2007-8 Blog Archive for Dalibor Rohác
Link to 2005 Archive
Link to 2006 Archive

	The Commission's state aid control: All bark, no bite?	30 APR 2008
	Against a European tax base	14 APR 2008
	Is CAP here to stay, indefinitely?	22 APR 2008
	Against a European tax base	14 APR 2008
	"Open Skies" deal or unilateral liberalisation?	09 APR 2008
	Same Lisbon Agenda, Different Day	26 MAR 2008
	Will Sweden be rallying Europe's free marketeers?	17 MAR 2008
	Anti-Dumping and Interest Groups	07 MAR 2008
	The End of the Microsoft Saga?	01 MAR 2008
	Social Darwinism, Société Générale and Rent-Seeking	14 FEB 2008
	A natural experiment on eBay	06 FEB 2008
	Free shipping on Amazon? Not in France	30 JAN 2008
	The Microsoft story, continued	22 JAN 2008
	Picking the wrong winners	14 JAN 2008
	Cartels are not always a bad thing	07 JAN 2008
	Should MasterCard be compelled to scrap its fees?	31 DEC 2007
	Competition Policy and the Theory of Second-Best	14 DEC 2007
	Should we applaud the green jobs?	07 DEC 2007
	Price-fixing in the glass industry? Maybe, but...	01 DEC 2007
	Will ASEAN become the next EU?	22 NOV 2007
	Why there will not be free trade. At least not anytime soon	16 NOV 2007
	Is the French consensus changing?	07 NOV 2007
	Religion and Competition	31 OCT 2007
	Microsoft, durum wheat and unintended consequences of public policy	25 OCT 2007
	Antitrust and the Wealth of Nations	23 OCT 2007
	Outsourcing, Central European Edition	10 OCT 2007
	Postal market liberalisation and the non-issues	05 OCT 2007
	Google, the Lunar Prize and Optimal Funding of R&D	27 SEP 2007
	EC v. Microsoft, Season Finale (?)	19 SEP 2007
	Competition and Corruption	13 SEP 2007
	The Commission, the Church and the "Lenin Shipyard"	05 SEP 2007
	Lou Dobbs and the free movement of labour	22 AUG 2007
	Do not play games with protectionism, please	11 AUG 2007
	"Every country should have a minimum wage"	18 JUL 2007
	Nicolas Sarkozy against "free and undistorted competition"	27 JUN 2007
	When will postal services be liberalised?	20 JUN 2007
	State aid control is hypocritical and dysfunctional	14 JUN 2007
	Free internet connection in Prague? Not quite.	06 JUN 2007
	Is "ownership unbundling" a panacea?	30 MAY 2007
	Should Consumer Credit Be Harmonised?	23 MAY 2007
	Who competes with Madame Tussaud's?	16 MAY 2007
	Will Nicolas Sarkozy save France?	14 MAY 2007
	Whither state aid control?	07 MAY 2007
	Mrs Kroes and the Brewers	26 APR 2007
	Sit straight or pay fines	18 APR 2007
	EC v. Microsoft, part 158	12 APR 2007
	In praise of price discrimination	04 APR 2007
	Competition and water supply	28 MAR 2007
	Should we fear cartels?	22 MAR 2007
	Is Europe becoming the next Argentina?	14 MAR 2007
	Open Skies deal and corruption of language	07 MAR 2007
	Why electoral competition and irrationality go hand in hand	01 MAR 2007
	On cheese and prizes	21 FEB 2007
	When will transatlantic air traffic be open to competition?	14 FEB 2007
	On cheese and prizes	07 FEB 2007
	Whither Microsoft?	31 JAN 2007
	Surprise, surprise: No liberalisation of railways!	24 JAN 2007
	Politicians versus competition in utilities	19 JAN 2007
	Ryanair is right to sue the French government	10 JAN 2007

The Commission's state aid control: All bark, no bite?
30 APR 2008 – The Commission is trying to flex its muscles in the case of the bailout of Italy's Alitalia. The Italian government has offered Alitalia a loan of €300 milion, while emphasising that the loan was made on "on commercial terms." But let us face it: how many bankrupt companies can access state "commercial" loans from the government on the same terms as the flagship national carrier?

In fact, more than enough money has already been spent on keeping Alitalia in its current sorry state, and from a purely utilitarian viewpoint the doubts expressed by the Commission are justified indeed. However, in this regard our experience with the Commission has not really been encouraging. Formal investigations of cases of state aid are started far too rarely and even scarcer are cases when a conclusive decision is reached. Apparently, controlling influential European governments is more difficult than bullying American companies.

The problem does not seem to be in the lack of formal powers of the Commission to step in and impose fines. The competences of DG-Competition are many and significant. Rather, the problem is related to the fact that to risk an open conflict with the French, the Italian or the German government is too costly for European bureaucrats who might have not lost their political ambitions in their respective home countries. Thus, unless a fundamental change occurs in the incentive structure of European civil service, it is difficult to expect the EC to have teeth. And even imagining such structure – without speaking about whether it is realisable or not – is extremely difficult.
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Is CAP here to stay, indefinitely?
22 APR 2008 – Here is a puzzle: It is almost universally recognised that the Common Agricultural Policy is a wasteful way of spending taxpayers' money. Yet no politician has been courageous enough to put an end to it. The explanation for this puzzle lies in the "transitional gains trap." When interest groups derive rents from a particular government policy, they will be willing to fight for this policy and will expend resources up to the expected value of the rent.

For this reason, no one has been able to stand up openly against the massive programme of agriculture subsidies run by the European Union. The modest efforts to start discussions about reform of fiscal matters within the EU are most often derailed, postponed or they end in a very vague and uncertain manner. Every excuse is good for not taking the hard decisions now but only in the distant future. Recently, the Constitutional Treaty has served as such an excuse. The long overdue reform of the EU budget has been delayed again until the Treaty is ratified in Ireland and the UK (Ireland being an important net benefactor of the CAP). If there is any reform at all, it will not affect EU expenses until 2014. And by then, there will clearly be new, more urgent matters to attend to, postponing thus an effective reform beyond many of our lifespans.
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Against a European tax base
14 APR 2008 – The French government, supported by some members of the European Commission, plans to push forward measures aiming at harmonising the corporate tax base across the EU. Allegedly, a common tax base for firms would simplify things for cross-border businesses and will be helpful to those companies which operate in more than just one country.

We should recognise that these gains are likely to be extremely small, for they are mostly informational and are do not involve any kind of risk uncertainty (contrary to, e.g., costs of switching currencies across different European countries and the exchange rate risk which existed prior to the introduction of the Euro). These rather small benefits should be compared to the potential cost of harmonisation. Both the French and the Commission deny that their ultimate goal is a harmonisation of corporate taxes across the continent. Maybe they are telling the truth but maybe they are not. Once the tax base is harmonised within the EU, it will extremely easy to impose a common European corporate income tax. Whether the French government or the Commission intends to do it now or not is completely immaterial with regard to the fact that the incentives to do it will be strong. And in the real world, bad incentives usually matter more than good intentions.
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"Open Skies" deal or unilateral liberalisation?
09 APR 2008 – The European Commission and the US government have finally agreed on the terms of the "Open Skies" agreement, which will provide a substantial degree of liberalisation to the air transport markets on both sides of the Atlantic. According to the deal, American carriers will be able to operate flights within the EU and European companies will be able to do the same in the United States. Additionally, a whole number of special regulations will be phased out, eliminating the power of national governments to prohibit foreign carriers which offer "excessively low" prices from operating flights in and out of the country. My take is that this deal is a victory for the free marketers and that it could bring about significant improvements in consumer services.

