Government regulation in Germany
Ladies and gentlemen,
Let me first of all thank the 12bet, and in particular Prof. Wang Jian for inviting me today to deliver a presentation on German experiences with government regulation. It is certainly an honour to speak at this renowned institution and I appreciate the opportunity to share my thoughts with the experts who participate in today’s 12bet, workshop.
What I cannot do, given the limited time and the vast experiences in Germany with government regulation, is to introduce the subject in its entirety. There are plenty of highly disputed topics, like the effectiveness and impact of magnetically levitated trains, energy from renewable resources, toll fees for transport companies, genetically modified objects, stem cell research and animal cloning. A one hour presentation will not allow me to cover all aspects of the 12BetOnline regulatory regime, spanning from the institutional framework to network industries, from competition law and policies to rules on trade and investment.
What I will try to do in the next hour is to share with you some thoughts on the German government’s regulatory capacity and to introduce some experiences with the German system of securing market competition as a key-area of government regulation. My analysis is based on some new research, including that of the OECD on the German government’s regulatory capacity, which was published in July 2004.
B) Faith in Regulation
First of all, it needs to be stated what is regulation and which aspects of regulation will this presentation deal with? A clarification of the term “regulation” is required. After all, all intended behaviour by government as well as individuals follows rules and regulations.
In its most narrow sense, regulation refers to technical control, which aims at enhancing a function or performance. For instance, we regulate the water flow by turning the tap. Or we regulate the heat of the stove by turning the electric switch. This technical control comprises a complex system of measured input and anticipated outcome, hence, refers to a steering mechanism or an engineering mechanism to achieve some desired results. By turning the electric switch of our stove, we want to make sure that our soup does only simmer, not boil. The desired effect is a tasty and well-cooked soup.
The described steering or engineering mechanism itself manifests a technical outlook on the world. Our understanding of cause-effect relations governs our behaviour. Centuries ago, reason has replaced faith in supernatural powers – triggered in Germany by the period of enlightenment. Absolute belief in reason led to the unquestioned trust in technical, i.e. regulatory capacities. Only this trust, which reaches way beyond our own technical understanding, allows us, for example, to enter an airplane without fear of instant death. The extent of this belief in technical regulatory capacity shows also very clearly when it comes to regulating our bodies and our physical well-being: Medicine is supposed to cure our bodies so that they will function well. In Western societies, faith in doctors has developed to a level, where they are regarded as “Gods in white clothes” and the remuneration of their services duly reflects this heavenly status �C at least in Europe.
Governments come into the picture, because they apply technical control in the public sphere by setting guidelines to secure standards of safety, environmental protection etc. In Germany, there are, for example, government regulations on the quality of air. If you visited Germany in the 1970s and if you went back three decades later, you will have noticed the difference in air quality. The memory of my childhood contains pictures of smoking chimneys and yellow fog. Nowadays, the air in Germany has been cleared and the country is a key proponent for environmental standards and a leading producer of environmental technology. A prominent role plays the German agency for technical supervision (TÜV). Its technical supervision work has developed to a level that sets benchmarks for other countries. The agency operates successfully in many parts of the world, also in China.
Problems arise, as you are all well aware, because technical standards are also used to create market barriers. But this is not subject of this presentation. By pointing to the original and narrow sense of its meaning, I merely wanted to explain how the term “regulation” enters the public sphere and how it is based on a firm belief, maybe a new kind of faith, in regulatory capacities.
C) Faith in Government Regulation
This belief or faith in regulatory capacities shapes public expectations towards governments and their capacity to create public goods, like freedom, justice, employment, development, etc. Governments, at least the one in Germany, are widely regarded as omnipotent. However, the required engineering exercises often exceed the regulatory capacities of governments. This became obvious in the failure of the planned economy. It also holds true for governments in a market economy.
