on the competitive position of other firms in the same sector.

12. Action taken on State aid in 1996

12.1. The Report on Competition Policy in 1996 reflects the emerging policy debate in the review of State aid which has been initiated and also reports on the actions of the Commission during the year. A number of steps were taken which clarify aspects of the existing criteria used to assess aid under Articles 92 and 93.

12.2. In an effort to reduce the involvement of the Commission in notified assistance which is unlikely to be significant in scale or potentially distorting to trade in the EU, the Commission introduced a notice on 'de minimis` aid (), and new guidelines on State aid for SMEs which introduces the prospect of aid for intangible investments, possibly in the form of technology transfers (), and a framework for the extension of the scope of State aid for firms in deprived urban areas ().

12.3. The ESC welcomes each of these initiatives which will allow greater concentration by the Commission on the more difficult decisions related to State aid. However, the ESC hopes that the Commission will be prepared, after a short period of experience of the effects of the relaxation of the rules for aid in defined and deprived urban areas, to widen the list of activities which are eligible for this type of incentive.

12.4. During the past year the Commission continued to refine the features of the measures which are, legally and technically, regarded as aid and therefore falling within the ambit of Article 92(1). The ESC welcomes the statement of the four criteria, all of which must be satisfied, which determine when Article 92(1) is applicable.

12.5. Three of the four criteria seem unlikely to be controversial. The aid must give a firm an advantage; it must be granted by the state, or using state resources; and it must affect trade between Member States.

12.6. The fourth is less certain. It requires that the aid must have particular characteristics to the point of favouring certain undertakings or the production of certain goods. The ESC notes that this condition is capable of differing interpretations. To illustrate the possible difference, the Commission should clarify whether it would exist if a Member State extended the aid only to manufacturers as opposed to all other businesses or would it only exist if applied to a smaller industrial sector? The Commission relies on a distinction between 'general` measures, available to all firms, and 'specific` measures available to a limited group. However, this distinction does not, without further clarification, answer the question posed. The ESC suggests that the Commission should clarify how the term 'certain undertakings` is to be defined.

12.7. The defining of aid relative to 'certain undertakings` has been a recurring problem for the Commission. During 1996, the issue was relevant to decisions on aid to reduce labour costs. The Commission has decided that measures to reduce labour costs on a national basis do not fall to be considered under Article 92(1). Reductions on labour costs in specified industrial sectors would however not escape. The details have been published in an explanatory notice. () The ESC welcomes this step which helps to clarify the position.

12.8. The Commission pursues a number of specific aid policies in relation to a number of sectors such as shipbuilding, steel, coal, motor vehicles, synthetic fibres, clothing and textiles, transport, agriculture and fisheries. The ESC has noted the consistent application of these policies in 1996.

12.9. Nevertheless, the ESC regrets that the proposed OECD sponsored international agreement on shipbuilding has not yet been ratified by all the participants. The delay by the USA has now placed the future of this agreement in doubt. The ESC reminds the Commission of the earlier opinion which proposed that, in the event of such a delay, the Commission should make alternative proposals as quickly as possible, and notes that a new draft regulation has indeed been published ().

12.10. The ESC has noted that an advisory study has recommended that the special sectoral framework for the textiles and clothing industries be abolished and replaced by the same regime as applies in general to other industries (see paragraph 194 of the Annual report). This decision was postponed until 1997. In the particular circumstances of severe competition faced by this sector, the ESC would urge caution that such a change would not further erode the viability of, and employment offered by, firms in this sector.

12.11. The ESC has noted the modest success in the first year of application of the guidelines which define when employment aid is acceptable. It also noted the positive outcomes of aid linked to environmental protection.

12.12. With rather more apprehension, the ESC has noted that some 'direct investments abroad` are now coming to the attention of the Commission as possible sources of distortion of competition in the Community (see paragraph 224 of the Annual report). The ESC appreciates that this raises complex questions on whether (a) aid takes place and (b) the incidence of that aid, as opposed to (c) the location of the investment. The ESC requests the Commission to engage in a wide-ranging consultation before reaching definite conclusions on the appropriateness of the existing rules for aid to cases of this kind.

13. Outlook for 1997

13.1. The Commission has included in the 1996 report a final section summarizing the work programme contemplated for 1997. The ESC welcomes this increased transparency about the activities of the Commission.

13.2. Many of the legislative priorities are logical developments from the policies already reviewed in this opinion. The ESC agrees that they are all of considerable significance. The caveat which the Committee would enter is that some of the policy reviews deserve an open and full debate before decisions are finalized. In particular, the Committee would request an opportunity to comment on new guidelines for the granting of State aid, sectoral aid and regional aid rules.

13.3. The ESC also welcomes the acknowledgement that effective enforcement policy is becoming more necessary as the complexity and range of competition policy proceedings increase.

14. Conclusions

14.1. The ESC commends the Commission on the expeditious publication of the Report on Competition Policy (1996) and the Fifth Survey of State Aids (point 1.5).

14.2. Because of the growing significance of global trading, the ESC has noted with particular interest the recommendation that the World Trade Organization should set up a working group to do initial work on the development of an international framework for competition rules. The ESC hopes that the Commission will further develop its approach, policies and methodology on these global aspects of competition questions (point 3.5). In support of this work, the Commission should call on the resources of the offices of the EU in other States to collect information on the way in which competition policies are being developed elsewhere, often to the disadvantage of the businesses in the EU.

