Notes

We met this topic in the first class talking about the Schuman declaration:

“ the movement of coal and steel between member countries will immediately be freed from all customs duty, and will not be affected by differential transport rates”, here he talked about the movement of coal and steel between member countries (France and Germany and the other countries interested in joining the community). He wanted that these goods circulate freely by abolishing the custom duties ( one of the first strategies to pursue the goal of the internal market)

The ideal of internal market was the heart of the treaty of Rome of 1957 and today it is in the treaty of EU union at article 3 and paragraph 3:

“the union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment”

Here there are all the political goals that the EU union wants to pursue. Starting from these general goals there are a lot of legal norms that detailed these general goals.

Also TFEU says something related to the internal market topic: “the union shall adopt measures with the aim of establishing or ensuring the functioning of the internal market, in accordance with the relevant provisions of the treaties. The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the treaties.”

So the internal market is an area without internal frontiers in which the free movement of goods, persons, services and capital in ensured in accordance with the provisions of the treaties; these are called the four freedoms.

Why did they choose this direction? They tried in the 50s to follow another direction (more political) which was finding an agreement in the military area, but it failed so in 1957 they decided to follow the economic perspective, with the idea of sharing some economics aspects between member states and then see if sharing those aspects would lead to more political union, this is the general idea from an historical point of view.

But once you want to follow this direction you may do it by following some philosophical basis, we may choose between different solutions if we want to pursue the goal of internal market. The main alternatives in following this direction are:

Firstly there is the idea of Adam Smith who said that it’s good to have economics over politics since the ability of the selfish interest could realize the interest of all people involved, a famous quote is “ looking at the interest of the butcher: it’s not from the benevolence of the butcher that we expect our meal but is for the personal interest of the butcher to give meat to us to have our meal, so if everyone pursue its own interest then we may realize the interest of all community.”

Why don’t we need politics from Adam Smith point of view? Since the market could be the invisible hand: if everyone wants a good, we can manage the problem through prices, if everyone wants a mobile phone, the price of that product could increase and through the price adjustment we can manage the scarcity of that product. If the product is too expensive then consumers will substitute that product with a cheaper one; then the seller has to decrease the price of the product. Thus according to Smith everyone has to pursue its own interest, and we can manage imbalances finding an equilibrium through market dynamics.

What is the problem of this way of thinking?

An example is the one of the masks in 2020, they were produced in Asia, the idea was producing masks there since the costs were lower and then import them, but then the countries that wanted to import found some difficulties since the product was required by lot of countries and the supply was not enough to respond and satisfy the demand, therefore they thought to use the market dynamics and then if everyone want masks they will find an equilibrium by increasing the price of masks, but this could create problems for poor countries. The idea is that there are some cases in which we need the intervention of the law. But before we should look at the opposite alternative to Adam Smith, typically it’s used the image of a cake, if we have to distribute the slices of this cake we may use market dynamics:

someone want a slice and some other do not want it, we may that who offer more will receive a bigger slice, we may find an agreement through market dynamics (this is the idea of Adam Smith)

Which is another criteria to distribute the cake’s slices?

Another criterion is based on the need, if someone is hungrier then it may receive a bigger slide.

Another criterion is the merit, I could ask some questions, who answer will get a bigger slice, who do not know anything will get nothing.

So we may decide to distribute resources not using market dynamics but by using other criteria, this is the idea of “the politics over the economics” of Karl Marx.

Example: we have specific product, which is the hour of lesson, assume that we may distribute this product not to all students, but we have to choose among them; how to chose? One could use market dynamics, there are the smart guys who could receive more product and some other (not smart) which could not receive this product. The smartest students will have a good job with good salary, whereas the other students will not have these things. Obviously, there is not a right distribution of the product. One solution from the market prospective could be using an ex post criteria to find a new equilibrium , for example using fiscal policy we may tax the rich (students with high salary) and then the state would distribute these resources to the poorer. So one solution are fiscal policies; is this solution effective? If we tax too much, none will work anymore here and will go abroad.

Now suppose a proportional taxation, are there other problems?

By receiving money from the state, this would be an incentive to an opportunistic behavior.

If just 1% of the population receives an income, then they are not able to receive a salary, to be taxed and to distribute resources to the other 99% of population, this is a social problem.

Another problem is that is we decide ex ante who are the students who will receive and not the lecture, then we may manage the unintended costs through fiscal policy, but the not smart guys do not have any change to change/improve their life; whereas the smartest have lot of opportunities, so looking only at ex post solution to manage a possible problem of balance we will not change the opportunities of people. So the idea is that if we look only at economics, we are not considering the fact that in a race the starting point is not the same for everyone. Indeed, there are some other authors who said let’s have classes for everybody, such that everyone has the same opportunity (this is another way of thinking).