Moreover, since freedom and justice – just like employment and development – can be conflicting objectives, governments often face an insurmountable task of delivering the publicly required services. Germany’s economic growth has lagged far behind that of the rest of the developed world during the past few years. Year on year growth of GDP has gone down to almost 0% in 2002 and below 0% in 2003, even though flourishing exports have pushed the current-account balance to a remarkable +2% of GDP. GDP growth in 2004 will probably see only a slight recovery to about 1%. Unemployment remains extremely high at almost 9% of the labour force, while the average standard of other OECD countries lies at about 7%. Government expenditures for financing advanced social services and stimulating economic growth have led to a budget deficit of nearly 4% of GDP, while public debts have risen to more than 60% of GDP. Germany thus violates the criteria of the stability and growth pact as laid down in the treaty of Maastricht and does practically not qualify anymore for the Euro currency. On July 13th 2004, the European Court of Justice ruled that Germany needs to be held responsible.
Meanwhile, the European Union is a major driving force behind structural reforms in key sectors, such as electricity, gas, telecoms and rail. According to the EU Gas Directive 98/30/EC, for example, EU member states are required to improve third-party access to their natural gas grids. In the German natural gas sector, however, although the German natural gas market has been opened to competition, many corporations criticise the government for allowing a few power companies to dominate the market. Germany needs to act if it wants to avoid the case to be brought before the European Court of Justice. Similar external pressure exists in the other network industries.
Now, there is a vivid discussion about how formerly monopolised markets should operate. To what extent is the government responsible for administrating the transactions on those markets? In the general public opinion and also as perceived by the European Union it seems to be first of all a matter of “regulation”, i.e. of engineering the markets to achieve the public goods, in our example: universal access to high quality and affordable environmentally-friendly energy resources. However, the faith in regulatory capacities of the government have turned a process that was originally meant to lead to the “deregulation” of the sector and to allow for competition and third party access, to that of government regulations and government control. While there is an understanding that government cannot monopolise the markets itself, there seem to be an unbroken faith in the government’s capacity to govern the markets. In fact, this leads to moving the responsibility from one government department, i.e. that of state-owned enterprises, to another government department, the regulatory agency.
This confusion finds its expression in the synonymous use of the 12bet terms “regulation” and “deregulation” in the international debate. It expands further by adding the ideologically loaded terms “liberalisation” “and privatisation”. The “Liberalisation” of a market allows for competition and thus equals the meaning of “deregulation”. It is not necessarily true, however, that in a liberalised, i.e. deregulated market, there should only be competition between private companies. “Privatisation” is required, if a public company operates ineffectively and/or inefficiently. This may and does probably hold true for most public companies. However, privatisation is not required to create competition. The liberalised electricity market in Germany sees hundreds of public electricity providers competing. Public companies should not enjoy monopolies and they must compete with private companies. They may, for instance, survive, if there is simply no competitor, like sometimes in local public transport or in rural banking. They will only function effectively, however, if there is at least the potential market entry of a competitor, i.e. if there are no market entry barriers.
The confusion between the terms regulation and deregulation was brought about by the necessity to liberalise markets and to limit the scope of government, while relying on the regulatory capacity of an independent authority.
This makes it especially difficult for governments in democratic countries like Germany, where voters have a chance to change government every four years. They face the prevailing public understanding that deregulation and limited government are associated with giving up regulation in its technical narrow sense. Democratic governments have to convince people, for instance, that there is and should be no trade off between safety and the efficiency of markets. There is seemingly a contradiction between low prices, good services and profit-oriented private business.
Let me give you one example of how the public associates deregulation with safety hazards: The crash of a low-price Turkish airliner Birgin Air back in summer 2000, which killed 170 people, led to the assumption that cheap prices did not allow for proper aircraft maintenance. However, the same strict maintenance standards are in place for all airlines operating in Germany. The crash of the Concorde of Air France in Paris during the same time, which killed 113 people, led to all Concorde planes been taken out of service. The public debate over the Birgin Air crash blamed the deregulated market and the lowered airline’s safety standards. Meanwhile, the news related to the Air France crash only two weeks later concentrated on the heroic action of the pilot. Subsequently, all Concorde planes were given a very friendly farewell.
