Managing the Financial Crisis in Europe: Why Competition Law is Part of the Solution, Not of the Problem

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Damien Gerard, Dec 15, 2008

EU Competition Commissioner Kroes likes to use catchphrases to encapsulate policy statements. Since early October, one of her favorite lines is that competition law, and State aid law in particular, is part of the solution to the financial crisis, not part of the problem. Understand: competition rules do not stand in the way of a solution to the crisis, they are part of that solution. She used it for the first time on October 2 when announcing the approval of a Euro 35 billion aid package laid down by Germany to rescue Hypo Real Estate Holding AG, a German bank holding that became troubled as a result of its involvement in the national and international mortgage business and its short-term refinancing strategy. She repeated it on October 6 in an address to the Economic and Monetary Affairs Committee of the European Parliament outlining her enforcement priorities in the framework of the financial crisis. She resorted to it again on December 2 to defend her record in front of the 27 EU Economics and Finance Ministers, some of them clearly upset at the Commission’s active involvement in the design of general financial recovery plans and individual rescue measures. Indeed, within the European Union, economic and financial policy remains first and foremost a competence belonging to each of the 27 Member States; there is nothing like an EU Treasury, a centralized EU economic policy institution, or a common EU financial services regulator. Some economic coordination takes place at the EU level, though, notably in the framework of the so-called “Stability and Growth Pact,” but it is driven by Member States representatives seating in the Economic and Financial Affairs Council (ECOFIN). As a result, in mid-September, when the crisis spread to the whole financial system following the bankruptcy filing of Lehman Brothers, thus affecting credit institutions across Europe, Member States remained in front to devise urgent recovery measures. It was at the ECOFIN meeting of October 7 that Member States came together to devise common principles to guide their respective reactions to the crisis. Those principles were turned into a concerted action plan on October 10 by the Eurogroup, (a meeting of those EU countries that share the Euro as currency), which was then endorsed by the European Council of October 15, 2008. Originally, in the design of a coordinated effort to contain the financial crisis, the Commission appeared to be largely only a witness to the Member States initiatives, under the leadership of the French Presidency. However, in parallel, it was also taking steps to preserve the possibility of playing its own role in managing the crisis, notably to ensure compliance of Member States measures with EU single-market principles. The European Council’s support for the continued implementation of EC competition rules in spite of the exceptional circumstances, including “the principles of the single market and the system of State aids,” combined with a lack of resources at ECOFIN’s level to monitor Member States adherence to the concerted action plan, in effect enabled the Commission to play a critical role in the design of the general recovery plans and individual rescue measures envisaged by various Member States. Eventually, the circumstances led to the emergence of State aid rules as a conduit for “positive” economic policy coordination rather than solely for “negative” control of compliance with the EC Treaty. Some Member States consider such de facto evolution as undue encroachment on their competences while the Commission finds its action legitimized by the magnitude of the amounts at stake and the associated potential for competition distortive effects due, notably, to the massive flow of money to banks benefiting from State backing and the disparity in Member States resources to address the challenges posed by the crisis. This paper describes three factors that contributed to shaping the role played so far by the Commission in its capacity as the major antitrust enforcement authority in the management of the financial crisis in Europe and, hence, the contribution of EC competition law to a solution of the crisis, as advocated by Commissioner Kroes. .