Politicisation is undermining EU competition policy  

By
Pieter Cleppe
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Margrethe Vestager, European Commissioner for Competition (Copyright: Friends of Europe from Brussels, Belgium, CC BY 2.0 , via Wikimedia Commons )

As the new European Commission has entered office, Brussels is saying goodbye to Danish politician Margrethe Vestager (picture), who has served for ten years as the EU Commissioner responsible for competition policy. This portfolio is really close to the heart of what the EU should be all about: guaranteeing a fair framework for trade within the EU, so companies are not being disadvantaged when they do business in another member state. A look at her track record however leaves a pretty sour aftertaste.

As is commonly known, the EU treaty, which guarantees the free flow of goods, persons, services and capital is not always properly applied. A recent survey by Eurochambres lists the following obstacles as significant: Complex administrative procedures, different national service rules, inaccessibility to information on rules and requirements, different national product rules and different contractual/legal practices.

This is not something the EU can do much about. It’s the responsibility of national government to address. However, almost half of respondents also cite “discrimination of foreign enterprises by legislation or national authorities” as a significant obstacle, more than for example “language barriers”. This really relates to the EU’s core business: taking action against national barriers to trade.

Despite this, the European Commission seems less and less interested in doing its job. Last year, the Financial Times reported that EU Commission action against internal market infringements had fallen by 80% between 2020 and 2022, causing business groups and some member states warning that the single market project is “at risk”.

Notably, barriers to retail businesses have increased in a number of member states, including Hungary, Germany, Belgium and Poland since 2018. It should not surprise that France is listed as the member state with the most restrictive conditions. Again, we are not only talking about the services market. Extra hurdles on sourcing goods from other member states have also been imposed, reportedly.

It is one thing that EU member states are wary of applying the EU Treaty. It is quite another for the European Commission to no longer even try to combat national protectionism. In one case, two years ago, the Commission was even officially reprimanded by the European Ombudsman for not taking any action against protectionism practised by German Länder.  

Vestager: A poor track record

Throughout her reign, Vestager has been a weak enforcer of the EU’s ban on state aid. Whether it concerned allowing Italy to bail out banks or France to nationalise a shipyard to prevent an Italian takeover, ultimately, it all simply passed. Perhaps that should not have been such a surprise. Already in 2014, when Vestager entered office, she openly stated that she found it “natural that competition policy is political.” This kind of blatant politicisation of enforcing the rules of fair competition is, of course, the last thing the EU needs.

During the Covid crisis, things went from bad to worse, and competition policy became increasingly lax. These relaxations were simply extended afterwards, with the result that member states now shamelessly hand out large-scale subsidies to counter the threat of deindustrialisation resulting from high energy prices – also already a result of European (climate) policy and energy supply experimentation.

Vestager for example agreed with a €1.7 billion cash injection from taxpayers to recapitalise Berlin’s struggling new airport, justifying that “airports have been hit particularly hard by the corona virus”.

Furthermore, also US policy is used as an excuse. In response to the protectionist US “Inflation Reduction Act”, whereby the Biden administration offers companies generous tax breaks to encourage green investments, EU Commission chief Ursula von der Leyen advocated in February 2023 for diluting the EU ban on state aid even more. On top of that, she also pushed for things like a “European Sovereignty Fund”, as part of her “Green Deal Industrial Plan”. All of this amounts to European industrial policy – something that has invariably led to wastefulness, nepotism and misallocation of investment in the past, when applied at the national level. Thus, European citizens will not only enjoy less competition, but they will also need to pay higher taxes. Thankfully, von der Leyen failed to push through her new crony scheme for now, but one can be sure she will continue to try. Ideally, she will aim for it to be financed through jointly issued debt, despite the poor experience the EU has had with the Covid recovery scheme, which was also financed in this way.

