Examination of Witnesses (Questions 28
- 39)
MONDAY 18 JUNE 2007
Dr Mark Thatcher
Q28 Chairman: Thank you very
much indeed for coming this afternoon. It would be helpful for
the record if you could say a little about yourself and your background.
Dr Thatcher: I have worked on comparative public
policy and regulation. I started off with a study of British and
French telecoms between the mid-1960s and the late-1990s, and
I have worked on other network industries, so I have looked at
securities trading, electricity, postal services and airlines,
and I have just finished a book which covers those five sectors
across Britain, France, Germany and Italy between the 1960s and
today. I have also done a bit of work on European Union policy-making
and my current project is to look at networks of regulators across
Europe, particularly on telecoms, financial services, and I have
looked a little bit at energy. I am mostly a political scientist
but I have also qualified as a barrister so a part of me is a
lawyer.
Q29 Chairman: Thank you very
much for those opening remarks. I think you have an indication
of the questions we might like to ask you. Would you like to make
an opening statement and then I think we will depart from our
normal practice and I will run round the table. I think you came
right at the end of the evidence given by Lord Williamson so you
have a flavour of how we conduct business. But, please, your opening
statement.
Dr Thatcher: Thank you. I have looked down the
list of questions you sent me, they are very vast and interesting
questions and lie absolutely at the heart of how the single market
operates. What I thought I would do to start with is perhaps outline
a very brief way of analysing how the single market operates.
I think there are four key actors which drive the single market
regulation and each of those actors has its own particular interests.
There is the Commission first of all and the Commission wants
to have extra powers but also has duties under the Treaty. Second,
there are the national governments, and those national governments
also have ambitions. They often find liberalisation is useful
because it opens up the national markets and lowers prices and
increases quality and choice. At the same time they often need
to shift blame for difficult decisions, and Brussels is a good
place to shift blame to. They face powerful national lobbies,
so they may wish to be looking for reasons or excuses or ammunition
against those powerful, entrenched interests. Thirdly, you have
independent regulatory agencies at the national level. They are
also looking for extra powers and allies as well as an expanded
role. Finally, you have transnational companies which want to
expand abroad and which want to supply cross-border services and
want barriers to those cross-border services to be reduced. If
you then turn to the nature of European legislation, one needs
to understand it has a number of features which are very important
for the way the single market operates. For a start, most European
legislation is incredibly broad and it sets out a set of objectives
with very little detail; a stark contrast to much national legislation.
Secondly, it relies on Member States for transposition, in other
words putting European law into domestic law and implementing
and enforcement. Thirdly, there is no European model of how the
national regulatory authorities, those bodies in Member States,
should actually be set up. There is no European law which says
you have to have an independent regulatory agency or which says
you have to have three members or five members, or it has to be
financed in this way or that way, so it is up to Member States
as to how they actually organise their internal administration.
Finally, the system is very much dependent on the European Commission
monitoring transposition and enforcement, and it is unhappy taking
a series of measures against Member States. These features give
rise to a third set of issues which are the problems, which is
probably the area you are most interested in. First of all, one
should say the Commission, contrary to some popular opinion, actually
lacks resources for detailed monitoring. It is a small organisation,
it is not a large one, and it is having to deal with a large number
of Member States in very complex sectors and yet it has very limited
resources. Secondly, the Directives are of such breadth that they
allow a great deal of scope for—how shall I put it politely—interpretation.
Thirdly, there is a lot of diversity of national interests and
traditions, so there is a lot of variation in implementation,
as one would expect. Finally, the remedies and capacity of the
Commission to implement those remedies is rather limited. The
remedies are very slow; by the time you get to the European Court
of Justice, you are two or three years down the line, and the
Commission, with its limited resources, has to make a choice as
to what it is actually going to take action about and what it
is not. Let me end this section with some comments about how the
system operates in practice. Again, contrary to a lot of popular
opinion, there is a lot of co-operation between the four sets
of actors. The idea that the European Union is a battle between
Member States and the Commission at least in this area is often
wrong. Problems arise when you get incentives to cheat or not
to implement properly and/or if you do not have the appropriate
institutional mechanisms to get these four sets of actors to actually
co-operate. So I would say that the biggest problems of the single
market are about enforcement and implementation in practice.
