Monti's bum rap: economically speaking, Europe's competition czar is really a `classic liberal'--with an interventionist streak. (Cover Story).

BRUSSELS -- Most Americans familiar with Mario Monti know him as the man who killed the GE-Honeywell merger. For many, their reaction was one of indignation--who's a European bureaucrat, after all, to tell Jack Welch whether GE can buy another American company? Not surprisingly, Monti came to be known as the first European Competition Commissioner to strike down a deal between two American companies after the deal had received antitrust clearance in the United States. He also gained a reputation as an interventionist and a protectionist out to protect Europe's soft, socialistic form of a market economy from American competition.

But Europeans, who are understandably less concerned about the implications of European regulators passing judgment on American business combinations, know a different man. While Monti has scuttled some prominent mergers inside the EU as well, on the Continent he's perhaps best known for his hard line against government subsidies to businesses and for his opposition to state use of "golden shares" held in privatized companies to block their takeover by foreign bidders. In short, at home he's seen as a classical liberal--sometimes to the point of being doctrinaire.

This difference of perception reflects not only different attitudes toward government intervention on either side of the Atlantic, but also the different roles of antitrust regulators and the different standards of evidence and proof in competition cases.

For the record, Monti is a self-described "liberal economist" in the classical sense of that word. But he also sees an aggressive merger-vetting process as an essential component of "making competition work." A good one-word summary of how competition "breaks" in the Commission's view, would be "dominance."

In the U.S., antitrust policy is governed by a "harm to consumer welfare" standard. This standard, in turn, is the product of a U.S. Supreme Court ruling that sets the bar at what it called "unreasonable restraint of trade." Since "unreasonable" lacks a certain degree of precision, restraint of trade is generally understood to be "unreasonable" when it starts causing harm to consumer welfare. In other words, what counts is the end result. In the U.S. model, a merger could well pass muster if it resulted in efficiencies that regulators were convinced would lower prices to consumers, even if competition in that market might adversely be affected. In the eyes of U.S. regulators, GE-Honeywell was precisely such a case.

But the EU's standard is different. The EU's governing regulations require the competition commissioner to block a merger if he determines that it will "create or strengthen a dominant position." This is based on a concern that "dominance" increases the likelihood of "abuse" but it eliminates the need to show any actual present or future abuse. So a company that is already dominant cannot engage in acquisitive activity that will increase its dominance, and a non-dominant company cannot acquire a competitor (or anyone else for that matter) if the Commission fears the resulting company (or, increasingly, companies) will dominate its industry or sector.

Some have argued that Europe's "consumer harm" is actually the more restrictive standard--after all, one can easily imagine a situation in which regulators find potential consumer harm without having to show that the merger would result in actual "dominance." In practice, however, the reverse has been consistently true. Since consumer harm is unlikely unless a company can be shown to be "dominant," consumer harm tends to be an additional hurdle for regulators to clear when attempting to block a merger. That is, a company must not only be dominant, but the regulator must show that the dominance is harmful. The EU standard makes dominance presumptively bad in itself.

While in the past Monti has protested that he didn't make the standards, and is merely stuck with applying them, his office is in the process of completing a review of its procedures, including the relevance of the "dominant position" standard. As of this writing, the results of that review have not been announced, but Monti's office is not expected to recommend a shift toward the U.S. standard.

So, his classical liberalism notwithstanding, Monti would seem to see the prevention of market dominance, where possible, as an important way of keeping the competition train from going off the rails.

This lends credence to the charge that he is an interventionist; by his own account, a "free" market is the sort of thing that needs periodic corrective nudges from regulators to remain "competitive." Specifically, the Commission's regulators operate by constructing complex theoretical models of the markets under scrutiny in a given merger. By analyzing the economic characteristics of a market--demand elasticity, barriers to entry, number of participants and so on--Monti and his Merger Task Force attempt to determine in advance the competitive effects of a business combination. This way of proceeding is well-entrenched at the Commission and precedes Monti's time as competition regulator. But he has extended the application of these principles in important and sometimes dubious ways.

On his first day on the job, in September 1999, Monti killed a merger between British tour operators Airtours and First Choice Holidays PLC. The case broke new legal ground in Europe by rejecting the proposed combination out of a fear of "collective dominance" of the package-tour market in the U.K. by the three remaining major players.

Collective dominance, applied only to duopoly situations before Monti's time, has since been extended further, to four-player markets. When EMI and Time Warner tried to merge their music-publishing businesses at around the same time as the AOL-Time Warner deal, the Commission objected on the grounds that the merger would leave just four companies in control of 80 percent of Europe's recording industry. And that, Monti's merger task force judged, was too few. Time Warner and EMI withdrew the deal before Monti could block it, in part out of the hope that such a gesture might earn Time Warner goodwill in the AOL review, which of course the Commission ultimately approved with only minor conditions. An appeal of the legal basis for the Airtours decision is still pending before the European Court of Justice.