This example offers also a question that libertarians should reflect upon very intensely. Usually, we tend to be sceptical of deals such as this one. We are very quick to emphasise that a unilateral liberalisation done a decade ago would have been preferable. This might be true or not but it misses the fundamental point: that unilateral liberalisation is usually not a feasible option, given the asymmetry between dispersed benefits and concentrated costs that it would entail. In such situations, clumsy bargaining and imperfect intergovernmental deals, overcoming the influence of pressure groups (or buying them off) might be the best solution that we can hope for. It does sound depressing but it might still be an accurate picture of the reality of democratic politics.
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Same Lisbon Agenda, Different Day
26 MAR 2008 – The Lisbon Agenda is a monument erected to the naïveté of those who believe that centralised economic policy and planning is capable of generating economic growth. Everyone can see now that Europe is not becoming, "by 2010, the most competitive and the most dynamic knowledge-based economy in the world." For this to happen, fiscal burdens would have to be less onerous, European labour markets would have to be more flexible, Europeans would have to work longer, and, to mitigate the effects of demographic changes, they would have to retire later. So far, no politician has been able to tell this to his voters. Instead, we are being assured that the economic objectives have been achieved as we have experienced two consecutive years of positive growth and reduction in unemployment.

In view of the utter failure of the initial ambitions of the Lisbon Agenda, European politicians are now trying to reshape it in way which would stress its social and ecological elements. No more does Europe aspire to be the most dynamic economy in the world. Now, its primary objective is to tackle the climate change and to eliminate "social exclusion."

Two years of consecutive growth do not mean that Europe's economic problems are nonexistent. On the contrary, in spite of encouraging economic performance in recent years, the unsustainability of the welfare state in face of demographic changes looms on the horizon. It is striking that the politicians refuse to face and prefer to live in a world of illusory plans, agendas and strategies.
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Will Sweden be rallying Europe's free marketeers?
17 MAR 2008 – From the point of view of preserving free competition in European markets, this week can be considered as a relatively docile one. Indeed, one step has been taken, which might take us closer – however insignificantly – to the liberal utopia.

On Monday, Swedish trade minister Ewa Bjorling announced that she would attempt to rally free trade forces within the EU in order to stop the protectionist policies promoted mainly by the French. So far, the governments of Britain, Germany, Denmark, Finland, the Czech Republic, Estonia, Latvia and Lithuania have expressed their support of the idea. Needless to say, the sympathies of yours truly are with the free traders. Still, there must be something awfully wrong with the rest of Europe when Sweden - reputed for its onerous taxation and regulation - is heading the movement for liberation of our foreign trade.

In any event, the problems with free markets within the EU go deeper than just the occasional excesses of Nicolas Sarkozy. Not only is the EU clearly not a free trader with regard to the outside world, its regulations and unwillingness to carry on the principles of free movement of labour and services to their logical consequences make it also a hostile environment for free markets.
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Anti-Dumping and Interest Groups
08 MAR 2008 – The European Commission imposed anti-dumping tariffs on Chinese air-compressors last week, in spite of the opposition of the Trade Commissioner, Peter Mandelson. Mr Mandelson argued that imports of air compressors was of extremely limited economic importance for Europe and that the possible welfare losses from Chinese dumping were likely to be very small, too. According to him, this is a case when anti-dumping measures are being used to simply restrain trade, which is not a reasonable policy to follow.

The main beneficiaries of the measure are Italian compressor producers. Curiously enough, we have witnessed a prime example of log-rolling taking place within the Commission, as a coalition of French, Italian and German Commissioners pushed forward the measure in spite of Mr Mandelson's protests. At least we know how the Italians will vote when, next time, the profits of some French or German companies will be at stake.

Anti-dumping tariffs may work in a textbook model of international trade, which takes the existence of a perfectly functioning public sector for granted. But in a world in which particular interests can exercise influence even over members of the EC, anti-dumping tariffs are doomed to be a bad and dangerous idea. Let us hope that Mr Mandelson has learned his lesson.
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The End of the Microsoft Saga?
01 MAR 2008 – The European Commission has imposed hefty fines on Microsoft for its prolonged lack of cooperation in making its software interoperable. These fines exceed even the fines initially imposed by the Commission back in 2004. The reason is, according to the Commission, that Microsoft had been refusing to comply with the ruling until October 2007. The motivation for this additional measure is to tax away some of the "unreasonable" profit that Microsoft was making by not making its products interoperable.

Now that the never-ending Microsoft story is almost over, it may be a good occasion to spend some time discussing its likely economic effects. Microsoft has been supplying innovative products in an industry in which the costs of imitating and copying are extremely low. Not all of its innovations were patented. Most of them were probably not even patentable under current statutes. This being said, the only way how Microsoft could have made money from its costly research and development was not to show how rabbits got into the hat. Were the profits which Microsoft was actually making "unreasonable"? No economist can answer this question. What is clear, however, is that by imposing these additional fines and by the messy atmosphere of the Commission's decisions and subsequent lawsuits, incentives have diminished for companies to engage in research and development which would take place at the boundary of what is technologically possible at the moment.

The sceptic may well argue that we need a decent regulatory environment to ensure that innovators do not collect unjustifiably great profits from their inventions. He may well be right but my classical liberal instincts tell me that such regulatory environment is impossible and that an attempt to introduce it would result in great many undesirable and unintended consequences. However that may be, it should be recognised that the current arbitrariness and the coarse rules of thumb used by the Commission to deal with an industry that it cannot fully understand are by far inferior to simply letting Microsoft and its competitors go.
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Social Darwinism, Société Générale and Rent-Seeking
14 FEB 2008 – Certain metaphors are misleading. For instance, the social Darwinian idea according to which market competition is equivalent to savage striving for survival is at the origin of many anti-market biases. The idea of survival of the fittest approximates the fact that in a competitive environment, only the most efficient firms will be able to secure their existence. At the same time, it sounds awfully cruel and cold-hearted. But it would be a mistake to take social Darwinism literally. Unlike the process of natural selection, market competition is not taking place among living beings. No group of individuals and no nation have to die out to make space for some other, more efficient, "species." Rather, competition in a market is taking place between various institutional structures, technologies and modes of organisation. The disappearance of a firm does not doom its owners, management or employees to death or destitution. Sure, it imposes some costs on them but these are not comparable with what is taking place in the natural world.