Q30 Chairman: Thank you very
much. May I ask a question specifically relating to your opening
statement, bearing in mind those limitations, which areas do you
think we should be looking at over the coming months? We have
to report perhaps sometime in November following the Commission's
Report about where the single market needs to be improved, where
the internal market needs to be developed. What do you think we
should be focusing on?
Dr Thatcher: Institutionally a couple of areas.
I think you might begin by looking at the resources of the Commission
to actually enforce in practice. Secondly, I think you might look
at the way enforcement is co-ordinated. I saw in your list of
questions you had questions about networks of regulators. There
is a key question here as to whether or not enforcement should
be left to the national level, which it has been in the past,
whether it should be the national level co-ordinated with some
kind of European networks of regulators, or whether you need more
centralisation. In terms of sectors, I would have thought the
financial sector is an important one for Britain. It is also one
where you should be getting a lot of cross-border services with
the internet and other technological developments. You would expect
to be having things like insurance and investment offered across
countries, you would expect to be able to compare services across
countries and to be able to invest and buy products right across
the Union using the internet; you do not any longer have to go
to a national insurance office or a local vendor of, say, unit
trusts. So I would have thought that would be a very interesting
area to look at. You might also look at some of the other networks—telecoms
or electricity—to explain why it is there are such differences
from one country to another and perhaps to explore the extent
to which countries still have national champions. I saw you had
a question about national champions and in the recent year or
so there have been some very interesting cases of Member States
which have been able to protect their national champions—and
takeovers of energy companies in Spain, issues about EDF in France,
Telecom Italia which has been subject to a recent takeover bid.
So there is a real issue about the extent to which Member States
are able to protect and promote their existing national champions.
Q31 Lord Haskel: I hear what
you say with great interest but if you read the papers produced
by the rapporteur of the European Parliament, by the DTI and the
Treasury here, by the Commission, they all talk about reducing
regulation. They all talk about reducing all the things that you
have mentioned, and I was wondering how you reconcile this.
Dr Thatcher: I find the deregulation debate
somewhat puzzling. First of all, all markets are regulated, be
they regulated by general contract law or by sector-specific legislation.
Secondly, almost every sector has sector-specific legislation,
otherwise it would not work. It might be in the form of standards
or it could be in the form of other regulations concerning matters
such as interconnection. The question is not, should we have more
or less of it, the question is who should decide this regulation,
how detailed it should be, who should be responsible for enforcing
it, how is it going to structure competition. Particularly the
kinds of sectors I look at, network industries, you will not get
effective competition unless you have regulation. So I understand
why politically it is interesting for people to say, "More
or less regulation", but I do not think it is perhaps the
most relevant question for a single market.
Q32 Lord Dykes: There is often
a feeling in this country which sometimes sounds a bit smug and
slightly pompous, that we are very virtuous and have far fewer
restrictive practices in various sectors than in other countries.
Is that exaggerated by the press because they are putting over
a certain line about economic policy formation, or is it substantially
true? If so, could you highlight sectors where there might still
be rigidities? For example, we think of the Commission deciding
on 1 January this year to abolish national frontiers for banking
transactions affecting companies as well as individuals. I am
not sure how far it has gone effectively because maybe there are
disunities and rigidities in what the banks are doing anyway,
hoping they will not be noted too much and too quickly. Do you
feel these things are areas where the Commission needs more resources
to look closely at these now?
Dr Thatcher: Let me answer your first point
about Britain. Britain is one of the most open economies in Europe
in terms of overseas mergers and acquisitions. Whether it is always
the most open in terms of effective competition, is another issue.
You pick the banking sector, well, as you will know the banking
sector is very much an oligopoly, so Britain may be doing well
in terms of openness to overseas entrants, perhaps less well in
terms of effective competition. If you were to look at some of
the other areas where there are still very high profits being
earned, that might lead one to suspect that competition is not
as strong as one wished it to be—and again I can think of
the energy sector and perhaps parts of telephony. Your second
question, where should the Commission focus and should it have
more resources in this area, I think that is absolutely right.
