Protection or Freedom: Europe Must Choose

Europe’s longest-running show moved to the Court of First Instance in Brussels last month. The Court heard Microsoft’s appeal of the EC’s antitrust judgment against it. The questioning from judges raised serious doubts about the legitimacy of Europe’s order to artificially separate out the Explorer browser from Windows, and delved deeply into Microsoft’s claims that the EC wrongly ordered it to disclose valuable patented information about its source code.

Whether it wins or loses in court, it’s high time for the EU to think anew: Brussels fears a new wave of internal protectionism, so why does the EU keep using regulatory levers like antitrust to protect itself from competition abroad?

The Right to Innovate

The Microsoft case relies heavily on technicalities of EU competition laws, but ignores the key goals of fostering open markets and the right to innovate. This dispute crystallizes Europe’s dilemma: Is it an economically open superstate, riding the next wave of globalization, or a mercantilist cartel nurturing internal markets while fanning the flames of protectionism worldwide?

The cartel model has been dominant for too long. Europe, admonished by the WTO for its regulatory barriers to genetically enhanced foods, has fought the U.S. over Airbus subsidies and America’s export tax breaks, and used competition policy to hinder U.S. multinationals like GE, Honeywell and Coca-Cola in the European marketplace

As Paul Meller noted in The New York Times, the “most high profile appeal” the Court of First Instance heard before Microsoft involved EC objections to the GE-Honeywell merger, which took a one-day hearing (Microsoft got five days). What Meller doesn’t say is that when the Court actually decided (after four years!) it rejected the EC’s legal rationale while de facto accepting its ban of a now-defunct merger plan. All that time, money, and legal talent — for nothing.

Now the EC has fined, sanctioned and forced Microsoft to re-engineer its products for Europe based on highly speculative assessments of its undue market influence. While Microsoft may never be the favorite of competition authorities, at least U.S. regulators had the sense to settle with the software giant rather than let the dispute drag on and on.

Taking a Different Course

Europe shows no such wisdom. Indeed, the EC’s case against Microsoft remains at full boil when it should be winding down. Further charges, countercharges and legal maneuvers have been flying back and forth as Competition Commissioner Neelie Kroes threatened new fines “and they won’t be small fines” against Microsoft for its alleged failure to reveal its source code enough to facilitate open competition. Microsoft alleges EC collusion with its key competitors Sun, IBM and Oracle, and the same three competitors filed new complaints against Microsoft with the EC, this time targeting Microsoft’s Office suite.

After three years of costly litigation, surely it’s time to end this dispute swiftly. The resources Europe invests pursuing Microsoft do nothing to make its software market more competitive, or benefit European consumers. One astute observer of the latest round in Europe vs. Microsoft, Jon Collins of Macehiter Ward-Dutton, wrote in the UK Register that while Microsoft’s disclosures of source code “should be good enough for most developers that have the wherewithal to understand the code,” the larger issue is that “the legal system is unable to keep up with a rapidly changing industry.”

Huge Target

As Sageza Group’s Clary Ryder told InformationWeek, “It’s a completely different world than when the EU started its investigation. The laptop/desktop aren’t the center of attention of consumers … [But] Microsoft is a wonder target … The Europeans hate it that such a successful company is American.”

An enforcement regime in the EU that ignores this reality is not only bound to fail, it has the inevitable effect of retarding not promoting competition — as protectionist moves always do.

Ironically, Europe continues to proclaim its devotion to openness and promoting consumer welfare. Last September Neelie Kroes announced that consumer welfare would be the watchword of her competition policies, but she declines to take her own advice in dealing with Microsoft.

In March she told a Vienna competitiveness seminar that, “Open and efficient markets are the best way to deliver quality products at reasonable prices to consumers. But sometimes the market alone may not deliver fundamental European policy objectives, such as social and regional cohesion, cultural diversity, and high-quality public services.”

This indeed is “consumer welfare” with a difference, starting with a presumption of market failure that demands aggressive state intervention. Ms. Kroes’ arguments, furthermore, could quite literally be transferred to the governments of France, Spain and others within the EU seeking to block investment from beyond their borders. Surely it is high time for Europe to learn that if it is serious about fighting protectionism, it first needs to wrestle with itself.

George Pieler is a senior research fellow at the Institute for Policy Innovation and former economic advisor to Senator Bob Dole.

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