The German government thus struggles to find solutions to a multitude of questions: to cut down excessive fiscal expenditures and to answer to internal as well as increasingly external pressure to open markets and to allow for open competition. In this following, I shall discuss matters relating to the overall regulatory capacity of the German government.
D) Current Situation and the Demand for Regulatory Reform
In a long-awaited verdict of a case launched by the European Commission, the European Court of Justice found that EU finance ministers acted illegally when they chose in November 2003 to suspend the “excessive deficit procedures” against France and Germany. While the ruling leaves open the question of how to deal with countries whose deficits breach the 3% of GDP limit, the verdict shows the growing international pressure on the German government to reduce its fiscal spending.
All publicly financed sectors in Germany have suffered budget cuts over the last couple of years. Still, most funds are spent on the social security system. In 2002, almost 112 billion Euros out of a total budget of 249 billion Euro, i.e. 45% of the German taxpayers money was spent on social services, like public contributions to pension funds, unemployment insurance etc. Much of the public debate in Germany is dominated by the question whether the country can afford this level of social security any longer.
The burden of taxes and fees on employees has reached a level that prevents national consumption. Growth of domestic demand has slowed down every year to a low of -1.6% in 2002 and 0.3% in 2003. Meanwhile, households are reluctant to spend, because they fear cuts in the social security system. The savings quota has hence been growing over the last couple of years to 10.8% in 2003.
Due to international demand for goods made in Germany, the German exports flourish, but their local German content gets smaller leaving more and more Germans without jobs. The head of the renowned German IFO economic research institute, Hans-Werner Sinn, already calls Germany a “bazaar economy”, which does not add much value and thus does not gain much benefit from the ever-increasing exports.
While private consumption spending has fallen since 2002, government consumption has never stopped to grow over the last couple of years: on average 1% per year. The burden of taxes and fees on employers has reached a level that prevents, or even prohibits job creation. In addition, detailed regulations of the German labour laws are supposed to support the interests of wage recipients. However, they also strongly discourage employers to employ permanent staff in Germany.
Let me briefly touch upon the German labour market. It is highly overregulated in the sense that the government has codified the rights and interests of everybody, including for example women and men, physically able and disabled persons. If a company employs men and women, they must provide two sets of toilets and the law also prescribes �C if necessary – separate showers and washing facilities. Every company beyond a certain size is supposed to employ physically handicapped people and to ensure an adequate worksite for these people, if they want to avoid being fined and to lose reputation in public opinion. In early 2004, the German government introduced additional plans to make all companies beyond a certain size accept and train young apprentices. Again, if they fail to do so, the company will be fined.
All this stems from the German concept of a social market economy, which at its core believes that market failures infringe upon the legitimate rights and interest of the people and that the government is obliged to rectify this. Throughout the years after the Second World War, the German economy was built on the consensus that decision-making power in large enterprises is to be shared with the employees and that a large share of all companies’ profits needs to be redistributed for the benefit of the society at large. This system produced massive redistribution agencies, which worked largely undisputed until Germany was struck by the financial burden of German reunification in 1990.
Nowadays, after a total of 800 billion Euros in net transfers went to East Germany since reunification, under growing global competition, also by emerging market economies like China, and under pressure by the increasingly integrated European market, the German system appears inflexible and not fit for international competition. The regulatory system of protection and redistribution appears to be the chief impediment to employment and economic growth.
The Economic Freedom report of the Canadian Fraser Institute measures every year the level of economic freedom in 123 countries of the world. Their latest report came out in July 2004 and shows that while Germany has kept its score of 7.2 (out of 10) points, its ranking has fallen from position 20 in the year 2001 to 22 in 2002. The main reason for the low ranking of Germany is the size of government (indicator 1), where Germany ranks on position 107 out of 123 countries! Next in line are the labour market regulations (indicator 5B), where Germany ranks on position 94.