If you want to have a more effective single market you need to
have more resources for the Commission. Perhaps the other thing
I would add to that is how can the Commission harness the resources
of national regulators, because they are the ones who have the
expertise on the ground, they are the ones who are also most prone
to lobbying by national companies, and they are the ones of course
who at the moment do most of the work in terms of implementing
European legislation. So they are pretty crucial to the way the
single market operates in practice.
Q33 Lord Whitty: I have two
questions. One is a very general one which is, a lot of the single
market is seen in terms of how a company based in one country
can actually trade in others, a system of moving capital and labour
and so on, but actually from the point of view of the individual
consumer only a very small number of transactions are actually
trans-border, apart from the obvious ones like tourism. Surprisingly,
20 years on from the single market, basically only 2 or 3 per
cent of actual purchases are trans-border. Why do you think that
is?
Dr Thatcher: I am not sure the single market
is just about trans-border transactions by buyers, it is also
about companies being able to enter overseas markets.
Q34 Lord Whitty: I accept
it is working from that point of view, but it is usually justified
in terms of benefit to the consumers, which it may be in one sense
because there is more competition, but actually the consumers
do not have the leverage themselves, or do not exercise that leverage
to the degree you would think now we have a single market.
Dr Thatcher: If you take the electricity market
or the telecoms market, companies come in from overseas thanks
to the single market and set up operations there and increase
competition, then ordinary customers should benefit. Take the
airlines as well, if low cost airlines can come in and break up
national monopolies, that does help consumers. They may not see
it that way, they may not realise, I do not know, EDF now controls
London Electricity and has come in; they may not see easyJet or
Ryanair flying from France to Italy as being a foreign company
thanks to the single market, but that is what is actually happening
in practice. It does not surprise me that cross-border transactions
are so limited, but that is because the focus is misplaced, it
should really be placed on the way that big overseas companies
can come into domestic markets. The kinds of markets we are talking
about require a lot of expertise and a lot of capital, which means
it is more difficult for domestic companies to enter, and overseas
companies are better placed to do so. Does that answer your question?
Q35 Lord Whitty: It partly
answers my question but it is still the case that even if you
know there are better terms or a better price from a company operating
in Spain than from companies in Britain, it is extremely difficult
to get in to buy a Spanish product. If you go to the website of
the company, they refer you back to their UK outlets.
Dr Thatcher: Let me make a preliminary point.
Customer inertia is immensely strong, regardless of whether it
is in your own country or in another country, so there is already
a problem about customers not always responding to prices. How
many of us have changed our bank accounts in our life times? Well,
virtually nobody does, and there are several domestic banks out
there. There is a second point which is, and this is perhaps what
lies behind your question, understanding overseas products and
having the certainty that if you buy an insurance product from
overseas as opposed to a company established in your own country,
you can actually take effective action if something goes wrong,
who will you contact, do you understand their terms and conditions.
I think there are a number of answers to that. One of them is,
these small transactions which are important for individuals are
difficult for companies, they prefer to go for larger transactions.
The kind of costs traditionally associated with selling your product
across borders to domestic consumers are very high. Secondly,
there is a straightforward question of understanding remedies.
If I buy an insurance product from a provider in Spain, can I
actually deal with those people in terms of legal remedies and
also in terms of effective remedies? If there is a problem in
Britain, I can ring up, speak in English, it is probably a headquarters
or a person who is answering me somewhere in Britain and there
is an understanding. If I am going to ring up Spain, I do not
have that kind of assurance. Again, that ought to be reducing
with the internet but most of us remain attached to the ability
to speak our own language and to pick up the phone and deal with
the problem.
Q36 Baroness Eccles of Moulton:
My question follows on from what has just been said and it is
about the country of origin principle, because I just wondered
following the description you were giving whether you would see
the country of origin principle as something which is gradually
going to have to wither away, because actually it is a deterrent
to the sort of progress and development you have just described?