A whopping 91% of state aid is now estimated to be exempt from the EU Commission’s scrutiny, with a whole lot of government support considered to be justified in itself. This includes social assistance, development, transport infrastructure, natural disaster relief, culture, education, environmental protection, innovation, and digitalisation

Also, roughly 80 per cent of the state aid approved by the EU Commission in recent years is spent by Germany and France. This proves that this kind of undermining of the single market mainly benefits companies with good connections in the EU’s two largest economies. What we can witness is large-scale distortion of competition, with the full backing of the European Commission.

In June 2024, an internal document reflecting conversations among European heads of state and government revealed that they had doubts about a second term for von der Leyen due to her Commission neglecting enforcement of EU regulations, as during her first term, fewer infringement proceedings were launched than in the past. EU leaders thereby also expressed reservations about the institution’s increasing politicisation. European Council President Charles Michel called all of this “regrettable”, but in the end, von der Leyen secured a second term anyway.

Redefining state aid

In contrast to Vestager turning a blind eye to the blatant violations of EU state aid rules were her attempts to requalify tax rulings agreed by the Benelux and Ireland with companies as ‘unfair state aid’. She backed this up by claims that that these tax arrangements were not really open to any company. 

Here, Vestager lost a few of these cases at the top EU court, as the General Court, the lower court of the European Court of Justice (ECJ), which is the EU’s top court, declared in 2020 that the Commission failed to prove “to the requisite legal standard” that Apple enjoyed preferential treatment which would have amounted to illegal state aid. Going after American companies in a bid to get them to pay more taxes, all based on grey areas in legislation, while ignoring clear violations of EU law, even led her to be dubbed the “EU tax lady” by former U.S. President Trump. Perhaps it would be fair for Vestager to pursue tax rulings when she would also go after clear violations of the EU’s ban on state aid, but that clearly wasn’t the case here.

The problem goes of course much deeper than simply the policies implemented by Vestager. In 2022, the ECJ issued its final verdict in the well known “Micula” case. This revolved around two brothers, Ioan and Viorel Micula, originally from Romania but having Swedish nationality, that invested million in various food processing and packaging factories in Romania in the 1990s. Thereby, they benefited from a tax incentives scheme, as the investment happened in an economically deprived area.

Romania scrapped the tax incentive scheme in 2005, as part of its negotiations to enter the EU, which happened in 2007. That repeal however constituted a violation of a bilateral investment treaty (BIT) between Sweden and Romania that had been signed in 2002, an arbitration court ruled, after the two brothers legally challenged Romania’s decision there. As compensation, the two brothers were awarded 178 million euro, which Romania also partially paid.

In 2015, the European Commission however classified that payment of the award as illegal state aid, ordering Romania to recover the sums that had already been paid. Indeed, the same body that was happily looking the other way for all kinds of violations of state aid, suddenly moved into action by redefining compensation awarded by an international arbitration court as “state aid”. A key problem here is that it is not clear why the European Commission should have any say over these supposed “state aid” measures at all, given that these predate Romania’s accession to the EU. That was also the reason why the General Court annulled the EU Commission’s decision in 2019. However, in 2022 the ECJ ultimately sided with the European Commission.

At the time, Nikos Lavranos, an expert in investment law and arbitration, described that ECJ ruling on the “Arbitration blog” of Reuters as “overreach”. He noted it was:

“in complete ignorance of public international law and the existing obligations which EU member states willingly and validly have entered into with other states, whether before or after accession to the EU. (…) Public international law and treaty law simply do not work on the basis of accepting the claimed supremacy of EU law and “automatic replacement” approach of the ECJ. Indeed, at the public international law level, all subjects of international law and all treaties are, or at least should be treated equally, with good reason.”

The backstory here is obviously the deep scepticism within the EU institutions towards private arbitration. In its separate “Achmea” ruling, issued in 2018, the European Court of Justice decided that intra-EU legal disputes should not be subject to arbitration.

The Micula case is a long running saga, and even involves a Brexit skirmish, as earlier this year, the ECJ declared the UK had been violating the Brexit deal, as it would have infringed EU law due to a ruling by the UK Supreme Court to authorise enforcement of the award benefiting the Micula brothers. At least, this shows that the rest of the world does not take such a dim view of arbitration as the EU does, certainly when arbitration has over the last few decades been instrumental to protect investors into legally shaky jurisdictions, ultimately also benefiting investment there.  