The German government, which comprises of a coalition of Social Democrats and the Green (originally environmentalist) party, are aware of the problem of over-regulation and has presented on March 14, 2003 its so-called “Agenda 2010”. The agenda aims to “reduce non-wage labour costs, boost domestic demand and capital spending, help the unemployed find a job more quickly, and make the labour market more flexible”. Let me briefly summarise those components of the reforms that concern with the labour market. A Commission under the chairman Peter Hartz, who is the personnel director at Volkswagen, has suggested in August 2002 the following legislation:
– Easing of employment protection regulations through liberalising temporary and agency work in companies up to ten employees (Hartz I, 2003)
– Legalising so-called “mini-jobs” (tax- and deduction-free under 400 �1�7/month, employers pay a lump sum of 25%) and “Me plcs.” (tax-free and non-repayable business start-up grant to promote self-employment); reducing master craftsman’s diploma in 53 of the 94 skilled trades (Hartz II, 2003)
– Reorganising the Federal Employment Office and cooperation with privately run Personnel Service Agencies (Hartz III, 2003)
– Unemployment aid after 12 months of unemployment will be merged with another social benefit scheme into a so-called “unemployment benefit 2”, which will be a means-tested flat-rate payment, plus rent and heating allowances. (Hartz IV, 2005)
While laws on Hartz I �C III are already in place, the German public has now engaged in a discussion on Hartz IV, which is to be enacted in January 2005. In a highly emotionalized response, in August 2004 mainly people in eastern Germany are taking to the streets every Monday to protest against Hartz IV. The reason is that about two third of the future recipients of “unemployment benefit 2” live in the formerly socialist part in eastern Germany. Though their fear of reduced income under the new subsidy scheme seems to be unfounded, the protests show their frustration with large disparities in economic and social development 14 years after German reunification.
East Germans still own fewer cars, less computers and have less internet access than West Germans. Their economic performance measures not even two third of the performance of their compatriots in the western parts of the republic. The employment rate is higher by about 5% in the East, but this is outshined by a pressing unemployment rate of more than 18% in the East. Unemployment in East Germany is thus about 10% higher than in the West. The reason for the simultaneous appearance of higher employment as well as unemployment rates lies in the strong wish of East Germans to seek employment, which stems from the socialist system that encouraged both parents to work. Therefore, while 75 billion Euros of public funds, or 4% of the GDP, are transferred to East Germany every year, many East Germans still feel and see themselves as victims of the market economy in general and of the reunification process in particular.
Given the democratic nature of the German system, East Germans have a chance to hold politicians responsible. The Socialist Party, which ruled East Germany with an iron fist until 1990, has good chances to become the number-two political force in the Eastern state of Saxony, and possibly number one in the neighbouring state of Brandenburg. Elections will be held in both states on 19 September 2004. In addition, the Social Democratic Party, which portrays itself as the guardian of the low-wage earners and the socially disadvantaged, faces increasing internal pressures against the Agenda 2010 of Federal Chancellor Schroeder. There might be a spin-off of a left-wing faction that threatens to create a new party on it own.
The task of the German government is immense and the question remains whether it has the regulatory capacities to manage the much needed but strongly resisted reforms. Obviously, the affected people accuse the German government of mishandling the conflicting objectives of freedom and justice as well as employment and development. The feel that their newly gained freedom leaves them disadvantaged and unfairly treated. While they clearly see massive developments in infrastructure and technology all around them since 1990, they lament being unemployed. Their desire is for more subsidies and care by the government. Budget cuts are regarded as unjust and favouring the rich. But what option does the German government have, given the fiscal restraints as well as the increasing international integration of and competition on the world markets?
The Organisation for Economic Co-operation and Development (OECD) spoke in a recent report of the missed opportunity, when Germany reunited. The OECD found that it would have been a time to rethink the contemporary role of traditional West German institutions and to pragmatically correct and adapt flaws in the old regulatory regime. “Rather than re-modelling the new Länder’s (i.e. states’; RH) governance structures from scratch, the public sector and regulatory management systems of the five East German states were to a large extent copied from West German ‘twin-states’.”