In our system we have a social market economy, namely we wants to favor market dynamics such that some people have good job and some other have worse job, but there is a limit since the political idea is affording a minimum protection for everybody.

Italy, for example, had some problems in the balance sheet of the state because do not have too much resources and therefore had to cut some costs.

We have also examples of real socialism like the Soviet union.



What happened in the EU union is that they followed a solution in the middle of the 2 previous solutions, the idea of Friedrich Von Hayek named “ Ordo liberal approach”, with the idea of favoring market dynamics but there are cases where the market fails, in such cases when the market is not able to find an equilibrium, then it’s justified the intervention of the law; the monopoly is an example of market failure, if everyone wants a smartphone we may find a point of equilibrium by increasing its price but then if we have the vaccine and there is a monopoly on this latter, there could be exploitation of the monopoly so the state has to intervene in order to provide vaccine to everyone.

Moreover, as occurred for Silicon Valley bank, where there are troubles for a bank, then there are problems of trusting the system, also depositors of other banks may run their bank. So the crises of a bank could have negative externalities (another example of market failure), that’s why the intervention of the states in these cases is justified.



Go back to article 3 of TEU:

The goal of the union is to have a highly competitive market economy, but also a social competitive market economy, these are the main goals but there are many other like full employment, the social progress, high level of protection and the improvement of the quality of the environment. So it do not want to follow only market dynamics but also other political criteria.

How to reach the goal of internal market?

It is an area where we have the 4 freedoms, how to favor the circulation for the 4 freedom? We may use 2 directions:

The negative integration: the idea is to eliminate some obstacles to the circulation of goods, services, people and capital; for instance if we eliminate duties then we may reach the goal of internal market.
The positive integration: the idea is that we do not have prohibition but also we have positive acts adopted by the EU union, and the main example is the approximation of laws ( like the mitigation of the principle of conferral, and which is also a strategy to pursue the internal market).


The negative integration:

A first obstacle to the circulation of goods is custom duties, namely the costs and pecuniary charge that you have to pay if a good cross certain frontier. If you have to pay these costs, then would be too costly to send the product to other countries, then the citizens would prefer to use another good which are less expensive. So we can favor the circulation of goods by eliminating these duties. The detail of this strategy is the fact that they have the prohibition of custom duties in the internal relation between member states (from Italy to France, from France to Germany etc) and then they have a custom union on the external relations, namely the ones between EU union states and the other countries outside the union, so they have a common union.



Another strategy that may be used to favor a country’s own product with respect the product of another country is putting some requirements (but this is a problem/obstacle looking at the internal market), indeed the positive integration could be a strategy to manage this problem.

Another option to favor your product vis a vis the others is using fiscal power (actually it’s not possible), you may say for a bottle of water produced in Italy you have to pay 5, while for one produced in France you have to pay 10.

The problem for the EU union is not the price, the point is that if the state wants to favor a product versus another one and in doing it, it imposes some taxes on the other product, it is an example of protectionism through taxation, which is prohibited in EU.



So the first strategy is related to duties; the second strategy is the prohibition on protectionism taxation and a third strategy is the idea of quantitative restrictions, in theory a state could favor its product by saying that there is a threshold and it cannot import too much goods from abroad or it cannot export too much products. The idea is that to favor the circulation of goods, we have to abolish of this strategy and indeed we have a prohibition on quantitative restrictions.

There are some exceptions of this rule, there are cases in which state can use these quantitative restrictions like for the protection of intellectual property, or for the public health.

So the general rule says that there is a ban, but in some cases it’s possible to use such restrictions.

Intellectual property: if you want to create something and everyone could use the results of your study you do not have n incentive do it, since you have made lot of efforts but everyone get the results. How to incentive you to study? By giving you a patient to protect the intellectual property.





The positive integration:

It’s the other direction with which the EU union reach the goal of internal market, its idea is explained by the example of Amazon, who distribute its product and if you do not like it you have the right to withdraw and give product back to the seller; amazon is a company which could provide its services throughout the EU union, if it has to comply with all the legal order of every state it then has to bear a lot of compliance costs; if the right of withdrawal is different among states then amazon has to write different policies of all countries.

Why do we have these costs? Since compliance with the law is a costly activity and by having different regimes we increase these compliance costs, this is another obstacle to the circulation of goods.

How to remove this obstacle? Through positive integration and the strategy is the approximation or harmonization of laws, instead of having different regimes we may have just one at the EU level, the union can adopt a legal act with this regime and in this way amazon has to comply to only one legal norm and compliance costs are lower, it’s even easier to distribute the goods everywhere.



If we think about freedom, this latter is liked by everyone but then we cannot give freedom without limits since someone could use freedom to harm another person, so states want to favor freedom but they may introduce some limits to this freedom and introducing limits could involve another problem for the internal market perspective: I could use limits to take a protectionist approach.