Dr Thatcher: The country of origin principle,
you are right, may be a deterrent to the customer but it has been
one way of preventing countries from putting up non-tariff barriers.
The point is, for instance, if you have a protected market and
you are a country which fears entry, you may be able to quote
a set of rules which are designed for your domestic suppliers
and keep out overseas suppliers. The country of origin principle
was designed originally to try and deal with all those kinds of
non-tariff barriers; the country of origin principle linked with
mutual recognition. If this principle is torn up throughout all
services, you may get a return of non-tariff barriers by countries
which want to keep out imports. There is a very good question
here, and legally there are lots of issues here, about when you
want to have what is called home country control and when you
want to have host country control. It is not always clear which
one is going to be more effective for competition. It is likely
to depend on the type of service and also the market structure
from one market to another, from one product to another.
Q37 Lord Lee of Trafford:
Dr Thatcher, while the policy of national champions may be superficially
attractive in an increasingly global world, is there any evidence
that in fact the economies of those countries concerned which
do actually substantially operate a policy of national champions
benefit?
Dr Thatcher: I am not an economist so it is
difficult to say. There are two philosophies here. One philosophy
is the British philosophy that you have the best in the world
who come to you, you do not care about their nationality, you
attract them to your place of business. That has worked extremely
successfully for the City of London. There is then what might
be called I suppose a state-led philosophy, which says the state
should be helping to create national champions and that is best
evidenced in France. It also has examples of success—EDF
is the largest energy company in Europe and a very successful
one. You might think of Airbus. You might also think of the United
States which is one of the most closed markets in the world and
a country which pursues very vigorously a national champions policy
in many sectors. I would suspect it would depend from one sector
to another, particularly the extent to which the service is mobile.
The British approach to financial markets I suspect is more successful
because finance is so mobile. The French approach to aeroplanes,
aeroplane construction, energy, might be more appropriate in markets
where cross-border mobility is more limited.
Q38 Lord Haskel: You have
said to us that one way in which the single market can operate
more effectively is to provide more facilities to the Commission.
I think if we recommended that it would be rather difficult to
persuade our colleagues. Do you not think there is a role that
business itself can play? Rather than have more facilities for
the Commission, do you think there are some ways in which we could
persuade business to take a more pro-active attitude towards delivering
the single market? After all, we are living in an age now when
businesses are trying to be more responsible, when they are concerned
about things like climate change, when they are concerned about
their impact on society, do you think that there is a way in which
we could persuade businesses to be more pro-active in delivering
the single market more effectively?
Dr Thatcher: Let me begin with a comment about
Britain and the Commission. It is a very strange perception in
Britain that somehow the Commission is an enemy. On the continent
they see the biggest winners from the single market as being Britain.
Q39 Lord Haskel: That is true.
Dr Thatcher: If one were to look back to the
mid-1980s the person who was driving the single market was of
course Mrs Thatcher. So there is a strange view in Britain that
on the one hand Britain wants to have a single market, wants to
have more competition, and yet is loathe to give any more resources
to the Commission. Be that as it may, let me turn to your question
about businesses. If there were ways of making businesses direct
interests to drive the single market, that would be helpful, but
be careful because one way of doing that is to give businesses
more power to take matters to court when they see barriers to
entry. As you do that of course you have a more legalised system
and juridification is in general the enemy of competition. So
one has to be very wary of getting businesses involved. We are
talking about big businesses, small businesses do not have the
capacity, so we are looking at very large companies which want
to enter the overseas markets and are going to lobby and take
matters to court. Given the choice between the Commission and
large businesses doing the hard work of enforcement, you would
probably want to have a bit of both. Each would have their disadvantages.
I would be a little careful about trying to make sure all the
burden rested on large firms to drive legal barriers to competition.
The business of firms is to sell in markets, what you are talking
about here is legal, regulatory barriers to competition. You are
also looking at co-ordination across the single market and that
is a policy, political and administrative matter. I am not sure
how much can be delegated to companies.
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