In general, the OECD report finds that regulatory reforms in Germany have been “marked more by disjointed incrementalism than by fundamental change, and more by improvement of the existing system rather than the transposition from other systems.” It identifies “the absence of one central single powerful actor and the multitude of reform levels and independent actors at the federal, the Länder (i.e. states; RH) and the local levels” as responsible for shaping this process. Let me look into this issue more closely.
The German administrative system comprises the three levels of a) the federal government, b) 16 state governments and c) about 16.000 local governments. The federal government is controlled by the Federal parliament. The parliament or lower house, however, needs approval of the upper house, comprised of representatives of the federal states, for all legislation that touches upon the constitutional rights of the states, or Länder. In the past, these so-called “consent bills” constituted on average between 40% and 70% of all new legislation. The German federalism thus secures the principle of decentralised authority through the powerful upper house of parliament. Furthermore, autonomy and self-government of the 16.000 local authorities have a long tradition and are enshrined in the constitution.
The constitution grants all three levels their specific rights, and every step of the central government on the federal level is watched by the lower levels with much suspicion whether it is perceived as an intrusion into their autonomy. Things are further complicated by democratic elections on every level of government. There is, for example, often a different majority among the federal states than in federal government, which make it additionally difficult for the lower house to receive the approval of the upper house for certain legislation. A discussion has started as to whether this system resembles the main stumbling block for much needed substantial reforms in Germany. After all, the described system is mainly driven by consensus between highly empowered administrative levels and social interest groups.
The last years saw an intensified debate on the necessity to reshape German federalism along the lines of competition rather than mutual agreement and cooperation. An academic commission for the re-design of German federalism will soon provides recommendations to the federal government. However, the consensus-driven system �C though it leaves little space for individual initiative – is widely perceived as having secured peace and stability in German society. It probably takes either very charismatic leadership, or a much worse crisis to make Germany abandon it.
E) Overall regulatory capacity of the government
Another proud tradition is the German public service. Germany maintains a bureaucracy with narrowly defined responsibilities and control, which follows Max Weber’s Idealtyp of a modern, rational type of legitimate authority. It resembles reliability, legality and honesty. Especially when discussing regulatory reforms, it must be taken into account that the German government and the German public can rely on a dedicated and loyal bureaucracy.
However, the German bureaucracy is also the main culprit for stalling higher efficiency and effectiveness of government action. The OECD describes it as weak in implementation, nurturing a legalistic administrative culture with sectoralised approaches and important transparency and accessibility issues. Generally speaking, bureaucracy has expanded and grown too complex. Too much money is spent on the administration, pushing the national costs of government consumption to 391.7 billion euros in 2003, almost 20% of that year’s German GDP. There is no other key economic indicator for Germany that has continued to grow over the last five years. Entrepreneurs are discouraged by the ever-increasing amount of time and efforts they have to spend on the administration, while all citizens struggle under a suffocating amount of taxes and deductions. Start-ups find it particularly difficult to cope with complex tax, labour and trade regulations.
The German government has responded to this situation with a strategy for modernizing the federal administration. In 1995 it established the so-called “Lean State Advisory Council”, which tabled its final report to the Federal Chancellor in 1997. Two years later, and after elections that swept the conservative government out of office, the new Social Democratic and Green coalition government implemented a government programme called “Modern State �C Modern Administration”. The programme follows the paradigm of an “Enabling State”, which acknowledges that the state cannot fulfill every possible wish and also does not have the capacity to regulate every area of possible conflict. Though being a coalition of traditionally left-wing parties, the government accepts the liberal standpoint that the state should not promise all-encompassing social security, because it cannot perform and deliver this good. Instead, the new government programme intends to promote a “culture of sharing responsibilities” between state and society. “Private individuals should have greater scope for personal responsibility and active participation in social change.”