14.3. This opinion has reviewed a number of aspects of competition policy which were outlined in the 1996 report. It also reflects the early reactions of the ESC to the publication of the Fifth Survey of State Aids. The Committee hopes that the Commission will consider the suggestions outlined in this opinion in the further evolution of its important work in ensuring that competition policy functions to the benefit of the citizens of the Union.

14.4. In particular (and inter alia) the ESC would draw the attention of the Commission to the following conclusions:

- a dominant position within the EU should be evaluated not simply with respect to the internal market when the relevant market is an international one (3.4);

- appropriate measures should be taken to ensure that EU policies on competition policy and State aids are developed in each of the aspirant countries prior to enlargement (3.8);

- Community competition law should be translated into national law in each Member State and then enforced, in defined types of case, by the national authorities (4.10);

- when agreements are submitted for consideration under Article 85, the procedure might be changed to add a series of trigger points for the automatic clearance of an application, using similar concepts to those already included in the merger control system (4.17);

- State aid (and aid from the Community) should be carefully targeted in a disciplined manner which minimizes the effects on competition, limits the scale of any subsidies, and reduces the scale of State aid where possible;

- in a reconsideration of the impact of State aid account should be taken of fiscal differences as well as other forms of more direct financial support (9.4); this should take account of the code of conduct agreed by the ECOFIN Council in December 1997;

- during the reconsideration of the impact of State aid, the issue of employment must also be clearly taken into consideration;

- the relationship of State aid to the role and operations of the Structural Funds and the Cohesion Fund should be reviewed;

- a clear distinction should be made between (1) the role of the Community in setting guidelines for State aid in the context of regional policy or of industrial policies and (2) the role of the Community in providing financial resources to support acceptable policies in Member States, or their regions (11.9);

- after a short period of experience of the effects of the relaxation of the rules for aid in defined and deprived urban areas, the Commission should widen the list of activities which are eligible for this type of incentive (12.3);

- the Commission should clarify how the distinction is made between general measures and specific aid as it applies to different groups of undertakings (12.6).

14.5. The ESC notes that the suggestions made in this opinion will have relevance in the debate on Agenda 2000, published in July 1997, which has implications for competition, regional, industrial and agricultural policies in the next millennium.

14.6. In view of the evolution of several critical aspects of competition policy in recent years, this may be an appropriate time to reconsider the application of competition policy. The general principles might be reviewed and then used as a basis for a reallocation of responsibilities for enforcement which allows for both decentralization and the application of subsidiarity. In this way, openness and transparency could be enhanced and a sharper focus on the needs of consumers and the role of SMEs might be developed.

14.7. As globalization increasingly affects competition, the ESC suggests that the Commission should amplify its annual report on competition with a review of the state of competition policies in major competitor countries, particularly where their actions may affect the business of EU firms.

Brussels, 10 December 1997.

The President of the Economic and Social Committee

Tom JENKINS

() SEC(97) 628 final, paragraph 1.3 quoting from the earlier Communication on 'Services of general interest in Europe`.

() OJ L 31, 9.2.1996.

() OJ C 262, 10.9.1996.

() OJ C 207, 18.7.1996.

() OJ C 29, 30.1.1997.

() OJ C 23, 23.1.1997.

() OJ L 107, 30.4.1996.

() ESC opinion of 19.12.1996, point 11, OJ C 75, 10.3.1997, p. 22.

() ESC opinion of 9.7.1997, OJ C 296, 29.9.1997, p. 19.

() ESC opinion of 28.5.1997, OJ C 287, 22.9.1997, p. 8.

() Notice on Services of general interest, OJ C 281, 26.9.1996 and ESC Opinion of 29.5.1997, OJ C 287, 22.9.1997, p. 85.

() Directive with regard to mobile and personal communications, OJ L 20, 26.1.1996 preceded by ESC opinion OJ C 15, 20.1.1996.

() Directive with regard to the implementation of full competition in telecommunications markets, OJ L 74, 22.3.1996, preceded by ESC opinion OJ C 39, 12.2.1996.

() Directive concerning common rules for the internal market in electricity, OJ L 27, 30.1.1997, preceded by ESC opinion OJ C 73, 15.3.1993.

() Proposal for a Communication on competition rules as applied to the postal sector, SEC(95)830 final, 26.7.1995; ESC opinion OJ C 174, 17.6.1996.

() Directive on access to the ground handling market at Community airports, OJ L 272, 25.10.1996, preceded by ESC opinion OJ C 301, 13.11.1995.

() Regulation (EEC) No 4064/89, 21.12.1989.

() ESC opinion: OJ C 295, 7.10.1996.

() COM(97) 170 final.

() There is, of course, a need to understand how the impact of State aid in other, non-EU countries is operating and its impact on business decisions which, indirectly, are relevant to EU policies. The work of agencies such as the OECD, in its review of Public Support to Industry, 1996, illustrates the benefit of setting the EU survey in an international setting.

() ESC opinion: OJ C 206, 7.7.1997.

() OJ C 68, 6.3.1996.

() OJ C 213, 23.7 1996.

() SEC(96) 1706/2.

() OJ C 1, 3.1.1997.

() OJ C 153, 22.5.1997.