For example the state do not want that everyone could become a doctor, therefore it’s necessary to pass a test, studying for years etc. by exercising discretion on the requirements that a person has to fulfill to be a doctor the state may have a protectionist approach.

By using these requirement the state may damage the internal market, the solution is the minimum harmonization which involve minimum rules for everyone; the member states may modify something and then we have an important principle which is the principle of mutual recognition.

This latter comes from a sentence of the court of justice about a liquor (cassis a Legion) , the sentence of 1979 in which French producers export it in Germany, and the idea is that the product comply with French laws but not with German laws. Can french producers export in germany calling this product as liquor even if it do not comply with german regime? The court of justice said yes since we have a mutual recognition, namely if a product comply with the legal regime of the country of origin, then germany has to recognize this regime. The court of justice is favoring the circulation of good in this way.





15/03/2023

Recap: we started a specific content of EU law that is the internal market. One of the first idea was the abolishment of the custom duties that was an idea that was present from the treaties of Rome 1957 to the actual treaties (art3 and 26 of TFU). The idea is that nowadays the EU want to push the 4 freedom (freedom of person, good, service and capital) by favoring the circulation of those aspects. The EU chose this strategy because, even though they tried other strategies with a political connotation that did not bring to an agreement in the ’50s, they decided to pursue a more practical approach since they though that putting together the economic interest of the states could be the first step towards a political union. To establish an internal market we have to decide the philosophical idea of it. This latter was about “Ordo liberalism” that is about favoring the market dynamics, but there were cases in which the market could fail, and it justified the intervention of the EU law in the internal market. To pursue the goal of creating the internal market was done by following 2 ways: the negative integration and the positive integration. The negative integration was about eliminating the obstacles surrounding the circulation of people, services and capital. There are also other regimes like the competition law. Some examples of this negative integration is the elimination of costume duties in the relationship between member states, the prohibition of using taxation as a protection mechanism (meaning on the origin of the product) and quantitative restrictions to import and export. Talking about the positive integration, we started by talking about the problem that regards the fact that, if we have different legal norms, complying with them can be costly instead we have just one legal norm is cheaper for enterprises. So, the idea was to harmonize the legal system of member state to have, if possible, to have just one legal norm to lower the cost of compliance to favor products and services. In doing it we have a problem because if we allow a specific behavior, this latter could harm someone else and because of that the state can put some limits to freedom that can be a mechanism used by member state that can turn out to be a measure of protectionism. To solve this problem, we had to ensure a minimum level of harmonization and then member state could exercise their discretion.



Once you create a market (in EU internal market) is important to decide how to regulate it. The political choice made by member states in the treaties (in art.3 of the TU) was to create a highly competitive social market economy. To understand when a market is competitive it is important to know what a monopoly market is. This latter is when there is just one firm or when the firm change the price of the product and so the preferences of consumer did not change and this is the opposite situation of a competitive market. So, the EU wants a competitive market and they want to prevent that this competitive market shift to a monopoly one because it is considered a positive effect that firms have to behave efficiently due to the forces in the market (if price changes, clients will change firm) and consumers may gain benefits (quality higher and lower price than in the monopoly). Tp create a competitive market you can choose between different competition concepts. Thus, we could look into the players in the market (we want to have many players, not single) basically the requirements thanks to which a market can be considered a competitive one or you may look at the effect (we want that the sold product have a high quality and low price). Thus, there are 2 prospective: looking at the requirement or the effect. They are identified by 2 ways of thinking that are respectively the Harvard school and the Chicago school related to competition law. Therefore:

· HARVARD PROSPECTIVE competition law has to prevent possible harm to consumers and competitors. They are looking at the behavior of players in the marker.

· CHICAGO PROSPECTIVE They look at consumer welfare. Thus, if consumer are fine, we are not interested in the behavior of the players.



EU decided to identify some conducts/behaviour that are considered anti-competitive and so are prohibited by the law. For instance: agreement (cartels) between firms to decide a fixed price to make firms better off and consumers worst off. Thus, we may have agreements that could restrict competitive and since it can be considered anti-competitive is prohibited. That can be explained by the following statetment:



«The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

• directly or indirectly fix unfair purchase or selling prices or any other trading conditions

•limiting production, markets or technical development to the prejudice of consumers;

• apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage

• make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts (art. 101, para. 1, TFEU)

Looking into the technicality and how it is written of this legal norm we can see that it is divided in 2 parts:

It describes in general term a behavior
“Prevent restriction or distortion of competition” this can be interpreted in different ways also depending to the type of perspective used. Indeed most of the times it is used something similar to the Harvard prospective even though in some cases it is used also the Chicago one. The idea is that, since the law maker did not write it clearly, then the court of justice could interpret this wording almost without limits and that can be done by looking at the specific case (the answer can be different depending on it)
“Have as their object or effect” we may have as object or the effect of the agreement. This is a technical and juridical point. They used both words because they judicial economy because it is easier for the judge to look at the object and therefore if we have an agreement with specific content, we don’t have to look into the effect of it because only the object is enough, and that agreement is prohibited. The point is to reduce the cost of justice that is a public cost (= we are pursuing a public interest). It is quite complicated to look at the effect of an agreement. However, there are some cases where we may discuss if the effect restrict competition or not. An example could be the “no compete clause” which is an agreement between seller and buyer of a firm that is about the fact that I can buy your firm if you promise nit to build another firm that may compete with me. So, looking at the effect we understand that one party will not be able to create a new firm tomorrow (not free to do it). So, looking at the direct effect that could be considered as a restriction of competition and so it should be prohibited. However, the court of justice decided to allow this agreement because of the “doctrine of the ancillary restrains” meaning that the no compete clause could limit the freedom of the seller but without that clause we do not have any agreement between the two parties
Three detailed examples
That was done because if legal norm were written only in the second way there would be no room for discretion. Thus, the judge would know exactly ex ante if a behavior is correct or not. However, the first way was also implemented to leave to EU institutions some discretion to prohibit other possible behavior.



We may have a second conduct that could damage the market and therefore is prohibited. This latter is called “abuse of dominant position”. And it can be explained by the following statement:

“Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States” This norm has a second part in which is described, as before, some behaviors that need to be prohibited. It is important to underline that the activity are “incompatible with the internal market” and “affect trade between Member States” which underlines the prospective of a European Union (we are talking about the EU law. Thus, we are talking about behaviour that damage the internal market, but if the behaviour damages the national market, it will trigger the national law on competition and the national authorities. A firm takes a dominant position, from the prospective of the court of justice, if it is not forced from market dynamics. Its peculiarity is that dominance depends on the relation with others and thus it is needed the decision of a court of justice that depends on 2 criteria:

LOOK AT MENTIONED PRODUCT meaning that they have to understand if two goods are in the same market. That is possible to do it by looking at the fact that if there is a change in the price of a product, there will be an impact on the preferences of people. In other words, they have to look at the change of preference of consumers given a change in price
GEOGRAPHICAL CRITERION looks at the area in which the undertakings operate. So, the goods should have the same geographical area. However, there could be also markets that are transnational.


Real life example: Google received a fine from the EU antitrust (authority that inforce this regime) since they said that they did an abuse of dominant position considering the Android position. This case started in 2018 and the idea was that google was using the android system to exploit their position making some influences in how to do research on internet. Thus, there was a restriction on freedom of manufacturer of smartphones only because google needed their system. So, this behavior needed to be prohibited because this activity was considered an abuse that violated the TFU treaty and because of that the authority (EU antitrust) fined them.



The difference between the first described behavior (cartels) and this one is that the first one need 2 or more undertakings while this second one can occur only with one undertaking (like in a case of a monopoly).



In this case we are talking about EU antitrust law so behaviors that trigger the internal market and because of that it is used a European prospective. In this case the competent authority is the antitrust authority which is inside the European Commission (formed by some members that are specialized in a specific area). However, there may be the case that some behavior that affect competition of a national market and because of that there are national law. In that case also the competent authority are national and in the case of Italy there is the AGCM.

In any case, if this field of law is violated there could be a public enforcement (so if you violate this regime, you will pay a fine) but there is also a private enforcement. To understand this latter is necessary to look into an example that is about an American case. Also, in US undertakings cannot make agreement that distort competition. In this case there were two universities, Duke and UNC-Chapel Hill, that agreed not to hire a professor at the other universities. Thus, there was a woman that was fired by one of the two universities, and she tried to get into the other one but then she discovered that there was this agreement for which she could not be hired in the other university. Because of that suited the two universities. This latter had to settle this lawsuit. This can be the way in which the private party, the woman in this case, is compensated from the damage she received from this agreement. However, the use of private enforcement could pursue also public interest (one the agreement was disclosed, they could not have the agreement anymore and it would favor the market of professors).



There is a conduct that is not entirely prohibited by EU law, but it could create certain problems and because of that it has special regime. Talking about that is important to have in mind the fact that Intesa San palo acquired Ubi Banca, but in Europe there is European Union Merger control (control over merger and acquisition of firms). That is because the M&A could be problematic at a EU level since it could change the players in the market and, because of that, a market could shift towards a monopoly. However, it could be harmful to prohibit every M&A operation (not justifiable) but it still could create some problem. Thus, the regime is that you can do an M&A operation only if you receive an ex-ante authorization that can be given only if the firm demonstrate specific fact (happened also in the merger of the Italian banks since both have big shares of the market => the merger was possible only in the case that Intesa would sell 200 of their branches to avoid having too many shares of the market). The idea is that the competent authority has to decide whether there could be a problematic effect.