It is thus paradoxical that many of the real-world policies seem to be inspired by the literal reading of social Darwinism. The hysteria of the French government over the possible take-over of Société Générale by a foreign bank is an illustration of such mode of thinking. Mr Fillon is saying that he will not allow Société Générale to become a target of "hostile raids by other banking establishments." This creates an atmosphere in which a takeover by HSBC or Deutsche Bank is equated to some violent event in which the blood of many would be spilt. Nothing could be further from the truth. For an average customer of the bank – as well as for an average employee – a hostile takeover by some major foreign bank and a "friendly" solution, splitting Société Générale among other French financial institutions will have approximately the same consequences.

Obviously, the only major difference between these two solutions is that the latter will create significant rents. This opens the question to which extent is the social Darwinian rhetoric a genuine misunderstanding of the way how markets work and to which extent it is simply a self-interested demagoguery. In any event, voters should be more sensitive whenever a politician compares markets to the jungle, particularly when the politician places himself in the right-wing of the political spectrum.
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A natural experiment on eBay
06 FEB 2008 – EBay is a fascinating example of how competitive markets can work even in the absence of formal enforcement. Obviously, eBay contains some legal disclaimers and one could argue that all of the transactions are taking place in the "shadow of the law." But still, reputation and repeated play seem to be stronger incentive mechanisms than the actual threat of legal action. A crucial element of this informal enforcement is the feedback system. By leaving feedback, both sellers and buyers can evaluate how happy they are with the transaction.

Now, eBay plans to modify its feedback mechanism in a way that would prohibit sellers from leaving negative or neutral feedback about buyers. According to eBay, negative feedback from sellers was an obstacle to smooth transactions.

This is an interesting natural experiment. The feedback mechanism practised on eBay served as a way of ensuring transparency, even though it could have been abused from time to time. Will a decrease in transparency of transactions lead to better of worse market outcomes? My bet – as with most exogenous interventions to any market – is that eBay will function worse, and not better, than before. In any event, economists – especially those who are interested in the mechanism design theory – should be very attentive to what will happen.
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Free shipping on Amazon? Not in France
30 JAN 2008 – A recent case reported by the IHT is an example of competition policy gone wild. French courts have decided that the free shipping offered by Amazon.fr is illegal. Instead of complying, Amazon has decided to face the daily fines and continue with its habitual practice of free shipping which it has been offering not only in France but worldwide.

The core of the problem is that French legislation limits discounts on books. This is done probably with the ambition of protecting small booksellers. How such a statute enhances competition is unclear, however. Sometimes, people argue that such protection of small businesses helps the book market to generate a diverse environment. We should realise though that this apparent diversity exists only at the retail level and comes at a high cost. While it is nice to encounter hundreds of small bookshops that would have not existed without such protection, consumers should know that these are not needed for a vibrant book market - just as the existence of many mom-and-pop shops are not needed for a diverse and vibrant market with food.
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The Microsoft story, continued
22 JAN 2008 – The Commission's attitude towards Microsoft borders on obsession and hatred. On Monday, 14 January, Neelie Kroes announced that it was launching two new investigations into the company's business practices.

This time, it is the Internet Explorer that seems to be a pain in the neck of Microsoft's competitors and of European regulators. The fact that it comes together with the whole Windows operating system is considered to be a violation of EU competition rules and an attempt to "control the gateway to the internet."

This is ridiculous. Microsoft Windows features many small programmes to help one to edit texts, record voice, paint, play the cards or sweep mines. After the MediaPlayer episode, it seems that every single one of these programmes can be subject of a lawsuit. Next time, producers of alternative Solitaires or Minesweepers may come and accuse Microsoft of unfair practices. In fact, all that Microsoft is doing is offering a better and a more complex product. If one wishes to, he may always purchase the allegedly superior media players, web browsers or mine sweepers from other producers. To object to the fact that Microsoft is offering them as an integral part of the Windows is like objecting to BMW's offering air conditioning and leather seats as standard features.
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Picking the wrong winners
14 JAN 2008 – No, I am not speaking about industrial policies' picking the wrong recipients of government subsidies. This time, I am speaking about the wrong Nobel Prize winners. Nicolas Sarkozy announced recently that he had asked two Nobel Prize winning economists, Joseph Stiglitz and Amartya Sen, to construct for France a "new definition" of economic growth.

Obviously, no one is disputing the competence of either of these two economists. Both of them have made substantial, albeit in some respects controversial, contributions to economic science. But what is interesting that these two are probably the two most left-leaning Nobel Laureates in the past 20 years or so. Not that there would be anything wrong with that, but by picking these two President Sarkozy sends a rather clear message about his own ideological positions. And this message might be somewhat disappointing for many a French voter, longing for a change.

Furthermore, the whole project of constructing a new definition of economic development - one that would take into account the overall quality of life - should sound suspicious. Obviously, every one accepts that the French way of life, of cooking, of eating and of enjoying oneself is superior to most of the things that one may experience on this planet. We do not need government-employed economists to tell us that. And, what is even more disturbing, when the government-employed economists tell us something that we already know, it may be just to mask some other and more disturbing facts - such the fact that the President has, by and large, failed to put forward a major reform of labour regulations and has not done much to liberate the productive forces of the French economy.
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Cartels are not always a bad thing
07 JAN 2008 – DG Competition seems to have been very active even during the holiday season. This time, the air freight industry has been under close scrutiny. On the day before Christmas, the EC announced that it suspected the existence of a large cartel of air-freight companies. This alleged conspiracy ought to include even Japan Airlines and Malaysia Airlines.

So far, no evidence has been presented in favour of the view that the air cargo companies were really practicing price-fixing. One should note, however, that in a business such as air transport and air cargo, many of the beneficial activities performed by these companies – or alliances of these companies – may superficially resemble the uncompetitive practices despised by the EC. Yet, it would be a mistake to try to curb those. Indeed, in industries such as telecommunications, banking or air transport, a high degree of cooperation between competitors is desirable, giving birth to what Pascal Salin aptly named 'cartels as efficient productive structures' (see pdf here). Such cartels are not really designed to rob the consumer and to eliminate competition. On the contrary, such cartels are the most efficient way of satisfying consumer's wants.

To be sure, this does not mean that price-fixing practices do not exist. They oftentimes do. But the real problem for competition policy is to distinguish practically between the two quite different instances of cooperation between market competitors. Such distinction is not easy to be made and I personally would hesitate whether to rely on the EC's judgment, particularly as the EC has a heavy stakes in showing that the arrangement in question is really a cartel of the harmful variety.
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Should MasterCard be compelled to scrap its fees?
31 DEC 2007 – The EC ordered the payment card company MasterCard to scrap its fees or to face tough daily fines. MasterCard is currently charging fees of the order of magnitude of 1 per cent for cross-border transactions. These fees increase the costs to incurred retailers for using the payment card systems; and in the end consumers pay not only for their banking accounts and related services but are also exposed to higher consumer prices due to these fees.

Well, noody likes to pay fees. We would all prefer if things were out there for free. But they are not. The only reasonable way of allocating resources to alternative uses is through the price mechanism. Sure, many economists would argue that there are instances when the price mechanism fails. But is there any compelling evidence that such is the case of MasterCard cross-border fees? The EC has not provided any, except for saying that the fees are not compatible with the existing EU statutes.

