Ladies and gentlemen, Governors, I should first say, I am deeply grateful to the Per Jacobsson Foundation and to the BIS for providing me with this opportunity. I am honored to have been invited to deliver this Per Jacobsson Foundation Lecture, and by the presence of so many distinguished guests.

Mario Monti

Ladies and gentlemen, Governors, I should first say, I am deeply grateful to the Per Jacobsson Foundation and to the BIS for providing me with this opportunity. I am honored to have been invited to deliver this Per Jacobsson Foundation Lecture, and by the presence of so many distinguished guests.

It is, of course, a special privilege to take the floor in this Na-tionalrat at the heart of the Swiss Confederation, which has been working smoothly as a Confederation for the last 715 years, which is a bit longer than most of our own home countries. And I believe this Parliament is a symbol of democracy, and this Confederation is also a symbol, as one would Say today, of subsidiarity.

We honor a man, Per Jacobsson, who was not only a statesman of the international economy as head of the Monetary and Economic Department of the BIS, and subsequently as Managing Director of the IMF, but was also gifted with an outstanding ability to communicate complex issues in a straightforward language and in a lively, persuasive style—a challenging benchmark indeed for those called to deliver lectures in his name, especially if such lectures take place early on a Sunday morning, and are delivered to a distinguished audience who in order to take part decided to indulge in a train excursion very, very early in the morning.

Why have I selected for my remarks the rather unusual topic, “Competition Policy and Monetary Policy: A Comparative Perspective?” For two reasons. There is first an objective reason. Monetary policy and competition policy are two key components of public policies needed for a market economy to function well, and indeed to exist, just as money and the market are two defining elements of such an economy.

The other reason is subjective. In my own professional life, it so happens that I first devoted 25 years as an academic economist to money, as a student of monetary and financial economics, and then 10 years to the market, with policy responsibility for the development of a single market in the European Union (EU), and for the maintenance of competitive conditions in that market. So it occurred to me that in addressing distinguished personalities who have key responsibilities in the handling of national and international monetary affairs, I might reflect on these two policies, money and competition, in a comparative perspective.

I should complete this premise by two brief observations. One, in my education as a monetary economist, I owe a lot to the country that is hosting us this morning. Although I was a student of James Tobin at Yale, I benefited from the strong influence of Karl Brunner of the University of Berne and also Rochester. Beginning in 1972, I attended for a number of years his Konstanz seminars on monetary theory and policy not far from here, and I recognize faces who were key actors when I was a young and naive economist on that mosquito-plagued lake at the end of June each year.

Also, it was with a small group of economists chaired by Karl Brunner that I had the unusual experience in September 1980 of having tea with Prime Minister Thatcher at No. 10 Downing Street and discussing what the Bank of England might—she would have said should—have done differently at the time in order to keep some order in a rather messy monetary situation. Of course, the Governor at the time was not invited to that seminar, in the characteristic No. 10 style of those days.

Apropos independence of central banks, the second and last observation of my premise is that when I was a monetary economist, I devoted my best efforts to asserting the intellectual case for the independence of central banks—particularly, of course, starting close to home since the early 1980s in the case of the Bank of Italy, which I must say at that time was not very keen itself to make the case for a form of independence, and then again in 1993 as a member of Eric Roll’s panel pleading the case for the independence of the Bank of England. 1

As you will soon recognize, I have since lost a lot of confidence in my knowledge of monetary policy, so it is with humility that I approach it, even though it is just one of the two key words in the headline of today’s presentation.

My first reflection on monetary policy and competition policy compared is that they both serve in different ways the same objective, or at least they have one objective in common, even though their practitioners may not always realize it, and that is price stability. Monetary policy, of course, has the fight against inflation as its paramount objective. One might ask the question, as a recent BIS paper did, is price stability enough? What are the dimensions of stability to be cultivated by a central bank? Price stability may refer to output prices, or asset prices, and so on, but certainly the objective of some price stability is at the core of monetary policy. Also, competition policy, although it is not primarily designed to achieve this, may indeed make an important contribution to price stability by helping to avoid price increases.

I believe that monetary policies in most countries have been largely successful in recent periods in achieving their objectives, and I believe that in some parts of the world, maybe in Europe specifically, this has been facilitated by a number of positive supply shocks, including the setting in motion of conditions in the real economy of greater flexibility and also the creation of the single market, the tearing clown of barriers, and the creation and maintenance of competitive conditions. If we put together the creation of the single market, a number of liberalization initiatives, the enforcement of competition rules, plus, of course, the opening up to greater Chinese and other competition, this is a set of supply shocks that probably has helped the monetary authorities in their difficult task.