The strategic concept of the programme foresees three pillars that serve the goal of modern state and modern administration: 1. Modern Administrative Management, 2. Reducing Bureaucracy, and 3. eGovernment. The first phase of the programme was finished in 2003. On 16 June 2004 the German government decided on a second phase that seeks to continue and expand the programme. Meanwhile, the Ministry of the Interior assembled a Committee for Organisational Issues, which brings together the Permanent Secretaries of the German ministries and thereby integrates these ministries into the process of developing the programme. All ministries are charged to conduct their own measures and projects for comprehensive reforms. The Ministry of the Interior coordinates this process and provides the cabinet with regular progress reports.
Under the second pillar of reducing bureaucracy, the cabinet has decided on 26 February 2003 to launch an initiative for reducing bureaucracy, called “supporting the middleclass, creating employment, fostering civil society”. A year later, in March 2004, the Ministry of the Interior published the first progress report, citing the successful implementation of 9 of 54 approved projects. However, this kind of reports needs to be taken with much caution. Successful project implementation does not necessarily indicate the realisation of a desired impact. In fact, the OECD has criticised the German government for making only limited use of evaluations and quantitative, evidence-based assessments in its regulatory decision-making process. More precisely, while “a non-mandatory guidance from July 2000 prepared by academics for the Ministry of the Interior explains what RIA (Regulatory Impact Assessment; RH) and its basic principles are”, ”there is currently no guidance available for regulators on how to assess regulatory impacts on business or SMEs, or on how to calculate administrative burdens.”
In summary, it seems justified to assume that the initiatives for modern administrative management, reduced bureaucracy and eGovernment will have only gradual and maybe even insignificant effects. As stated in the quoted OECD-report, the German reform measures fall short of “fundamental changes” and also do not incorporate “transposition from other systems”. The overly complex and multi-layered German bureaucracy remains and continues to consume an over-sized proportion of the German GDP.
However, the reforms are a necessary expression of the intentions of the federal German government and while they are setting a paradigm for current bureaucratic self-assessment, they might also initiate a future overhaul of institutions. Recent studies of 83 countries that experienced sustained economic growth showed that it was mainly triggered by small policy changes, not by full-blown economic or political reforms. So, maybe the current programmes are necessary steps, which may be followed by the creation of “one central single powerful actor“, as suggested by the OECD. In its view, a central regulatory quality agency is most effective, if it:
– is independent from regulators (i.e. not closely tied to specific regulatory missions);
– operates in accordance with a clear regulatory policy, endorsed at the political level;
– operates horizontally (i.e. cuts across government);
– is staffed by experts (i.e. has information and capacity to exercise independent judgments);
– is linked to existing centres of administrative and budgetary authority (centres of government, finance ministries).
These central oversight units may have advisory and advocacy functions, but the OECD recommends that they also must have the authority to challenge, set and enforce targets for regulatory quality in order to go beyond the limits of reforms that are primarily driven by self-assessment.
F) Regulating Competition
The overall performance of any German government will be measured by German voters according to the government’s ability to reduce unemployment and enhance economic growth. Many attempts by this and previous governments have not had the desired effects. The famous German Ruhrgebiet, with its outdated industrial base, serves as a point in this case. After years of government initiatives and government spending, unemployment remains high and economic growth stagnates. The overall misery of the German economy reflects the same truth on the national level. In fact, government efforts do have the potential to increase red tape and government consumption spending and can thus even be counterproductive.
Meanwhile, economic policy right after the Second World War was driven by the insight that it is, in fact, not government, but only entrepreneurs and the initiative of the individual that create employment. State action must show self-restraint and empower entrepreneurs to develop their business. A key government regulatory function in this regard is to secure market competition by establishing an effective anti-monopoly law and independent competition enforcement. The remaining time of my presentation I will spend discussing the experiences of competition law and enforcement in Germany.
It was during the First World War 1914-1918 that the German economy was for the fist time entirely under government control to support the German war machinery with production facilities used for producing weapons and ammunition. The corporate structure was dominated by government-related cartels, which were easier to regulate than a large amount of individual firms. However, those corporate alliances were publicly seen as main culprits for the economic crisis and especially the hyperinflation of 1923. Hence, the German government issued in 1923 the ‘Regulation Against Abuse of Economic Power Positions’ (Verordnung gegen den Missbrauch wirtschaftlicher Machtstellungen).