My understanding of the matter is such that a policy of scrapping credit card fees or mobile telephone roaming fees are hugely popular among the general public, even though they are either ineffective or harmful. After all, if the EC has been guided by a sincere concern for the welfare of the Europeans, it would have found itself better ways of improving the ways how European companies compete - it would have fought hard for the liberalisation of services for instance. But one should not be surprised or disappointed at seeing the EC behaving in this way. After all, the Commission is but a bunch of self-seeking individuals, exposed to a particular set of incentives generated by the political process.
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Competition Policy and the Theory of Second-Best
14 DEC 2007 – The European Commission has stopped the disbursement of state aid to Polish steelmaker Huta Warszava. Before the company was sold to a foreign investor, the Polish government had been trying to provide it with loan guarantees to boost its investment. That is something that ought to make Polish taxpayers happy. Or not?

It should always be our first instinct to smell something fishy when governments step in market transactions to back private companies's loans. In the vast majority of cases, such interventions are indeed wasteful and serve few other purposes than politicians' re-election concerns. This being said, does it mean that the European Commission's control over state aid is desirable?

From the perspective of economic theory, this is a tricky subject, because presence of competition-distorting state aid places us in an environment of the second-best. And in a second-best world, it is very difficult to perform welfare comparisons. Thus, even if we know that state aid is wasteful, it does not follow that state aid in the presence of supranational state aid control is always desirable.

Some twenty years ago, Stiglitz and Sah had an interesting paper in the AER, describing the effects of industrial policy. The welfare implications of alternative modes of organising industrial policy were largely ambiguous. Furthermore, when we take into consideration the fact that the EC suffers from a number of public choice problems, the case for consistent state aid control becomes extremely weak.
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Should we applaud the green jobs?
07 DEC 2007 – Although the climate change is a subject of a different weblog, it has certain implications for the ways competition is being distorted and merits being addressed even here.

It might be that the rise in global temperatures is just a statistical illusion. But it might be that the increase is real but that the costs of limiting it are greater than the costs of the climate change itself. Finally, it may well be the case that the increase is real and that policies limiting its extent are justified in the cost-benefit sense. Essentially, we cannot say in which case we find ourselves. Some people would argue that this uncertainty is not really an argument for doing nothing. Most libertarians would counter that, unless government action can be proven to bring greater benefits than costs, it should be avoided.

However that may be, if the climate change is real, then it is only an exogenous occurrence which imposes costs on mankind. It is not something that should be welcomed. And neither should the policies aiming at curbing its effects be welcomed in their own right. If climate change is not a problem, then these policies will represent pure social waste. Their hypothetical justification as a necessary evil lies only in the possibility that climate change materializes. To try to find bright sides of these policies, other than remedying the alleged problem of global warming, is utterly fallacious.

And yet it is precisely this consideration that the UN is ignoring. The environmental policies aiming at limiting global warming are supposed to create new green jobs and this is why we ought to rejoice ourselves. Even if we assume that the change is real, this "advantage" is no more an advantage than the fact that the hurricane Katrina has led to a boom of the construction industry in New Orleans area. The fact that people need to rebuild their homes – or that they need to participate in various anti-warming businesses is a deplorable consequence of an exogenous disturbance, of a "negative technological shock" and not something which should be applauded. To say otherwise means to commit the broken window fallacy and to claim that we can be made richer and happier by destroying things and then incurring costs in repairing them, or by purchasing new ones.

My contention is that the situation is even worse than that. I suspect that the acclaimed "green jobs" are not a necessary evil, but that they are an unnecessary, a pure social waste, distorting competition, creating false incentives and producing myriad undesirable unintentional consequences.
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Price-fixing in the glass industry? Maybe, but...
01 DEC 2007 – Adam Smith used to say that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." And there is something to it. Although price-fixing cartels are inherently unstable and tend to break down, they may arise on the markets. This week, the European Commission imposed a fine of 486 million euros on the major producers of flat glass for fixing prices of their products. According to the Commission, there exists evidence that representatives of Asahi, Saint-Gobain, Pilkington and Guardian met in various hotels and restaurants to coordinate price changes. Together, they organised several rounds of price increases.

It may be that these firms were just facing symmetric cost shocks which made them increase prices at the same time. But it may be that they were indeed engaged in coordinated action to assure themselves abnormal profits at the expense of consumers. In the latter case, the EC's intervention would come at the right moment and it would have the potential to boost welfare - both on the glass market and by sending a signal to other industries that price-ixing will not be tolerated. After all, not even economists of the Austrian School deny that government intervention can have some favourable consequences.

But does the fact that the government sometimes gets it right justify its involvement in general? Adam Smith was very sceptical about the possibility of effective antitrust policy. In his era, governments were small and weak. Now they have armies of bureaucrats to prepare their agenda and to pursue it forcefully. Perhaps with enough secret agents sniffing around, from time to time the Commission can succeed in identifying a cartel or two. But is the EC's ability to find and destroy cartels worth the cost of having a big and omnipotent Commission? I doubt it.
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Will ASEAN become the next EU?
22 NOV 2007 – The ASEAN countries have made an important step towards establishing a common market in South-East Asia. The countries intend to liberalise the flows of goods, capital, skilled labour and services. Obviously, removing barriers is a praiseworthy thing and one is compelled to look forward to 2010 when all unhampered movement of services should be established within ASEAN. If nothing substantial happens in the EU, then the ASEAN will in fact introduce the freedom of services before the EU does, in spite of the fifty year long European integration process.

The ASEAN plan is not without its risks, however. Gains from trade and liberalisation are potentially immense but it is important that the Asian states do succumb to the temptation which has lead the EU structures to become a supranational government living a life of its own and eventually forgetting the initial goals of economic integration. It is also important that the integration does not become a pretext for creating a common trading bloc, raising new trade barriers with regard to the rest of the world. This risk is particularly pronounced in the Asian context, as most of the ASEAN countries have a long tradition of industrial policy and protectionism. Let us hope that economic integration of South-eastern part of Asia will not serve as a disguise for amplification of these unfortunate tendencies.
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Why there will not be free trade. At least not anytime soon
16 NOV 2007 – One of the many depressing things about European affairs and politics in general is that, even though, from time to time, some politician or civil servant may start to put forward good ideas, it is extremely difficult for him or her to go against the established consensus. Thus, even though Mr Mandelson may be sincere in his efforts to reduce trade barriers, his efforts seem to be doomed from the outset. The main reason is that bad policies not only benefit specific interest groups but also that they enjoy huge popularity. Perhaps Mr Mandelson is not concerned about his prospects as a politician. We should nonetheless realise that a vast majority of European leaders are. And that is why Nicolas Sarkozy did not hesitate this week to utter the following words:

"If others have the right to protect themselves against dumping, why not Europe? If other nations put industrial policies in place, why not Europe? If others defend their farmers, why shouldn't Europe defend its farmers?"