In this context, one question also comes to my mind: what about the response to cycles of both policies? For monetary policy there was in the past the ambition of fine-tuning it in order to be precisely countercyclical, but at those Konstanz seminars the early experience of the Swiss National Bank, looked at very carefully by the Deutsche Bundesbank, suggested to many that maybe it was wiser to adopt a longer time horizon for monetary policy decisions. I believe that this is now established practice, in different ways and modalities, although one could hardly say that monetary policy has completely forgotten the objective, or at least side objective, of trying to moderate the business cycle.

You may be aware that a similar discussion has been going on for a while with regard to competition policy. It comes up and down like the Loch Ness monster, as Professor Tobin used to say about his own Tobin Tax. Because when conditions in the real economy become really tough, generally for specific industries, the voice is always there—that competition policy should for a while become more “reasonable,” that enforcement should become less tough.

Take the case of the telecommunications industry in Europe, but not only in Europe, after the bursting of the bubble in the early years of this decade. I was then Competition Commissioner in Brussels, and there were huge pressures from the telecommunications industry to have a sort of a pause in the application of competition rules to that industry—otherwise the industry could suffer too much—and rather daring ideas were coming up to this effect.

Normally, the view of the competition authorities is that it would not be a good idea to insert a cyclical element into the handling of competition policy, precisely because when an industry is in difficulty, if it is an industry characterized by high concentration and incumbents—maybe former monopolists—who still enjoy a dominant position, it is particularly for the (potential or actual) small new entrants that it is difficult to secure financing conditions in those difficult years. And if a competition policy were put in place that was particularly understanding to the needs of the large operators, then it would make entry by potential new entrants even more difficult, leaving as the result a worsening of competitive conditions.

In the financial sector, one way in which monetary and supervisory authorities are linked to competition issues, is, I believe, in their attitudes toward competition. I think it would be fair to say that in most countries, until 15 or 20 years ago—and I want to try to be a bit provocative—monetary authorities had toward competition a similar attitude to the one that you find in business circles; namely, competition is excellent, especially if it concerns the others.

Monetary authorities on average were not particularly keen, and supervisory authorities as well, on having a high degree of competition in the financial sector. But unlike those businesses in the private sector that may not like a high degree of competition in their industries because of their vested interests, in the case of monetary and supervisory authorities, it was because of their belief that if there were overly competitive conditions in place in the financial sector, or even the same degree of competition as in most other sectors of the economy, then the achievement of the public interest objectives of monetary policy and of prudential supervision, financial stability in particular, might be made more difficult.

It is obvious that there is for the financial sector, and each of you knows this better than I do, special justification to look at stability concerns. But of course, if the stability-competition trade-off were too heavily biased in favor of stability, the overall performance of the financial sector in terms of efficiency and the allocation of resources would suffer. And I think it is one of the most interesting developments of the past 15 or 20 years that without renouncing the objectives of price stability and stability of the financial system, monetary and supervisory authorities have implemented monetary policy and supervisory policy in ways that are more compatible with competitive conditions. So in most countries, the time has passed when, for example, monetary policy was largely based on credit ceilings, portfolio constraints, or, in some cases, on central banks openly facilitating cartels among banks. Indeed, monetary authorities have turned, and this is extremely helpful for the overall soundness of competitive conditions, into very strong and authoritative advocates of more competition.

I would like now to say a word on the exercise of the responsibilities of a competition authority in Monetary and financial markets. In a number of countries, there are no sectoral exemptions from the competence of the competition authority. Certainly, there are not at the EU level, where competition policy applies equally to all industries in the economy, including the financial industry. No instrument of competition policy is a priori to be left inoperative as regards the financial system. There have been cases where powers against restrictive practices or against cartels have been used: a case in Austria a few years ago comes to my mind. There have been cases where the rules against abuses of dominant positions have been used: a case concerning clearing and settlement comes to my mind here. And, of course, the normal instruments of merger control apply also to mergers between financial institutions.

There are two facets that I would like to underline as regards the interaction between the enforcement of competition policy and the financial services industry. One is specific to Europe, and I am sorry if I have a bit of European bias in my presentation, but I will try to compensate for this in the last few minutes. At any rate, it is not a home bias, as we are speaking about the EU from this Parliament.

One aspect is that at the EU level, but nowhere else in the world, the competition authority has the power and responsibility to control what the governments and the parliaments do in the area of subsidies to companies. This is the control of state aid. You will not find this in the United States or elsewhere, simply because you need a supranational element for a competition authority to be able to tell a government or indeed a parliament, sorry, you cannot do this.

