In December the European Commission (EC) fined 5 envelope makers from Sweden, France, Germany and Spain a total of almost €20m for participating in a cartel. Between 2003 and 2008 these firms had coordinated responses to tenders, fixed prices and exchanged information. This increased the prices paid by their buyers who were stationary distributors and large companies.
Commenting on this case the European Competition Commissioner Margrethe Vestager stated:
On this case we have closed the envelope, sealed it and returned it to the sender with a clear message: don’t cheat your customers, don’t cartelise.
The EC initiated an investigation and undertook dawn-raids on the companies involved following a tip-off from a whistleblower. The Commissioner also had this message for other firms considering taking part in a cartel:
I do hope that you realise that just a simple tip-off from a whistle-blower, from within the company or from a customer is all it takes for your cartel to come up on our enforcement radar.
A previous post on this site highlighted the fact that the game of golf has played a prominent role in a number of previous cartels and that in these code names for their activities were sometimes adopted. The envelope cartel seems to have gone one step further by combining the two and referring to their cartel meetings as ‘golf’ or ‘minigolf’ appointments.
All firms involved in the cartel settled their case with the EC, resulting in reduced fines. The EC encourages such resolution of cases because it frees up resources and allows them to pursue a larger number of cases. In addition, the fines imposed on two of the companies were reduced due to their inability to pay.
Finally, it is also interesting to note that, following the collapse of the cartel, one of the companies involved went into liquidation and subsequently merged with one of its former cartel co-conspirators. This coincides with broader evidence of merger activity following the breakdown of cartels. One explanation for this is that merger activity is a response to competition breaking out in the post cartel environment.
Antitrust: Commission fines five envelope producers over €19.4 million in cartel settlement European Commission – Press release (11/12/14)
EU regulators bust envelope cartel in time for holiday cards The Guardian (11/12/14)
European Commission fines envelope cartel €19.5m PrintWeek, Simon Nias (06/01/15)
Kipper Williams on the envelope cartel The Guardian, Kipper Williams (12/12/14)
Questions
- What are the key features of the market for envelopes?
- Do the features of this market make it particularly prone to collusive behaviour?
- What are the trade-offs involved in reducing the fines for firms that are willing to settle?
- Is it right that cartel fines are reduced if firms are unable to pay?
The eurozone is certainly in trouble and, despite the efforts of world leaders to create confidence, it appears that most announcements are having the opposite effect. The risk of deflation has now emerged to be very true; the powerhouse of Europe ‘needs to do more’ and the euro has fallen following Mario Draghi’s recent comments. So, just how bad are things in the eurozone?
Mario Draghi suggested that as a means of stimulating the eurozone economies, a process of quantitative easing may soon need to begin. However, rather than reassuring investors that action was being taken to improve the economic performance in the region, it appears to have had the opposite effect. Following his comments, the euro fell to its lowest level since the middle of 2010.
Quantitative easing has seen much use in the aftermath of the financial crisis and the aim in the eurozone would be to put a stop to the continuing price decreases. The eurozone has now entered deflation and, while the aim of this economic area has always been low prices, deflation is not good news. The downward pressure on prices has been largely driven by oil prices falling and prices in other areas remaining relatively stable.
Quantitative easing would inject money into the eurozone, thus creating growth (or at least that’s the idea) and pushing up prices. One of Mario Draghi’s comments was:
‘We are making technical preparations to alter the size, pace and composition of our measures in early 2015.’
So, while it’s not certain that the QE policy will be used, it seems pretty likely, especially as this policy has been floating around for almost a year.
A key question is, will it work? The quantity theory of money does suggest that an increase in the money supply will lead to inflationary pressures, unless its velocity of circulation falls. But will it actually stimulate aggregate demand and economic growth? If there is more money in the banking system and hence more money available for lending then it may well stimulate investment and consumption. However, if consumers and firms are not confident about the effectiveness of the policy or about the future of the economy, then will the fact that more money is available for lending actually encourage them to borrow? In this case will there merely be a fall in the velocity of circulation?