Given the dispersion of costs and their small size at the individual level, many Europeans may find it pleasant to indulge in irrational ideas about how beneficial it is to protect "our" farmers and workers, as opposed to some socially distant and therefore unimportant farmers and workers in China or in the Third World. The origins of this irrational desire to oppose "us" and "them" in trade relationships seem to go deep into our past. Perhaps that this tendency is determined by thousands of years spent by our forefathers in small groups of hunters and gatherers for whom the presence of strangers meant a threat and not an opportunity to realise gains from trade. And if this is true, then the best outcome that we can hope for is decreasing the extent of trade protectionism at the margin, not getting rid of it altogether.
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Is the French consensus changing?
07 NOV 2007 – That the French labour market is extremely rigid is a fact that most readers of this website would acquiesce without hesitation. It seems though that for many French, their labour market regulations are a price worth paying for increased job security and social solidarity. Or not? Even in France, the consensus seems now to be moving in the sensible direction. Although Nicolas Sarkozy has not met some of our optimistic expectations, it appears that the French are slowly coming to realise that there are some deep problems related to the way how their labour markets work.

In a recent article in Le Figaro, some of the most respected French economists – Olivier Blanchard of MIT, Pierre Cahuc, Francis Kramarz and André Zylberberg of Ecole Polytechnique – present a very sober analysis of the ways in which French welfare state has strangled all competition and flexibility on the market with labour. France is the only country in the world in which courts examine whether lay-offs in private companies are done only to maintain competitiveness and not to 'increase' it (which is considered illegal under current French statutes). Also, the obligation to offer a reassignment to every employee whom a company wishes to fire stifles the adjustment processes on the labour market. The price for 'saving' existing jobs at any cost is that creation of new jobs is discouraged and that French unemployment figures are among the least favourable in Europe.

The authors of the article are no libertarians. The view which they are presenting is view that most members of the economic profession would consider standard and uncontroversial fare. Let us hope that it will make its way into French legislation.
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Religion and Competition
31 OCT 2007 – It is an old question what institutions promote religious peace and tolerance. And it is a question that ought to be of interest to economists as well, because it has been on the table since the very birth of economic science. David Hume asserted that an established and state-run church would promote moderation and religious peace. Adam Smith, on the other hand, was of the opinion that competition among small and austere churches was a better way of achieving this end.

Modern economics, as well as the historical experience, seem to prove Smith right. Yet it is important to note that his is not at all an intuitive insight. The United States, for instance, is a religiously fractionalized country in which toleration has been the norm from the moment when the first religious fanatics landed in New England. Some countries with established and publicly funded moderate churches have experienced that the "consumers" of faith have become dissatisfied and have turned towards various forms of "ersatz-religions" or even towards sectarian violence. Thus it is often not so much the actual content of the religion which plays a role, as the institutional structure through which it is supplied.

Surprising as it may sound, economics gives us tools to study production of spiritual commodities much in the same way as we study production of shoes or software. And in supply of religion, competition and free entry represent the most desirable forms of industrial organization, just as in most other sectors of the economy.
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Microsoft, durum wheat and unintended consequences of public policy
25 OCT 2007 – Microsoft has decided to comply with the 2004 EC decision, which was upheld last month by the European Court of First Instance. It will share its compatibility data with its competitors and it will charge smaller prices for its licenses. According to Neelie Kroes, this is a major victory for consumers worldwide; according to Yours Truly, it is an unfortunate conclusion of an embarrassingly long bullying of a company whose only fault was its success. And an unintended consequence of this ruling is that incentives to become business and innovation leaders will lessen, which is certainly not an outcome that the EU leaders who agreed on the Lisbon strategy should welcome.

This week has brought us another fine example of unintended consequences of public policy. Italian authorities have started an investigation into the prices of pasta products, which are expected to increase. The regulators suspect the existence of a wide-ranging conspiracy of pasta makers against the general public, but the reality appears to be far more trivial. Durum wheat prices are on the rise and one of the reasons is that wheat is being increasingly used as a bio-fuel, apparently as a result of various environmentally-oriented policy measures. Politicians and regulators should finally grasp the fact that living in the world of scarcity involves trade-offs. When wheat is used to produce bio-fuels, it cannot be used simultaneously to make fettuccine. This observation results not from a conspiracy of pasta or bio-fuel makers but simply from the fact there are indeed no free lunches in this world of ours.
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Antitrust and the Wealth of Nations
23 OCT 2007 – Many a modern economist discounts the importance of the history of economic thought. It is said that, in the same way as modern physicists do not read Newton, there is no point for students of economics to read Smith, Ricardo or Malthus. This, obviously, is not the perspective of Yours Truly. Considering specifically the issue of competition policy, it is my belief that economists' understanding of the matter has improved only negligibly since the old days. Consider this widely quoted passage from Adam Smith:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. (I.10.82)

What has modern economics added to these insights? Of course, neoclassical apparatus enables us to distinguish between a fine variety of ways in which the real world differs from the model of perfect competition, but the essence remains the same. There are ways in which private individuals can conspire, in some way or another, against the general public. And there is basically nothing that public policy can do about it, unless we adopt the crazy assumptions of its benevolence and omniscience. In a fundamental sense, economists have gone a very long way only to reaffirm the wisdom of Adam Smith.
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Outsourcing, Central European Edition
10 OCT 2007 – Although few people recognize it, outsourcing is one of the features of the modern era that has certainly contributed to making our world a better place. Classical economists would have seen it with awe how the principles of division of labour and of comparative advantage are being applied to the provision of sometimes very abstract services. Indeed, transport and communication appear to be now the two single most important sectors of the world economy, pointing out thus the historically unique depth of the division of labour.

It might seem that outsourcing consists simply of relocating call centres from the West to Bangalore. Yet the practice of outsourcing is far more sophisticated than that. I was particularly amazed to see how the same or very closely related tasks are often subdivided – as in Adam Smith's pin factory – among workers situated on different continents. This Prague Post article brings interesting evidence on how outsourcing of accounting services is being performed simultaneously in India and in the Czech Republic:

At its Prague outsourcing center, Accenture digitizes 25,000 invoices and receipts every month for an unnamed customer, a financial institution. The scanned images are archived and then sent to India, where office workers enter the data manually into the bank's computer system.

"We are able to perform work in the most efficient manner possible," Grech said. "Scanning [data], for instance, does not need to be done in the location in which it is processed."

Postal market liberalisation and the non-issues
05 OCT 2007 – European postal markets will not be liberalised until 2011 – such is the conclusion of deliberations by EU transport ministers. Unsurprisingly, the main line of opposition against liberalisation came from France and Italy. In fact, as a result of these pressures, the deadline for liberalising this market could be postponed until as late as 2013.

This is certainly not good news. Postal services liberalisation has been an issue since late 1990s and it is a shame that a mixture of vested interests and populism has prevented any conclusive decision from being taken.