The saga of the Micula case is still running. In October 2024, the EU’s “General Court” ordered the Micula brothers to repay the millions of euros to Romania, thereby also declaring the brothers to be personally liable. According to the court, it is possible to recover the partial payments from any of the companies owned by the brothers or from themselves, without having regard to who actually received those payments. In other words, even a company that did not enjoy the supposed “state aid” would need to pay it back. This should raise some eyebrows. Also in other jurisdictions, as for example under English law, it is possible for judges to pierce the corporate veil and declare that companies really constitute a “single economic unit”, but courts only enjoy the power to do this when all other remedies have been exhausted, which is a rare occurrence. In July 2024, the ECJ also introduced some clear limits to applying the “single economic unit” doctrine in cases involving competition law, so perhaps here, it will overrule the General Court.

Antitrust

Last but not least, the European Commission is also responsible for “antitrust” policy, which typically revolves around whether to allow large-scale corporate mergers or not. Here, Vestager has been a lot more enthusiastic to act than when it comes to state aid. In 2019, the Commission for example banned the proposed acquisition by German industrial concern Siemens of France’s Alstom “to protect competition in the European railway industry.”

Arguments that this would in fact make it more difficult for them to compete with Chinese or American companies were ignored. At the time, Elie Cohen of the French think tank National Centre for Scientific Research (CNRS) argued that the real markets are abroad, writing:

“While the European high-speed rail market is stagnating, China has just launched an additional investment plan of 125 billion dollars to build 3,200 km of high-speed rail lines in addition to a network of 25,000 km.” 

Antitrust policy also involves decision making on preventing companies from acquiring excessive market power in a certain market. The problem here is defining the “relevant market”. Should we look at the European high-speed rail market or the global one? Or should we look at the transport market, instead of merely the railways market? Good arguments can be made for various approaches, resulting in differing outcomes.

An example of Vestager’s questionable policies on combatting supposed abuses by companies is her reaction to Apple’s decision not to provide new artificial intelligence (AI) features to EU consumers earlier this year. The company cited the EU’s new restrictive Digital Markets Act as the reason to do so. What Vestager said in response, makes clear how the Commission’s understanding of what competition is all about is not exactly up to scratch. She stated in response that Apple’s action is a “stunning, open declaration that they know 100 per cent that this is another way of disabling competition where they have a stronghold already”. According to her, the “short version of the DMA [Digital Markets Act]” is “to be open for competition”.

This response by Vestager is very telling about how profound the problem is. Not only does she employs a truly arbitrary and distorted understanding of the concept “competition”. For most people, it’s hard to see how Apple not releasing a product would be “disabling competition”.  

In March, Apple already received a €1.8 billion fine from the EU Commission, in a separate case. The Commission then stated Apple “applied restrictions on app developers preventing them from informing iOS users about alternative and cheaper music subscription services available outside of the app”. This followed a complaint from Spotify. Perhaps one might think companies should be fighting for customers’ favour in the marketplace, not with regulators, but apparently, this is how business is done in Europe in 2024.

This fine was one of the first applications of the DMA, whereby the EU imposed a fine on a company for basically just reserving their shop for their own products. After such policies that are vulnerable to arbitrary decision making had already been established as EU competition policy, they are now enshrined into EU law with the DMA.

Vestager is now gone, and a Spanish socialist, Teresa Ribera, has succeeded her as the EU Commissioner responsible for competition policy. More importantly for EU competition policy may however turn out to be the election of Donald Trump as US President. He was already not amused with Vestager going after US big tech, and he will be even less amused if the EU continues with its current competition policies, now that Elon Musk has become a leading ally of his.

After the European Commission opted to politicise its competition policy, it may soon witness its competition policy being politically restricted, from the other side of the pond. Live by the sword, die by the sword.

 

 

 

 

 

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