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Archive for February 29th, 2012

The Economist Corner (1) – When State aid rules get seriously wrong…

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Unlike many lawyers who keep on bashing the use of economics in competition proceedings, Alfonso and I love antitrust economics. The reptilian reflex of dismissing economics as a source of legal uncertainty is misguided (although on this point Alfonso has more nuanced views that he will develop here). As explained by J. Sims, the introduction of economics in competition law, and the ensuing flexibility of competition analysis does not necessarily mean that legal certainty is degraded. Antitrust economics help channeling discussion in competition proceedings. It has helped define more accurate theories of harm (the boundaries of infringements) and the requirements necessary for them to fly (the conditions of infringements). And those concerned that opening the gates to antitrust economics means accepting the Trojan horse of small, Chicago-like, antitrust policy should think of a minute to how economists have helped enlarging the scope of competition law in the past decades. Examples of such expansions abound, with doctrines such as collective dominance, below-dominance unilateral effects, raising rivals’ costs, etc.

With this background, and to help our lawyer-friends feel more at ease with economics, we have decided to create a new, bi-monthly column on this blog, called “The Economist Corner”. Our first invited blogger for this column is Benoît Durand from RBB Economics. It would take too long to go through Benoît’s full biography, but as most of the guys we like here, Benoît has a wealth of experiences, having worked as an official in COMP and at the UK Competition Commission, and being the author of a Phd. in Economics from Boston College. More importantly, Benoît is a fun person to have a beer with – we did a natural experiment of this 2 weeks ago – and a huge rugby fan.

For his first column, Benoît has decided to focus on State aid in the Banking sector. As with our posts, this post reflects Benoît’s own, personal opinions,  which cannot be attributed to the firm he works for. We hope you’ll enjoy the reading.

When the financial crisis hit the banking sector in 2008, some European governments had to step in to rescue banks in order to avoid a financial meltdown.  For example, Gordon Brown, the UK prime minister, announced in October 2008 that the government would inject capital in some of the major banks, Lloyds TSB, Royal Bank of Scotland and HBOS.  Little did he know that these capital injections violated state aid rules, which meant that in return for being saved from bankruptcy, the banks had to severe a limb to satisfy Brussels.

The European Commission enforcement of State aid rules is based on the view that government rescue distorts competition.  That is, the public capital injection gave the recipient banks an unfair competitive advantage, and in return for this advantage, the bailed out banks had to be penalised so as to restore the level playing field.

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Written by Nicolas Petit

29 February 2012 at 8:44 pm