Cartels, Europe’s shadowy offspring

The upstanding businessmen usually get together at meetings of the Zentralverbands Elektrotechnik in Frankfurt. There they talk about new markets and technologies and whatever else is new in the business of power transformers, those huge devices made of magnets and wire coils without which there would be no electricity supply. But the really exciting stuff always comes at the end of the official programme, in the evenings or on joint excursions.

Then, as the investigators describe it, managing directors and heads of sales meet in “small groups” for “project-related discussions” that can work out to be highly lucratively. What comes up in the conversations are arrangements that secure for the supposed competitors additional hassle-free profits in double-digit millions. Agreements are madein detail on who should get which contract and, above all, at what price.

For at least five years, as established by officials of the Federal Cartel Office in Bonn, the Siemens Group, the Regensburg Starkstrom-Gerätebaupower (high-voltage current equipment manufacturing company), France's Alsthom and the Swiss electrical giant ABB have carved up the German market for transformers, wholly without competition, to rip off their customers, who have had to pay much more, had the providers been forced to compete.

The antitrust watchdog's investigation went on for four long years, and in September last year resulted in a package of fines. Overall, €24.3m in penalties were levied against the four companies and managers involved, and were paid into the national treasury.

Name and shame?

But there it ended. No one had to show up in court. None of those involved had their name published. In the media, not even a brief mention was made about the entire procedure.

That's the way it almost always is when cartels are broken up in Europe. Year after year, the competition authorities investigate hundreds of companies that violate the ban on cartels. Coffee and detergents, cement and chemicals, flat screen televisions and DVD players, glass and wire harnesses for cars, even fire engines andNorth Sea prawns - the list of industries creating cartels is almost unlimited.

Indeed, the cost of cartels to society are far higher than generally assumed. As the authorities have discovered, the cartels succeed in driving the prices of their products up by an average of 25 per cent and within four years are able to book a whole year's turnover as a windfall profit. Precise data, though, are by their nature, impossible to come by.

Cartels are the “children of darkness”, says Franz Jürgen Säcker, himself formerly an anti-trust judge and one of the leading experts in competition law at the Free University of Berlin. However, a nine-member team of economists from three European research institutes, in a study for the European Commission in 2007, calculated that the economic losses caused by cartels in Europe cost more than €260bn a year. That's 2.3 per cent of Europe's annual economic output, or double the annual budget of the European Union.

Toothless laws

This insight into the disastrous effects of the cartel business are nothing new. Walter Eucken, one of the pioneers of the West German economic system, considered the concentration of economic power by syndicates and cartels the fundamental problem of the pre-war economy. He therefore called for the state to enforce competition with an iron hand to keep prices down. In real life, however, little of that notion survived. Indeed, by 1957 the Bundestag had passed the first law against restraint of trade, and a European antitrust law was later included in the the EC Treaties. In practice, the laws against cartels remained toothless for decades, and whether the legislation actually works even now, remains a subject of controversy.

Doubt about the legislation nurtures the already high number of repeat offenders. American economists who analysed 283 cases of international cartels came up with some astonishing results. Between 1990 and 2005 the German chemical company BASF, for example, took part in 26 cartels. The French oil company Total was involved in 18 and Germany's Degussa in 13.

The official cartel busters cannot be accused in any way of any lack of zeal. Since the start of 2010 the European Commission has dealt with 15 major cases and imposed fines totalling almost €4bn on 112 companies. That amount, levied in just three years, was four times higher than the penalties paid throughout the entire 1990s.

The steep increase, however, is in no way due to greater powers having been given to the antitrust authorities, but to the introduction of a generous arrangement for giving state's evidence. Since 2004 companies and their managers that voluntarily reveal the existence of a cartel to the European Commission and give the necessary evidence escape without penalties, even if that company itself was the biggest beneficiary of the cartel.

Risk versus reward

What's more, the fines are limited to a maximum of 10 per cent of sales. How little that is, was made clear in 2002 by the exposure of a nationwide cement cartel. According to calculations of the cartel office, this brought its clients profits of around €2bn. All the same, the companies ended up paying only €400 million in fines.

Although cartels do enormous harm, the punishment meted out is at the level of fines for traffic violations. Their collusions are merely misdemeanours. In consequence, none of the perpetrators must appear personally before a court. The public usually does not even learn their names.

Things are rather different in the US. There, cartel members face long prison sentences, and in 2004 the maximum imprisonment was even extended to 10 years. Ireland and Britain have followed America's lead. The German federal government, though, does not want to hear of this. Speaking for Minister of the Economy Philipp Roesler, the Secretary of State declared that he considered the sanctions regime as “appropriate” and was “reluctant to turn EU antitrust legislation into criminal law”.

As many lawyers see it, that Germany of all countries continues to regard cartel offences as mere peccadillos is also rather questionable, as this generosity does not apply equally to everyone. Collusion in public tenders, or “bidding cartels”, is indeed indictable. “In that case, the State protects itself vigorously,” remarks Professor Säcker. German lawmakers must now ask themselves whether “collusion between local artisans truly deserves greater punishment than a global price-fixing agreement between multinational companies that causes billions in damage.”

European Commission

Record fines against screens cartel

On Wednesday, December 5, “the European Commission slapped a record fine of €1.47bn on seven companies that had fixed the price of cathode ray tubes for televisions and computer screens for nearly ten years” since the late 1990s, reports Le Figaro. The Parisian daily recalls that the Commission had carried out searches at the premises of these companies in late 2007, and emphasises that it is “the largest cumulative fine imposed so far by the Commission for cartel cases.”

The companies fined are LG Electronics, Philips, Samsung, Panasonic, MTPD (today a subsidiary of Panasonic), Toshiba and Technicolor. The Taiwanese Chunghwa Picture Tubes company, which revealed the existence of the cartel, escaped the fines.