And this state aid control, I want to underline as far as the EU is concerned, also fully applies to financial institutions. Well-known examples here are the actions in which the European Commission recently achieved the elimination of the state guarantees to the German public banks, the Landesbanken and the Sparkassen, or the abolition of certain tax privileges for Italian banks. State aid control will apply also in the case of rescue or restructuring aid, so Monetary and supervisory authorities will be well advised to consider that they do not have full room for maneuver in coping with the consequences of a difficulty or an insolvency, because any state aid, also in those circumstances, is subject to scrutiny by the European Commission. One recent complex case, again involving Germany, was the case of the Bankgesellschaft Berlin.

The other observation that I would like to make in relation to government intervention in the markets is not confined to Europe, even though it is in Europe that it may find its greatest manifestation. This is that the competition authorities may find ways to intervene against government-induced restraints on competition, and I know how important this point is considered to be by central bankers when they rightly plead for structural reforms in their economies and the removal of anticompetitive, restrictive regulations.

In the United States, the Federal Trade Commission has started a systematic action to review government-induced restraints on competition, and in Europe, a judgment of the European Court of Justice two-three years ago has underlined that a national competition authority will be empowered to disapply a national law if that law introduces restrictions to competition in violation of the competition articles of the EU Treaty.

The subject of competition enforcement interventions against government behavior of course becomes sensitive and rather topical in the area of cross-border mergers in financial services and in other industries. We have seen in the last year or so in the United States, in Europe, and elsewhere, cases of re-emerging economic nationalism, with government reluctance to accept cross-border takeovers, and attempts by governments to impose obstacles to them. There are limits to what national governments can do, at least in the EU context, because a number of principles are enforced against “golden shares” or other oppositions to cross-border consolidations. Concrete cases—the one of Santander/Champalimaud in 1999, and the one of ABN Amro/ Antonveneta of last year in Italy—show that the principles of enforcement are not only on paper but can indeed be applied.

I would like to devote the last few minutes of my remarks to one quote, and two subjects. First, the quote, which is the title of a paper, and I am sorry that I do not have time to go into its contents. It is rather rare for somebody to have been a member of a monetary authority and then change jobs and become part, or, indeed, the head of a competition authority. But this has been the case for John Vickers in the United Kingdom, and I can only recommend the reading of the very enlightening and amusing paper that he published in June 2002 when he was Director General of the Office of Fair Trading, entitled, “The Hedgehog and the Fox in Economic Policy.”2 One of the two is the monetary authority, and the other one is the competition authority. I leave you to guess who is who in this zoological analogy for two public policy authorities, but it is really an interesting reading comparing the distinctive features of the two policies that we are discussing this morning.

I would rather like to make some reflections on the institutional setup for the decision making of the two policies, because I believe that there are important similarities. First of all, there are genetic or historical similarities. In the EU and the United States, there is a broadly similar model. Within the EU, monetary policy and competition policy have a common historical lineage that is post-war Germany, with the strong influence of the prewar Freiburg School. There the foundations were laid for the social market economy. Two of the key features of these foundations were, in particular, an independent central bank, and competition policy. They came to be embodied in two institutions of Germany, the Bundesbank and the Bundeskartellamt. Both were transplanted into the European model with the Treaty of Rome for competition policy, and then with the Maastricht Treaty for monetary policy. This, by the way, always makes me puzzled when, particularly in France, but also in Germany, one hears these days people—in particular, politicians—refer to the market economy as “ultraliberal” and “Anglo-Saxon.” The market economy in Europe was really established by German, with the help of French and Italian, minds, in the Treaty of Rome of 1956, 23 years before the advent of Margaret Thatcher, at the time when the U.K. economy, with all due respect, was not ultraliberal, but may have been called paleosocialist.

Behind this German-made institutional model of a central bank and a competition authority, we find the influence of the United States—its strong, not only intellectual, influence on Germany in the immediate postwar period, and of course, it is not difficult to see the resemblance of the Federal Reserve model in the Bundesbank’s DNA, and the resemblance of the U.S. antitrust principles in the origin of the Bundeskartellamt.

A second similarity between monetary policy and competition policy is institutional. In Europe, there are, in fact, not many policy areas where the EU decides in a unitary way and speaks with one voice. As a matter of fact, there are only three such areas, two of them were born in 1957, competition policy and trade policy, and the third, monetary policy in the euro area, was born in 1999- This unitary feature of policymaking is a key prerequisite, among others, for the EU to be respected as an interlocutor in international coordination.

