Monti's Bum Rap: Economically Speaking, Europe's Competition Czar Is Really a `Classic Liberal'-With an Interventionist Streak. (Cover Story)

Article excerpt

BRUSSELS -- Most Americans familiar with Mario Monti know him as the man who killed the GE-Honeywell merger. For many, their reaction was one of indignation--who's a European bureaucrat, after all, to tell Jack Welch whether GE can buy another American company? Not surprisingly, Monti came to be known as the first European Competition Commissioner to strike down a deal between two American companies after the deal had received antitrust clearance in the United States. He also gained a reputation as an interventionist and a protectionist out to protect Europe's soft, socialistic form of a market economy from American competition.

But Europeans, who are understandably less concerned about the implications of European regulators passing judgment on American business combinations, know a different man. While Monti has scuttled some prominent mergers inside the EU as well, on the Continent he's perhaps best known for his hard line against government subsidies to businesses and for his opposition to state use of "golden shares" held in privatized companies to block their takeover by foreign bidders. In short, at home he's seen as a classical liberal--sometimes to the point of being doctrinaire.

This difference of perception reflects not only different attitudes toward government intervention on either side of the Atlantic, but also the different roles of antitrust regulators and the different standards of evidence and proof in competition cases.

For the record, Monti is a self-described "liberal economist" in the classical sense of that word. But he also sees an aggressive merger-vetting process as an essential component of "making competition work." A good one-word summary of how competition "breaks" in the Commission's view, would be "dominance."

In the U.S., antitrust policy is governed by a "harm to consumer welfare" standard. This standard, in turn, is the product of a U.S. Supreme Court ruling that sets the bar at what it called "unreasonable restraint of trade." Since "unreasonable" lacks a certain degree of precision, restraint of trade is generally understood to be "unreasonable" when it starts causing harm to consumer welfare. In other words, what counts is the end result. In the U.S. model, a merger could well pass muster if it resulted in efficiencies that regulators were convinced would lower prices to consumers, even if competition in that market might adversely be affected. In the eyes of U.S. regulators, GE-Honeywell was precisely such a case.

But the EU's standard is different. The EU's governing regulations require the competition commissioner to block a merger if he determines that it will "create or strengthen a dominant position." This is based on a concern that "dominance" increases the likelihood of "abuse" but it eliminates the need to show any actual present or future abuse. So a company that is already dominant cannot engage in acquisitive activity that will increase its dominance, and a non-dominant company cannot acquire a competitor (or anyone else for that matter) if the Commission fears the resulting company (or, increasingly, companies) will dominate its industry or sector.

Some have argued that Europe's "consumer harm" is actually the more restrictive standard--after all, one can easily imagine a situation in which regulators find potential consumer harm without having to show that the merger would result in actual "dominance." In practice, however, the reverse has been consistently true. Since consumer harm is unlikely unless a company can be shown to be "dominant," consumer harm tends to be an additional hurdle for regulators to clear when attempting to block a merger. That is, a company must not only be dominant, but the regulator must show that the dominance is harmful. The EU standard makes dominance presumptively bad in itself.

While in the past Monti has protested that he didn't make the standards, and is merely stuck with applying them, his office is in the process of completing a review of its procedures, including the relevance of the "dominant position" standard. …