In light of the striking failure to open many sectors to free competition, one has to wonder what DG Competition is doing instead. What is more important than pushing for free movement of services and labour across Europe and for liberalisation of government-run postal services and railways? Apparently, bullying private firms is a more urgent task. This unfortunate habit of the EC seems to have gone so far that nowadays the concerned firms denounce themselves so as to avoid harsh punishments. Most recently, Google has asked for the commision's approval of its purchase of DoubleClick. Is it not strange that a takeover which has no particularly European feature ought to be approved by European Commission?

Sure, this is not so much an issue of restraining competition, but rather one of privacy and whether the outcome will be reconcilable with European statutes on internet privacy. But let me say it loudly: The privacy problem is a non-issue; people give their personal information willingly and they will give it willingly to anyone they trust. It is interesting to note that this business was thriving without many formal enforcement mechanisms simply on the basis of trust for quite some time – it has been only in past few years that politicians have identified the "problem" of privacy and have used it as grounds for further intervention.

My take on this topic is clear – the commssion should focus less on non-issues and private transactions and more on the burdensome and annoying features of the Common Market, still plagued by heavy regulation and trade barriers of varied character.
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Google, the Lunar Prize and Optimal Funding of R&D
27 SEP 2007 – Google is offering a $20 milion prize for those who land a privately funded craft on the Moon. Now that is a competition to behold! Among other things, this issue reopens the debate on grants versus prizes in funding of research. As a general rule, prizes appear to be a better solution. Announcing a prize simply means committing to pay a certain amount of money at the time when a discovery is made. There are no costs of monitoring the effort, reviewing the applications and so forth. On the other hand, giving a grant to promote research in a certain direction suffers from a whole bunch of public choice problems. A committee must evaluate the projects, review the progress and so forth, which risks distorting the incentives of both the researchers and the committee members.

Still, under high levels of uncertainty and liquidity constraints, prizes may not be a feasible option. Without an upfront grant, I would not be able to fund my spaceship project as no sensible banker would make such a loan. Also, giving prizes should lead us to ask what the optimal size of the prize is. If the prize is too small, not enough effort will be developed and if it is too large, more research than appropriate will be undertaken. In the first case, no entrepreneur will send a space ship to the Moon. In the second, more than one craft will land there. In any event, Tyler Cowen discusses these and other issues here, in a very nice address to the staff of the Google Corporation.
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EC v. Microsoft, Season Finale (?)
19 SEP 2007 – The European Court of First Instance upheld most of the EC's rulings against Microsoft. Given the theme of this blog, I feel obliged to share a couple of quick thoughts.

First of all, this decision is not surprising. Should the Court have ruled against the EC, this would put the Commission in great embarrassment given that it has been occupied the issue for such a long time. I am not saying that the Court succumbed to political pressures; I just think that we cannot completely ignore incentives that the judges were facing.

Second, there is not much new to discuss about the decision itself, for it basically reaffirmed the previous rulings of the Commission – which have been extensively commented upon at this website and elsewhere. Let us thus focus on what appears to be the main issue here: the interoperability, as they call it. It is claimed that the design of Microsoft's operating system is such that it prevents competitors from realistically supplying rival software to compete with the Media Player or other applications. This claim comes in two forms: The crude form says that the origin of the problem is that Microsoft offers some of these applications as a part of Windows, therefore disabling any competition. True enough, but who loses from such situation, except for producers of rival software? If this is the crux of the matter, what prevents the producers of alternative software applications from supplying the product to those customers who cannot live with the imperfections of the Media Player?

The subtler version of the claim says that the Windows is designed in such a wicked way that it actually technically prevents the alternative software applications from working correctly under Windows. Even under superficial scrutiny, this does not hold. After all, we do observe these alternative Media Players, word processors and so forth working in Windows. But even if there is some barrier to correct functioning of such software, is it reasonable to try to impose something different through government regulation? I claim that it is not. For one thing, no one has ever cogently shown how much such increased interoperability would cost us. And yes, costs to Microsoft should count as everyone else's.
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Competition and Corruption
13 SEP 2007 – Werner Troesken of the Mercatus Centre has a highly interesting paper (pdf here) on the relationship between competition and corruption. The paper uses historical evidence to support the well-known intuition according to which there is an inverse relationship between the degree of competition and corruption in an industry.

The paper tells the stories of three industries of very different degrees of competition: whiskey distilling (very high degree), oil refining (moderate degree) and public utilities (low degree). Over its history, competition and free entry into the whiskey distilling industry have destroyed all attempts to create rents. In the case of the oil-refining industries, there were attempts to buy legislative and regulatory favours but these were usually short-lived. And the utility sector has appeared to follow the worst scenario of rent-seeking and corruption. Troesken argues that the underlying cause of this is the fact that capital deployed in the utility industry cannot be transferred elsewhere and that – unlike in the oil-refining industry – technological diffusion is quite slow.

His is an interesting account of corruption. Now, the true challenge is to understand competition not as an exogenous variable, but as something which emerges from the technological characteristics and rate of technological change and also from the interaction between the private and public spheres. Without this understanding, we will be just left to wonder over the striking differences between the organization of different industries and the fact that highly competitive sectors, independent of any government favours, live side by side with monopolised industries, closely connected to the government and benefiting from its regulation.
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The Commission, the Church and the "Lenin Shipyard"
05 SEP 2007 – Over the past week, the EC has been unfortunate enough to investigate two very emotionally charged matters: Gdansk shipyard and Catholic Church tax exemptions. I believe that in neither case there is any role for the EC to play.

As for the first issue, the Gdansk shipyard has been the recipient of massive aid from the Polish government. Some of the Poles simply dislike the idea that the place where Solidarity was born ought to be closed or fundamentally restructured. This is silly. People fought for their freedom in all kinds of strange places. In many nonsensical factories and bureaus people expressed their disagreement with the communist regime. These people should be honoured but I do not think that there is any reason why the factories and bureaus in question be kept for their original purposes. But, anyhow, this is a Polish matter. If Polish taxpayers want to keep the former "Lenin Shipyard" alive for some nostalgic purpose, let them do it.

With regard to the second issue, the EC has started questioning the Italian government over tax exemptions for the Catholic Church. Apparently, these represent state aid and are incompatible with the functioning of the Common Market (most probably they distort competition on the market for salvation). My answer tends to be the same as in the previous case: If Italians are willing to exempt the Church from tax liability in the same manner as not-for-profit organisations are, let them do it. Again, this is no issue of European interest.

All these small cases generate suspicion about the purposefulness of the EC's work. There would be nothing wrong with it if such suspicion were fully justified. At the same time, they may generate hostility against the very idea of the Common Market. For some Poles and Italians, competition and open markets may have just become abstract notions which had been used by evil foreigners to insult the symbols of their national and religious pride.
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Lou Dobbs and the free movement of labour
22 AUG 2007 – Everyone who has watched this video must concur that Mr Dobbs had disgraced himself and qualified as one of the worst demagogues ever. Calling economists jackasses really does not disprove the idea that free trade in labour is as beneficial as free trade in apples. Sure, there are some difficult issues, most of which are related to financing and maintaining the welfare state but even the most generous reading of the sceptics' arguments shows that benefits of immigration outweighs its costs. If nothing else, the inflow of immigrants may make American policymakers rethink some of the attributes of the social safety net.