The third similarity between monetary policy and competition policy, at least in Europe, is organizational. What I believe we have seen in Europe is that monetary policy was born national, and then when it was realized that monetary sovereignty nationally consisted only in having a few minutes available each Thursday afternoon to change one’s own interest rate after the spokesperson of the German Bundesbank had said what it had decided, then gradually, but not too gradually, it was decided to have a unitary monetary policy in the European Central Bank (ECB).

For competition policies, the process has been the opposite. With the exception of Germany, no other member state of the then-six members of the European Economic Community had in 1957 a national competition policy, so competition policy was created European.

But just as, recently, the European System of Central Banks and the ECB have emerged from national central banks—bottom-up, one could say—in parallel and apparently in contradiction, a deep reform of the architecture of competition policy has been put in place since May 2004 in the EU, and that is a top-down approach. Now for many aspects of community competition policy, the enforcer is no longer Brussels alone, but a European Competition Network with 26 competition authorities—the Commission and the National Competition Authorities.

The fourth similarity is a crucial one, independence, and in different ways it would be interesting to deepen this subject. In Europe, there is independence both for monetary policy and for competition policy, even though this is not always the case for that part of competition policy that is done nationally, not as a result of the devolution that I just mentioned, but as a result of the original national competition laws introduced in the 1970s, 1980s, and 1990s. For example, to be very concrete, there is now a big case going on between Germany and Spain in the energy sector—you might have heard of this—with E.ON trying to acquire Endesa. Now the Spanish government favors the formation of a national champion by authorizing the merger between Gas Natural and Endesa. That merger was not authorized by the competition authority in Spain, but the government overruled the competition authority because it has that power in Spain. Of course, Germany and E.ON are bitterly critical of this. The only thing is that there is the same original sin at the origin of E.ON because a few years ago, when E.ON acquired Ruhrgas, the German competition authority was against, but the German federal government using the powers that it, too, had authorized the merger. Fortunately, legislation in most member states does not provide for this power.

The very last point: I speak to monetary authorities who have the historical credit of having put in place over the decades very, very advanced forms of international cooperation and coordination. The two institutions in which Per Jacobsson was so deeply involved, the BIS and the IMF, are of course the embodiment of this cooperation.

I must say that until not so long ago, there was very little in the parallel area of competition policy. That is why in the last few years, and really having in mind very much international cooperation in the monetary field, competition authorities around the world have tried to make up lost ground and to put in place much more in terms of international coordination. This is so particularly bilaterally between the United States and the EU, but also multilaterally.

Bilaterally, the attention of public opinion may have been captured by those rare exceptions where the authorities in Washington and Brussels did not converge—the two main exceptions being the General Electric/Honeywell merger and the Microsoft case. But in hundreds of also very important cases, the daily cooperation, albeit in two distinct jurisdictions, between the respective competition authorities has allowed a degree of convergent outcomes that is crucial for business, just as it is crucial for consumers around the world that the competition authorities can get together smoothly in the fight against cartels, in dawn-raid inspections, and so on.

Also, because the EU and the United States have worked very well, hand-in-hand, they have been instrumental in creating, very recently, in 2002, the first embryo of a multilateral cooperation and competition policy. We do not have—sorry, I still say “we”—the competition authorities do not have their IMF or BIS, they simply have their newly born but quite promising ICN, the International Competition Network, now embracing some 90 competition agencies from around the world, including the emerging market countries. A lot of pragmatic, soft convergence is going on in an area where it is so important to avoid contradictions among jurisdictions.

So I believe that the two policies, monetary policy and competition policy, should maybe talk a bit more to each other. As I mentioned, in so many things, competition policy has been able to learn from monetary policy. Perhaps some useful inputs could flow also the other way around. And both—this comes to my mind speaking in this House—have a relationship with parliaments. Both are policies that are more independent than other public policies, and rightly so. Both, nevertheless, ultimately are accountable to parliament, not for individual decisions, but for broad policy orientations.

By the way, I forgot to say that decisions of monetary authorities on monetary policy cannot, as far as I know, be object of appeals before a court of justice. And I am not suggesting that they should be. Whereas, this is, of course, the case, as it should be, for decisions of the competition authorities. But the role of parliament is, ultimately, crucial in both cases. I would add that those policies that do not have to rely on parliamentary approvals for their individual decisions have a particularly strong need to keep public opinion on board, also through parliament. Therefore, the- advocacy role of the respective authorities for monetary policy and competition policy to keep this consensus is of great importance.

For all these reasons, I believe that “competition policy and monetary policy: a comparative perspective” was an odd subject to propose for this lecture, as one of the panelists candidly said to me. But I believe that from time to time we should be odd, especially if the links between two elements are more deeply rooted than is normally recognized.

Thank you very much for your attention.

Competition Policy and Monetary Policy: A Comparative Perspective