However, the main purpose of the regulation was not to eliminate cartels, but to enforce some social responsibility among them. In fact, the number of cartels rose from approximately 400 in the year 1900 to about 3,000 in 1929. The system was generally regarded as a failure and often served as negative reference for setting up a different type of cartel legislation after the Second World War.
When Germany emerged from the smoking ruins of the Second World War, it had undergone terrifying experiences during the autocratic rule of the National Socialists. While after monetary reform in 1948 it engaged straight away into the often-quoted rapid economic development (“Wirtschaftswunder”), the guiding principle after the Nazis’ authoritarianism was justice for all. Competition law and policy was a means by politicians and those involved in economic policy decisions to respond to claims for ‘economic justice’, i.e. the protection of consumers and small business.
The general intellectual framework for competition law in Germany was provided by the so-called ‘Freiburg school’ with members, like Walter Eucken and Franz Boehm. The school basically shared a liberal belief that open markets are a necessary component of a prosperous, free and equitable society. They assumed, however, that the markets need a regulatory arrangement, which protects the process of competition from distortion and minimizes governmental intervention in the economy. This legal arrangement to assure market competition in the economic sphere was the essence of the so-called ‘ordoliberalism’ of the Freiburg school in the late 1940s and early 1950s.
Meanwhile, there was increasing international pressure for the enactment of competition laws. Mainly the US pushed for the governmental protection of competition, to secure their own interests in international trade and �C in the particular German case – because many US officials believed that economic concentration and cartelization have helped consolidating Hitler’s power and fostered fascism in Germany. An effective antitrust law based on the US model and enacted by the military government in Germany after the war was thus to prevent the reemergence of a centralist power and also to support the US democratization efforts in Germany. On January 1, 1958, the US decartelization laws were finally replaced by the new German competition law, which was “a conceptually much more sophisticated text rooted in German conceptions of the role and form of legislation”.
The spirit of ‘ordoliberalism’, i.e. the belief in legal regulations assuring market competition, remains the intellectual framework of competition law and enforcement in Germany. The Federal Cartel Office (FCO) takes charge of enforcing the competition law, which covers cartels and restrictions on competition through the abuse of dominant market power. In addition, merger control provisions were introduced in 1973.
“The FCO’s basic role is not to execute political decisions or exercise discretionary authority in the name of ‘the public welfare’, but to interpret and apply legal norms �C ‘the law’. This is reflected, for example, in the FCO’s internal procedures. Decisions are made by ‘decision sections’ whose procedures largely follow judicial models. They must be carefully justified in writing by reference to the GWB (Act against Restraints of Competition; RH) and existing case law. In practice, if not in theory, the FCO enjoys a large measure of independence from the ministerial bureaucracy and thus from political pressures.”
However, “the system does include a role for political influence. This is the so-called ‘ministerial permission’ (Ministererlaubnis) which authorizes the minister of economics, if requested, to permit conduct that the FCO has prohibited where he considers this necessary for ‘overriding social or economic reasons’.”
The last institution, which joined the German competition community after the FCO, the relevant courts of appeal and the Ministry of Economics, was the German Monopolies Commission in the mid-1970s. It is an advisory body that consists of five members who must not belong to any German government or administration on the federal or subordinate levels. The Commission monitors the development of concentration levels in the German industry, it evaluates the enforcement of merger control regulations and it comments on current regulatory competition issues. For that, it provides general assessment reports every two years and additional specific assessments of current regulatory competition issues either upon external, i.e. mainly the Ministry’s, or also its own initiative. The Commission reports directly to the Federal government and makes its assessments available to the interested public.