I believe that this video excerpt is very instructive for Europeans as well. The European Union was created, among other things, to ensure free movement of labour. Fifty years later, there still exists a sizeable group of member countries whose citizens cannot freely seek employment in large parts of the Union. I can imagine that this status quo is being defended in France and Germany with the same demagoguery and lack of wit as shown by Mr Dobbs. But when it comes to immigration and movement of labour within the EU, the truth is that we will not find any of the relatively difficult issues which can make open borders policy problematic. Poles, Czechs and Slovaks do not come to the UK and Ireland to free ride on local social services. They do not form ghettos and they do not preach any ideology of racial or religious hatred. They simply come to work. The fact that they cannot come to work to Germany or France under the same conditions is a monument erected to the stupidity of the European likes of Mr Dobbs.
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Do not play games with protectionism, please
11 AUG 2007 – What would you do if the Chinese bought BAE Systems? If the Arabs bought Sainsbury's? If you are bothered by questions like these, I have some good news for you. To protect European interests in sensitive industries, Peter Mandelson is proposing the use of "golden shares." Under European auspices, national government could have a veto right in selected companies without necessarily holding a majority of shares.

One must say that there might exist a risk related to foreign governments' buying specific European companies. Imagine for instance, an obscure Al Qaeda/Kremlin-run investment fund buying some major defense company. I cannot say that such risk is nonexistent. On the other hand, Mr Mandelson's proposal is not innocuous either, and I would bet that the risks related to European governments' managing foreign investment are far greater than the conspiracy theory according to which all corrupt and nasty regimes are raising money to buy the jewels of European industry.

There can be no discussion about the fact that if such a measure was adopted, even with EC oversight, this would mean a massive rise of protectionism in countries such as France, which already suffer from a strong anti-foreign bias. Until now, the EU has played largely a positive role in mitigating the protectionism of national governments. Making the "golden shares" an official doctrine means abandoning this role. Furthermore, by introducing shared competence between the EC and national governments on this issue, it is inevitable that the European Union becomes an accomplice in the game of particular interests and nationalism. And as such, I would have troubles relying on its oversight directed at limiting the extent of the "golden shares" to truly strategic companies.
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"Every country should have a minimum wage"
18 JUL 2007 – It really hurts to read something like this. Joaquim Almunia, the economic affairs commissioner, is saying that every EU country should have a minimum wage fixed by law. Fortunately, he is not suggesting that there should be one single European minimum wage. At least not yet.

If there is one issue on which there should be a quasi-universal agreement among economists (although for some reason which I do not quite understand, there is not), then it is the issue of minimum wage. The controversial Card and Krueger study notwithstanding, it is very difficult to find reasons supporting the idea that minimum wages are a good thing. In the better case, minimum wage is ineffective, in the worse case it reduces employment of the least productive and the most vulnerable individuals. It is fortunate that in most countries the minimum wage is set sufficiently low so as not to be a major economic problem. But this does not make it a good thing and there is absolutely no reason why European countries which do not have minimum wage laws should adopt them.

Here is Greg Mankiw's older piece on the issue. I bet that Mr Almunia has not read it.
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Nicolas Sarkozy against "free and undistorted competition"
27 JUN 2007 – What precisely is the new EU Treaty about? It seems that the core of the negotiations over the past weekend concerned the system of voting in the Council. As for myself, I remain agnostic about what the optimal voting system would be and I indeed consider it to be a question of secondary importance.

Although, in many respects the political agreement over the new treaty seems to be a reasonable compromise – and is probably far less intrusive than Giscard d'Estaing's original Constitution – there is one disturbing thing about it. Following the pressure by Nicolas Sarkozy, European leaders have dropped the commitment to "free and undistorted competition" from the text of the treaty. It's only a detail,yet a detail with strong symbolic meaning. If there is one praiseworthy feature of European integration, it is the fact that it has, by and large, opened barriers to trade and movement of capital and labour. We are now in a situation when some of the original goals that motivated the creation of European Communities are still unfulfilled: Eastern newcomers are not free to offer their labour in the old EU countries and services cannot move freely across countries. And if there is one pressing issue of truly European interest, then it is that Europeans have these two freedoms and that Europe becomes a place of free and undistorted competition.

A correct understanding of economic integration is one from which the word "competition" is inseparable. Economic integration is competition. And now it appears – more clearly than ever – that European leaders use economic integration only as a pretext for their ambitious political goals. It is saddening that these efforts have been led by Mr Sarkozy who has been considered by many (including yours truly here) as a source of hope for France. To paraphrase Jean Giraudoux, the return to individual liberty will not take place. Not this time, not in France.
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When will postal services be liberalised?
20 JUN 2007 – I had always thought that the Slovak Post worked miserably because Slovaks were incompetent even at delivering letters and parcels. Then I moved to Prague and realized that the Czech situation was about the same. And in my – I admit – limited experience with post companies in other European countries suggests that there is something universal going on: inefficiency, waste and slack of stiff monopolies. For some time, it seemed though that things were moving for the better. Two European directives (this one and this one) opened up parcel delivery and express mail delivery but suddenly stopped there. A large part of the postal market has remained under the auspices of largely state-owned monopoly companies. Last year, commissioner McCreevy proposed this directive (pdf here) that would liberalise European postal markets by 2009. Some countries have already liberalised their postal markets (most notably Sweden, United Kingdom and Finland). In other countries, liberalisation is on the way (Germany and Netherlands). And finally, in a large bunch of countries, liberalisation remains an issue of the distant future (Italy, France and Poland). And the latter countries have recently succeeded in delaying the liberalisation process until 2010-2013. (More here).

This is bad news, especially given the time that has already been spent on the efforts to liberalise. But let us have a brief look at the arguments proposed by those who oppose the liberalisation. I believe that these are basically of two kinds. The first is that liberalisation will hurt and that a number of employees of the current monopoly companies will have to leave. This is true: every liberalisation hurts someone. But still, it can be shown easily that in spite of these temporary costs related to relocation of labour across sectors, liberalisation is a very good deal.

The second argument pertains to what seems to be the more difficult issue with liberalisation. In every country, postal service guarantees the so-called universal service – collection and delivery of mail five times a week at the same rate for all citizens, no matter whether they live in a city centre or in a remote mountain village. Liberalising the postal market could endanger existence of this universal service, as new entrants could simply compete on the market with business deliveries within cities while the incumbent company would still have to deliver less profitable services to customers in rural areas. This is a fair concern and I must say that, in a fully liberalised market, universal service would have to go. It is absurd that the price of a basic letter is the same, no matter whether I am sending it from Prague to a recipient in Prague or whether I am sending it from Horní Lhota in the Silesia to Mokrosuky in the Southern Bohemia. In this sense, universal service is unfair and inefficient.

