EU Regulatory State: Privatization, Agencies, and Market Control

The Evolution of the Regulatory State in the EU

The role of government in the economy has significantly evolved. We can identify distinct phases:

1. Positive State: Initially, governments often owned and controlled key industries.
2. Liberalization: A shift occurred towards liberalization, with governments reducing direct control and allowing greater private sector involvement.
3. Growth of the Regulatory State: Industries became increasingly governed by private companies, but with regulations set and overseen by both private and public entities.

Factors Contributing to the Decline of the Positive State

• Privatization: Private companies gained control of industries previously managed by the state.
• Europeanization: The increasing influence of the European Union impacted national governance.
• Third-Party Governance: Governments began creating agencies to handle specific regulatory tasks.

Key Concepts in Regulation

• Monopoly: Competition law aims to prevent monopolies and ensure fair market conditions, including setting prices and ensuring equal access for all operators.
• Windfall Profit: This refers to unusually high and unexpected income. It can be a justification for government intervention.
• Externalities: These are unexpected effects (positive or negative) of economic activities. Governments may use taxes to internalize spillover costs.
• Asymmetry of Information: Regulations often require the disclosure of information and establish mechanisms to address information imbalances.
• Moral Hazard: Regulations may establish payment obligations and control excessive consumption to mitigate moral hazard.
• Precautionary Principle: This principle allows decision-makers to implement precautionary measures when scientific evidence regarding an environmental or health hazard is uncertain, but the potential risks are high. It is typically invoked when there is a risk of serious harm, some supporting data, and a degree of uncertainty (e.g., the initial response to the COVID-19 pandemic).

EU Agencies: Structure and Function

EU agencies play a crucial role in the regulatory landscape. Key bodies include the Commission and the Council.

• Executive Agencies: These operate for a limited period and generally do not have rule-making power.
• Regulatory Agencies: These are independent and possess some rule-making authority. They are often divided into decision-making and executive branches.

Agencies are specialized, non-majoritarian bodies established by secondary legislation. They exercise public authority, are composed of experts, operate independently, and possess legal personality.

Reasons for Agency Creation

• Credibility: Agencies are often perceived as more credible because they are outside direct government control.
• Increased Member State Cooperation: The EU framework facilitates cooperation between member states.
• Catalysis of Compliance: Agencies help ensure that Member States adhere to EU laws.
• Increased Network and Participation: Agencies often have specific goals and actively work towards achieving them.

National Variations: Britain vs. France

The implementation of regulatory agencies varies across countries. For example:

• Britain: Independent Regulatory Agencies (IRAs) were created to address specific problems and are typically separated from the general government civil service. They have controlling powers, and members are often nominated by the government, frequently coming from the private sector.
• France: IRAs were established primarily due to EU mandates. They have closer links to the traditional civil service and possess no formal powers. Members are nominated by the President and Prime Minister, and most come from the public sector.

Mechanisms of Control and Regulatory Strategies

States can exert control over specific issues through various mechanisms:

1. Market Discipline: Imposing financial sanctions.
2. Private Enforcement: Utilizing arbitration and other dispute resolution mechanisms.
3. Regulation: Implementing different regulatory systems.
4. State Ownership: The state taking direct control.

Regulatory strategies include:

• Command and control (punitive measures)
• Deploying wealth (e.g., incentives like free parking for electric cars)
• Harnessing markets (government influencing competitor behavior)
• Informing the public
• Acting directly
• Conferring protected rights

Potential problems with regulation include regulatory capture, legalism, challenges in standard-setting, and enforcement difficulties.

Regulation of Economic Activities

• Price Regulation: Particularly relevant in monopoly situations.
• Non-Discriminatory Access: Ensuring transparency and equal opportunities.
• Corporate Unbundling: Controlling smaller companies through various methods:
  • Accounting unbundling (separate accounts and finances)
  • Functional unbundling (no connections between corporations)
  • Ownership unbundling (breaking down large companies)

Public Intervention in Markets

• Direct action of public powers (e.g., loans).
• Direct provision of services.
• Universal services.
• Quasi-market allocation.
• Information disclosure mechanisms.
• Exclusive rights.
• Public service obligations.

The Regulatory Process

The typical process for agency regulation involves:

1. Identifying a problem or need.
2. Identifying the relevant competences.
3. Drafting a proposal.
4. Stakeholder consultation.
5. Summarizing responses.
6. Passing the regulation.
7. Final decision made by experts.

In the USA, the process includes publishing a notice, basing decisions on information and comments received, a consultation process, drafting the regulation, and presenting a proposal with supporting analyses.

State Aid

State aid, a form of subsidy, is generally prohibited because it distorts the internal market. Examples include providing money, land, tax breaks, or special rights.

Legal exceptions exist for aid:

• Having a social character.
• Addressing natural disasters.
• Targeting specific central areas.

Procedure:

1. State aid must be notified to the Commission.
2. It must be granted prior notification.
3. A balancing test is applied:
   • Identification of purpose: A clear reason for the state aid must be established.
   • Analysis of whether the aid will change behavior.
   • Proportionality: The aid must be proportionate to the objective.
   • Positive effects must outweigh negative consequences.

• Block Exemption: EU regulations list specific situations where state aid is automatically allowed without requiring Commission approval.
• De Minimis Aid: State aid below €500,000 over three years is not considered state aid and does not require notification.