While companies in the U.S. long ago learned to respect the ability of the federal government to sue to force the breakup of two merged companies, and so routinely seek a green light from regulators before doing so, the right to buy and sell private companies is beyond dispute in the U.S. Should a regulator seek to stop a business combination, he must, outside of certain highly regulated industries, sue in a court of law to show that the merger violates the law (usually the Sherman Act).

In Europe, the right to a trial only comes into play after the regulator--Mario Monti--has made his decision. And business combinations that proceed without his approval can be unwound by order of his office.

This leads to some curious Catch-22s, as in France, where takeover laws designed to streamline business combinations forbid firms to make a bid conditional on regulatory approval, while EU law forbids the combination to go ahead without it. This contradiction turned potentially expensive for French electrical-equipment maker Schneider Electric last year, when it was ordered by Brussels to sell or spin off the 98 percent of rival Legrand that it had purchased in a tender ofter. It has until November to do so, and as with all forced sales, especially one in which the deadline is known by the bidders, the price is bound to be a bad one for Schneider.

But Schneider, which has the dubious distinction of already owning the company the Commission has told it that it cannot buy, has joined the growing list of companies suing the Commission in the European Court of Justice to seek reversal of the Commission's blocking order or a ruling on the legality of the antitrust doctrines employed to prevent the transaction.

At the end of April, the ECJ took the unprecedented step of fast-tracking Schneider's appeal in an attempt to issue a decision before the November deadline for selling Legrand. Airtours PLC, on the other hand, is still waiting to hear from the ECJ, almost three years after Monti struck down its purchase of First Choice Holidays. But Schneider's case is almost unique, in that if it wins, it will actually get to keep the asset it wanted to purchase. For most appellants, it is a question of setting a precedent for future transactions, since as a practical matter mergers and corporate strategies cannot be put on hold for the length of time needed to seek a court review in the EU.

The lack of a trial--or even of a supervising judge--in Monti's merger-review proceedings seems to bother the Commission not at all. It sees most antitrust decisions in the U.S. made in practice by the antitrust division at the Department of Justice. Thus they view the matter as a distinction without a difference. But quite apart from the question of the presumption of innocence among companies engaged in voluntary capitalist acts, it can't be denied that the need to present and justify one's theory before a judge or jury necessarily forces one to look at one's theories in a different light, and thus raises the bar higher for those who would seek to block a merger. Even in the Legrand case, Monti has cautioned against seeing it as a sign that the EU's procedures are moving toward a "prosecutorial" model similar to that in the U.S.

No case needs to be brought because the EU does not see large companies as having that kind of property right in their businesses; the buying and selling of large enterprises that do business in the EU, regardless of where they are headquartered, is a regulated activity like driving a car or handling radioactive waste. And you need a license from Monti each time you want to do it.

This difference of approach reflects both Europe's more timid approach to the free market and Monti's broader role in regulating economic activity in the European Union. For in addition to being the EU's antitrust cop, he is also charged with policing the activities of member states themselves with respect to the internal market of the EU. As Competition Commissioner, his job is, broadly speaking, to make sure neither private companies nor state actors move to prevent "free" competition within the EU. Given Europe's history of subsidizing "national champions" and propping up industry to save jobs, his activism on this front is welcome.

Thus, in addition to moving against Airtours, Monti also took the opportunity, in his opening days on the job, to inform the Portuguese government that it was not within its rights to stop a Spanish bank, Banco Santander Centro Hispano, from buying Portugal's Champalimaud financial group, and that the Commission was claiming jurisdiction over the merger. That case, with which he had become involved while still Single Market Commissioner, his first job at the Commission, had a clear message--but this time for Europe's governments, rather than its businesses. If Monti had anything to say about it, EU member states would no longer be given a free hand to protect their beloved "national champions" from takeover by foreign companies, be they from within the EU, as with BSCH, or abroad.

At his confirmation hearing before the European Parliament in September 1999, Monti highlighted a third priority: stamping out the use of illegal state aid by EU member governments to prop up ailing industries. In order to create a level playing field for businesses with Europe's single market, the use of state aid is strictly limited, and the policing of state aid also falls under Monti's Competition portfolio.

Here, too, he laid down a marker early. The day after German Chancellor Gerhard Schroeder triumphantly announced that he had sewn up a bailout package for the ailing construction firm Philipp Holzmann, thereby saving thousands of German jobs, Monti replied with a "Not so fast." The Commission launched a year-and-a-half-long investigation into whether the bailout was proper. In this case, the Commission ultimately approved the aid, on the grounds that the German government's direct contribution amounted to only a small portion of the total recapitalization package.