This system with 1. the Federal Cartel Office as an independent enforcement agency with judicial competencies, 2. specialized Courts of Appeal and 3. the Monopolies Commission as their general advisor has gained much reputation for its high effectiveness in the last decades. Its has played a significant role to secure market access of the renown German Mittelstand, i.e. the small and medium sized companies, which contribute an immense share to German GDP.
Moreover, a competition law that is generally based on the German model has been introduced in the European Union. There, a European Commissioner is in charge of competition enforcement and has judicial authority just like the FCO in Germany. The European Union therefore also applies the ordoliberal principal of legal regulatory arrangements, which protect the process of competition from distortion and minimize governmental intervention in the economy. The decisions by the European Commission can be appealed at the relevant court of appeal, i.e. the European Court of Justice.
Back in Germany, the governments have for about 40 years generally respected the independence of the FCO and hardly ever attempted to apply the regulation of ‘ministerial permission’ in order to overrule a decision by the FCO. This, however, has changed with the Social democratic and Green Party coalition government that has been voted into power in 1998. This government tends to believe it can create advantages to the economy as a whole by allowing mergers that were previously prohibited by the FCO. It generally believes that its industrial policy can outweigh the negative effects of restrained competition.
For this purpose it has overruled the FCO decision to prohibit the merger of two large energy companies E.ON and Ruhrgas. It has created new media merger regulations which basically allow market domination. It has extended the monopoly of the German Post in the area of letters under 100 Grams. In addition, the Chancellor has publicly called for the merger of large German banks. Finally, in the area of network industries, the government has decided to create sector-specific regulatory agencies and grants the Ministry of Economics the authority to issue directives to the agency. These are only examples of a new trend in the regulatory practices of the German government.
On the European level, the German along with the British and French government have urged the new President of the European Commission to merge all economic competencies, including competition and industrial policy, under one Commissioner. This would in effect increase political considerations in competition matters and compromise the independence of the European competition watchdog. This was rejected by the European Commission, because it feared the undue interference by the most powerful members of the European Union. Meanwhile, a new EU regulation on merger control from 1 May 2004 already strengthens the importance of efficiency criteria in merger decisions by trying to measure price effects in the relevant markets. For this purpose, the European Commissioner for competition has incorporated a team of economists in his ‘Merger Task Force’. However, the Commissioner has clearly stated that competition remains the main criteria for merger decisions. The IMF lately also criticized the trend in European politics to enhance economic competitiveness by strengthening national champions.
The FCO and the Monopolies Commission are equally alarmed. The Federal Cartel Office has repeatedly criticized government for its interference into competition enforcement. Yet, it is merely a legal enforcement agency and only its President has a voice on general matters of competition law and policy. The Monopolies Commission, however, published in July 2004 its general bi-annual competition assessment report under the title “Competition Policy Overshadowed by ‘National Champions’”. Inside this report, the Commission harshly criticizes the economic policy of the German government. It states: “The Monopolies Commission disagrees with this development. It considers the underlying theoretical and political assumptions partly wrong and partly unfeasible. Moreover, it questions the emerging changes in the governance structures of competition policy.”
In this presentation I do not want to engage in a general argument for or against national champions: The information given above just aims to explain the nature of the German regulatory system and how it responds to domestic political pressure for change. It is a system with institutional actors who strongly believe in their independence from government intervention and in the ordoliberal principle of legal regulatory arrangements, which protect the process of competition.
Those actors, mainly the Federal Cartel Office, are therefore also critical of the external pressure by the European Union to create sector-specific regulatory agencies. They favour instead some voluntary agreements (Verbändevereinbarung) among the players in the gas and electricity markets. However, this principle of self-government relies on committed players, who regulate market access and market rates by themselves. The German companies did not get their act together and found no agreement. The German government instead ruled in late July 2004 in favour of a regulating agency in the energy markets with government intervention through government directives. The President of the Federal Cartel Office has criticized this decision and warned that Germany might turn the European pressure for deregulating the domestic energy markets into an overregulated market structure. Consumers of electricity might in the end face higher prices than before the reforms.
Beijing, November 2004.