Car industry analysis

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European Business – Pre-release
Question 1:
To what extent does support for the banks and car industry go against the main objectives of competition policy within the European Union?

Introduction
EU competition policy (defined and explained)
The success of the single market ultimately relies on an effective competition policy, ensuring that companies do not become too big in concentratedmarkets, that supplies are not limited by segmented markets, and that national governments do not give domestic companies unfair advantages through subsidies and tax breaks.
Competition policy was built in the Treaty of Rome, and this has turned out to be an area in which the EU has clearly intervened in the economic life of member states, and even of non-member countries where mergers andacquisitions are seen to pose a threat to competition.

Basic Idea
- Free market economy
- The market regulates itself.
- Supply and demand lead to an equlibrium
- No support
- Wider consumer choice in markets for goods and services.
- Technological innovation which promotes gains in dynamic efficiency.
- Effective price competition between suppliers.(http://www.europa-digital.de/dschungelbuch/polfeld/wettbewerb/instrum.shtml)

EU competition policy has four key objectives (which the Commission supervises):
• Discouraging the development of monopolies and cartels
• Merger control
Important for this question:
• Promoting the competitiveness of European companies by
o protecting intellectual and industrial property
o reducing the bureaucraticburden
o providing help with research and development
o providing aid to small and medium enterprises
• State aids (!!!)
o Monitors the provision of subsidies, loans, grants and tax breaks to companies
(To ensure that they are not given an unfair advantage over competition
o Temporary aid in times of real need, aid for research and development and for regionaldevelopment are permissible
BUT: state aid must generally be in the interest of the EU as a whole

Reference: John McCormick, “Understanding the European Union- A concise introduction” (2008), pp. 153-155
Main part
Why did the banks and car industry get support?
(Economic crisis!
(Two of the industries which were most affected by the crisis

Why did banks get support?
• "Ifbanks collapse, the economy collapses" (Statement: Commission official, Website “New Europe”, Article “No banking sector style state aid for EU car-industry”, November 2008)
(Government support for banks was expected!

Measures and extent of support for banks:
• Bank deposit guarantees
• Injections of fresh money from their national governments
• Aid schemes (restructuringaid, recapitalisations, etc.)
• Nationalisation (!)

Examples:
• Germany: Hypo Real Estate bank has been nationalised completely in 2009
• UK: Royal Bank of Scotland now over 80% state-owned (according to “telegraph.co.uk”)
• France: 360 billion euro bail-out package for banks (according to “telegraph.co.uk”)

Why did the car industry get support?
• Large and regionallyconcentrated employment makes the industry politically sensitive
• Strong interconnections between the car industry and other industries implied that spillover effects were high.
• Stimulating demand was seen as an effective way to strengthen total demand by moving forward purchases
• Bailing out car producers could help solve credit problems when they had financing companiesMeasures and extent of support:
• Government support to the automobile industry has been provided in a variety of forms
o actions aimed at boosting car sales
o measures to directly support the industry
o subsidized credit facilities and car scrapping schemes (bonuses for replacing old cars by new cars)
loans The EU wants the car industry to...
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