Should markets be regulated in Brussels or London? Brexit and competition policy

Cross posted on the UEA CCP Blog.

by Prof Bruce Lyons

Much of the UK referendum debate jumps in on headline details about specific ‘regulatory burdens’ without thinking carefully about how to compare membership of the EU against life outside the single market.  In this post, I set out a framework for thinking about the economic advantages and disadvantages of having regulation harmonised across the EU (and possibly implemented centrally in Brussels), as compared with an independent UK-specific regulation (for implementation in London or the devolved nations).[1]

I apply this approach to competition policy and its implementation.  This includes the regulation of cartels and other anti-competitive agreements between firms, the control of abusive practices by dominant firms, merger regulation, and the control of state aid.  Apart from state aid, these regulations are currently enforced at both the EU and UK levels, with the allocation of cases depending on rules defining jurisdiction.  For example, the European Commission (EC) decides on large mergers and cartels that affect multiple member states, and the UK’s Competition and Markets Authority (CMA) decides on mergers and cartels that significantly affect only the UK.

Advantages of UK-level regulation

In general, the big advantage of localised regulation is that there is usually better information available about local conditions and local preferences. There are also fewer competing interest groups to complicate negotiations, and this facilitates a more responsive system.  These advantages should set a default preference for UK regulation in the absence sufficient advantages of collective regulation in Brussels.  In relation to competition policy, there is currently a more-or-less global agreement on the type of regulation that is beneficial, but four current and/or potential future differences in ‘local preferences’ merit highlighting.

First, the UK has a preference for ‘market investigations’ with powers to intervene in potentially highly invasive ways in the pursuit of creating more competitive conditions in markets that are not working well for consumers. There are no similar powers at the EU level (or in other member states).  However, these market investigations powers are currently in operation unconstrained by membership of the EU.  They are not under threat, so Brexit would have no effect.

The second difference is much more important. The EU has a unique power to regulate state aid offered by member states to their local firms.  A UK government would not regulate itself to restrict its own ability to grant aid and could certainly not regulate other countries, so change in relation to state aid would be an inevitable consequence of Brexit.  I explain why this matters below.

Third, the UK has introduced a criminal offence for individuals directly involved in organising a cartel (e.g. guilty individuals may be sentenced to gaol). There is no such criminal offence at the European level, and Brexit may make it easier for the UK to pursue a criminal prosecution in cases that are currently investigated under the EC’s purely civil / administrative enforcement regime.  Having said that, the UK’s record of criminal prosecutions is one of almost total failure, and unless that record is improved, tortuous attempts at criminal cases have essentially only delayed the application of civil sanctions.

Fourth, some politicians favour broadening the aims of competition policy to incorporate wider ‘public interest’ issues (e.g. employment, location of head office, ‘strategic industries’). Recent UK governments have not supported such a fundamental change away from the narrow competition test which is shared with Europe and which judges the behaviour of firms according to whether it is pro- or anti-competitive.[2]  Brexit would allow a wide public interest test to be adopted for all mergers affecting the UK, including those under EC jurisdiction (i.e. the larger multinational mergers).  Such a change should not be taken lightly as it would raise tricky issues about: short term political pressures affecting the long term interests of the economy; the independence of the CMA; and the CMA’s ability to make judgements outside its competition expertise.[3]

Advantages of EU-level regulation

The advantages of EU-level regulation fall into two categories. First, there may be administrative economies of scale which result in a less expensive and higher quality collective (supranational) institution – for example, set-up costs for regulatory institutions, and the avoidance of duplicative investigations.

In the CMA, the UK already has an experienced and mature institution to enforce competition policy, so its general competence is not a serious issue. However, its case load would rise with Brexit as it would have to review multinational cartels and mergers, which affect both the UK and other countries in Europe. For example, the European Commission deals with some 300 merger notifications each year, around 20 of which are found to require intervention.  Of course, many of these do not affect the UK directly, but globalisation means that a significant proportion do and Brexit would result in duplicative review in Brussels in London.  Beyond the burden on the CMA, this duplication would create a serious cost to firms being investigated for the same thing in multiple jurisdictions.

The second type of advantage of EU-level regulation is where there are international externalities (e.g. trans-border pollution or state subsidies to foreign exporters who then undercut local firms). In such situations, there is typically a conflict of national interests between the subsidising and ‘dumped on’ countries.  In principle, bilateral negotiations are a way to resolve these conflicts, but the bargaining process can be very costly and time-consuming.  A supranational institution such as the European Commission can then more easily impose a solution that eliminates the negative effects of, for example, state aid.  The purpose of state aid regulation in the EU is to create a level playing field for competition across Europe.  It protects against dumping and is currently being used to tackle ‘over-generous’ (or race-to-the-bottom) individualised tax deals agreed between European national governments and multinational firms.

Similar conflicts of national interests can arise in other competition-related areas of regulation. For example, it would be very difficult for a post-Brexit CMA to block a merger between foreign firms that would result in higher prices for UK consumers; it would be harder to investigate foreign cartels and to influence foreign dominant firms; and it would be harder to impose regulations such as the recent EU regulation that has slashed mobile roaming fees when we travel across Europe.

Looking further forward is inevitably more speculative, but just as the regulation of competition has converged internationally over the last 25 years, it could begin to drift apart. The principle of open and competitive markets is enshrined in EU treaty, which provides an anchor that it would take a major storm to shift.  The UK has been very active in supporting this principle, but there may be some drift without the UK’s voice.  Post Brexit, there would also be no such anchor in an independent UK, so a future interventionist government could be relatively unconstrained in its industrial policy.  For example, a post Brexit government would find it much harder to hold out against short run political pressures to subsidise a large firm in decline, even if it knew that this would, at best, be only a costly delay of the inevitable.

Overall evaluation

Overall, Brexit could be attractive if you strongly favour an interventionist industrial policy and the application of wide public interest criteria to large mergers. However, if you are wary of the ability of politicians to make efficient decisions in relation to specific firms, the balance of economic benefit in relation to competition policy favours remaining in the EU.  Brexit would result in duplicative investigations of British firms, a loss of influence over anticompetitive behaviour by foreign firms, and a less level playing field on which British firms must compete.

[1] This framework could, in principle, be applied to all aspects of regulation from labour markets to the environment, and to all levels of devolution from Brexit to Scottish independence to local mayors.  For a short but passionate opinion on the legal implications of Brexit for competition policy, see Richard Whish ‘Brexit and EU Competition Policy’ (2016) 7(5) Journal of European Competition Law & Practice 297.

[2] Having said that, the current UK legislation does allow a constrained public interest test for mergers investigated by the CMA.  This must be at the request of the Secretary of State and on specific, narrow grounds.

[3] It is also worth noting that there are formal channels in the current system through which the UK can influence the Commission in Brussels (e.g. ECN), and informal pressure can be exerted as illustrated by theCMA’s letter to the European Commission in relation to the prohibition of Hutchinson 3G’s proposed acquisition of Telefonica (O2).  Public interest issues in relation to mergers are further discussed by David Reader in hisrecent blog post.

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