One could say that no one should suffer by the liberalisation, regardless of where he lives. The truth is that maybe not even the citizens of remote villages would suffer from having a fully liberalised postal market and having to pay the full price of postal services. They would definitely end up paying more than those who live and send their letters to large cities, but still they may pay less than they do today. This is because monopoly postal service providers suffer from a terrible amount of X-inefficiency, overemployment and rigidity. In a free market, under competition and without state aid, companies would be more and more incited to invent new, less costly and more rapid ways of delivery and, from my perspective, there is nothing significant to worry about.
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State aid control is hypocritical and dysfunctional
14 JUN 2007 – According to Richard Wagner, one of my professors at George Mason University, there are two distinct ways of understanding social and political phenomena. First, they may be understood as equilibrium results of optimizing behaviour done by perfectly rational agents maximizing well-defined utility functions. Or they can be viewed as ever-changing and oftentimes unintended results emerging from interaction of heterogeneous individuals.

What does this mean for our understanding of such a practical issue as the state aid control? Obviously, there are two ways of approaching this question: First, we may look at it as a game theoretical problem taking place between vote-seeking politicians and the European regulators. In this case, a case can be made in favour of state aid control, although I think that it will be only very weak. However, if we adopt an emergent-based approach towards thinking about these matters, most of the welfare conclusions about state aid control will go down the drain. State aid control will be a space in which bureaucrats, politicians and interest groups will make their mutually beneficial deals, producing a mixture of results with no particular welfare characteristics. And my impression is that this is exactly what we observe. Sometimes, one is compelled to welcome the EC's stepping in, sometimes the intervention seems preposterous. But most importantly, there appears to me that what was once designed as a strict rule to follow is now decomposing into a complex system of exceptions and political considerations. State aid that does not affect competition on the common market is usually allowed. Even if competition is affected by aid, it can still be justified on social grounds or in the name of some broad "public interest." In the end, most of national governments' wasteful spending goes on unpunished and the EC focuses on rather small cases in which the stakes of the national politicians are low. As a result, state aid control is largely dysfunctional. For instance, when we see European governments spending huge amounts of money of subsidizing film production, the EC does nothing and just asserts, as Neelie Kroes recently did, that:

"Our aim is to ensure that state aid control continues to ensure optimal and equal conditions for artistic and cultural creation."

Free internet connection in Prague? Not quite.
06 JUN 2007 – Prague's municipal authorities wished to cover a third of the city with free WiFi. Obviously, private internet providers complained that this would ruin them. At that point, Neelie Kroes stepped in and stopped the project, saying that:

"state subsidies for such networks are only acceptable if they address a well-defined market failure or cohesion problem."

So far so good. One may have hoped that the intervention would save Czech taxpayers some Euros (or Crowns). But the municipality of Prague modified the project in a way that made it acceptable for the Commission: namely it stipulated that the broadband network will allow access only to websites of public institutions. There will be therefore a € 12 million wireless network that will allow the Czechs to visit websites such as this one or this one.

It is true that such a network will not affect competition among Prague internet access providers. In this sense, there will be no ground for the EC’s stepping in. But is the project not going to be a colossal waste of public money? A network that would provide free internet access would destroy competition in the sector, but at least people in Prague would have free internet. A network that will provide access only to public sector websites will not affect competition at all, but I can guarantee that it will be of no use to anyone. I cannot defend either of these projects but I can’t see the latter as being any better than the former. Sensible policy would allow neither (or both) of them.
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Is "ownership unbundling" a panacea?
30 MAY 2007 – Since April, the German Federal Cartel Office, the Bundeskartellamt, has a new head, Mr Bernhard Heitzer. He is a proponent of the notion of "ownership unbundling," designed to boost competition in the energy sector. Ownership unbundling consists of seprating the distribution networks of production and sale of energy. Under Mr Heitzer's direction, German authorities will aim at preventing mergers in the energy sector and will tailor German legislation to the needs of the energy market.

Unbundling may be a good idea. But it is a good idea only when the government enjoys the luxury of privatising a previously state-owned company. Such was the case in some of the transition economies in which the distribution facilities were sold to a different company than the ones that bought the power plants. But is it sensible to speak about unbundling in a context in which some of the companies in question are privately owned? Yet this is precisely what Mr Heitzer does - the new legislation against mergers in the sector will clearly interfere with the principles of private ownership.

Sure, competition in the energy sector is far from perfect. How could it be perfect, after fifty years of jealous subsidisation of national champions? Market structure is very different from what it would have been without the infamous industrial policies of the fifties and sixties. Adjustment to a more free-market environment is slow and costly. But what can politicians and regulators do about it? Surely the least advisable thing is to step in again with some rather dubious policies.

More importantly, the approach chosen by Mr Heitzer reflects a purely technical understanding of competition. Market shares and concentrations are what bother him the most. But these are of no importance in themselves. A contestable monopoly can be as welfare-maximising as perfect competition. At most, too concentrated a market can be a symptom of an underlying failure, but my bet is that the failure is one of the government and not of the market itself. Therefore, to put in place costly policies only to decrease the concentrations and reduce market shares of the leading companies is very unlikely to benefit anyone at all.
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Should Consumer Credit Be Harmonised?
23 MAY 2007 – The European Union has decided to boost cross-border competition in credit and personal loans by harmonising relevant regulations across the member states. The agreement should standardise existing national regulations pertaining to loans up to 100,000 euros. It is hoped that this step will introduce a greater level of transparency and will allow European consumers to shop around
for the best deals.

It is certainly good to remove existing obstacles to cross-border competition in this area, but I fear that the new consumer credit directive is fundamentally flawed. To have genuine competition, it is not necessary to have unified legislation over consumer credit. It would be preferable to allow competition - even among various institutional settings - to flourish and not to "standardise" an area in which
experimentation and creation of new forms of doing business is desirable.

Even the German Justice Minister, who presided over the EU Council, said:

"Of course, most consumers will enter credit agreements with nearby banks, or at least banks in their own country."

On the whole, I find the case for harmonisation to be very weak. Furthermore, the harmonisation is far from being risk-free, as the directive may leave European countries stuck with "standardised"
rules and forms of consumer credit, insulated from further change and experimentation.
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Who competes with Madame Tussaud's?
16 MAY 2007 – One particularly deplorable and kitsch form of competition is over, without the European competition watchdog intervening. While it would be truly absurd if the EC examined the Eurovision contest, it would not be that surprising given its current agenda. Few weeks ago, the Commission approved the purchase of Madame Tussaud's waxwork museums by Legoland's owner. Apparently, merger of Legoland and wax figurines does not threaten competition on the European market for amusement facilities.

It seems to me that there are market activities that are so specific by nature of the goods provided that approaching them in terms of standard microeconomic theory of industrial organisation is problematic. This can be illustrated precisely on the example of amusement facilities: in fact, competition among various providers of amusement parks is much less important than competition among any given amusement site and providers of close substitutes in its vicinity. A potential visitor of Madame Tussaud's in London will probably not consider prices and quality of Legoland in Copenhagen or EuroDisney in Paris but rather his London options - going to the theatre, to the cinema, for a dinner or just strolling through a park. Real competition is thus not taking place in some "European amusement facilities" sector - which is therefore a completely artificial construct - but rather among very heterogeneous goods provided by suppliers who would never think that they are competing among each other.