Presciently, he declared at the time he closed the investigation that Philipp Holzmann was "not out of the woods yet." The company filed for bankruptcy earlier this year. It may be assumed that the threat of another extensive review by Monti's office was one of the factors that prevented another bailout, even in the midst of a German electoral campaign in which job-creation looks to play a determinative role.

For his willingness to take politically unpopular stands against member states acting parochially to protect vested interests, Monti has a well-earned reputation for being an independent actor within Europe, one who has called down as much ire from European national officials as from their counterparts in the U.S. Indeed, in April the French government lashed out at Monti over the Schneider deal; outgoing Finance Minister Laurent Fabius accused Monti of preventing European companies from acquiring the scale they needed to compete globally, making them takeover targets for foreign firms.

That may come as scant relief to those who perceived Monti's scuttling of the GE-Honeywell deal as a way of keeping U.S. companies down while the EU incubated its own competitors inside the walls of Fortress Europe. But it is likely that Fabius himself is referring to reports that GE is circling should Monti's decision on the Schneider case be upheld in court. If it is, and Schneider is forced to sell, Fabius can expect Monti to have little sympathy with French desires that the company remain in French hands.

If GE does move on Legrand, it may well get the green light from Monti. Approval for such a deal would go some way toward dispelling U.S. fears that Monti is a protectionist, but will likely do little to assuage American frustration that a bureaucrat in Brussels would dare to strike down a merger between two American companies that had already received the blessing of U.S. antitrust authorities.

But the jurisdiction that the EU claims over firms doing business in Europe is not far different from the right the U.S. claims to review deals that it fears could have negative effects on the American market. And there is a simple, if painful, solution for companies that bristle under Brussels' authority--withdrawal from the EU market.

Of course, the EU's internal market is one of the world's largest and richest; such a decision is nearly impossible for a global corporation like General Electric. The result of this is that the EU, with its more-restrictive merger reviews, becomes the default standard for global companies. The irony is that this is precisely the opposite of what antiglobalization agitators in Europe and America fear--a legion of multinational companies, answerable to nobody, roving freely about the globe in their rapacious, capitalistic way. Globalization has made multinationals more accountable, and accountable to whomever has the highest standards, in many cases, rather than the lowest ones. Monti, merely by applying tougher standards, becomes the benchmark, regardless of the value of those standards. And other global competitors then flock to the EU when shopping for a venue in which to stop a deal that they feel threatens their competitive position. It becomes the regulators, and not the corporations, who are unaccountable.

Thus, in GE-Honeywell, it was not GE's customers, such as Airbus in Europe or Boeing at home, who objected to the deal. Nor was it Rolls-Royce, a European competitor to GE in the aircraft-engine business. Among the chief opponents of the deal were American competitors such as Lockheed Martin. The Commission says that it is well aware of the potential conflicts of interest of some of those who bring objections forward. But the very structure of the Commission's review process, in which those that attempt to construct a case against the merger based in part on those complaints then also pass judgment on the merger, would seem to make objectivity difficult and to give competitors who dislike a deal the upper hand.

It is neither an inconsistency nor a contradiction that makes Monti a classical liberal when fighting government interference in the economy, but an interventionist when it comes to his own task of merger review. The same cagey skepticism that makes Monti so forceful in moving against state actors tends to manifest itself in the merger-review process as a wariness of the sorts of efficiency claims GE made in justifying the Honeywell purchase to U.S. regulators.

Some form of independent review could only improve the quality of the analysis, as well as separating the decision-making process from the individual preferences of Monti himself and the members of his antitrust taskforce. Indeed, there is probably no solution to this difficulty short of setting up an independent arbiter of the respective arguments of the Commission's regulators and industry. But that would involve either expanding the ECJ greatly or creating some other judicial organization at the EU level--something neither Monti nor European member states want.

So what's Monti's proposed solution for those who argue he blocks too many mergers?

The Commissioner has claimed that he might approve more mergers if, like his U.S. counterparts, he had the power to break up companies after a merger had taken place and determined the deal was anticompetitive. But this bargain calls to mind the story John Gardner tells of how Odin lost his eye. Having captured the king of the demons, the Norse god demanded to know how to keep his kingdom safe from the demon-king's minions. His adversary agreed to tell him--for a price. He wanted one of Odin's eyes. Odin agreed, and upon handing over his eye was told the secret: "Watch with both eyes."

Mr. Carney is the editor of the Business Europe column on the editorial page of The Wall Street Journal Europe.