The comments by Mario Draghi have also caused the euro to fall to its lowest level since 2010. The graph included in the CNBC article provides an interesting view of the path of the euro. Marc Chandler, from Brown Brothers Harriman said:
‘I’d say there’s a good chance it [the euro] gets there [parity with the dollar] before the election next November (2016) … We know the Fed’s going to be raising rates sooner or later, and the ECB is going to be easing sooner or later. I just see a steady grind lower.’
The outlook of the euro therefore doesn’t look too good by all accounts. It is now a waiting game to see if the policy of quantitative easing is implemented and whether or not it has the desired effect. The following articles consider this topic.
Eurozone economy slows further BBC News (6/1/15)
Eurozone falls into deflation for first time since October 2009 Financial Times, Claire Jones (7/1/15)
Eurozone officially falls into deflation, piling pressure on ECB The Telegraph, Marion Dakers (7/1/15)
Eurozone consumer prices fall for first time in five years Nasdaq, Brian Blackstone and Paul Hannon (7/1/15)
Draghi comments send euro to lowest level since 2010 BBC News (2/1/15)
Oil slump drags Eurozone into deflation The Guardian, Graeme Wearden (7/1/15)
Eurozone prices fall more than expected in December Reuters (7/1/15)
Eurozone lurches into deflation after oil price crashes Independent, Russell Lynch (7/1/15)
German inflation hits five-year low as Eurozone prepares for QE The Telegraph, Mehreen Khan (5/1/15)
Euro slide could take it to parity with dollar CNBC, Patti Domm (7/1/15)
Questions
- Why is deflation a cause for concern when normally the main problem is inflation that is too high?
- What is the quantity theory of money and how does it suggest an increase in the money supply will affect prices?
- If quantitative easing is implemented, is it likely to have the desired effect? Explain why or why not.
- Why has the euro been affected by Mario Draghi’s comments? Use a diagram to help your explanation.
- How will quantitative easing help to stimulate economic growth across the Eurozone? Are there any other policies that would be effective?
- Oil prices have had a big influence on the deflationary pressures in the Eurozone. If oil prices increased again, would this be sufficient to create inflation?
One thing that economists often argue for is free trade. It promotes competition, allows greater choice and generates efficiency gains through specialisation to name a few of the advantages. Barriers to trade have gradually been brought down across the global economy, but some do still exist.
Although free trade does have many advantages, there are also arguments for barriers to trade, especially for developing or emerging economies. In some cases, barriers to trade can help a country to develop a particular industry or offer protection to a new sector from the giants of the world. In the case of China, it had a quota system in place since 2009 to restrict exports of ‘rare earth materials’, such as Tungsten and Molybdenum. Many of the hi-tech products that China specialises in require these rare minerals during production and, as the dominant producer of these minerals, Beijing had imposed restrictions on exporting them in an attempt to develop these industries.
However, other countries had raised concerns about the quota system being used, suggesting that by restricting exports of rare earth minerals, China was driving up their price. It was also suggested that the restrictions benefited domestic producers, at the expense of foreign competitors, given that domestic producers were able to access the raw materials at cheaper prices.
A complaint was made to the World Trade Organization in March 2014 by the USA, supported by the EU, Canada and Japan. Following an investigation by a WTO panel, the panel found that China had failed to show sufficiently that the quotas were justified. After an appeal by China, the panel’s findings were upheld in August by the WTO.
In response to the failure of its appeal, China has just announced that it is removing the quotas on exports of rare earth materials. However, this is unlikely to be the end of the story, as other policies may well be imposed, including a resources tax; and an export licence is still required. The following articles consider this battle.
China axes rare earth export quotas Financial Times, Lucy Hornby (5/1/15)
China scraps quotas on rare earths after WTO complaint BBC News (5/1/15)
China ends rare-earth minerals export quotas Wall Street Journal, Chuin-Wei Yap (5/1/15)
China scraps rare earth export controls after losing WTO appeal Bloomberg (6/1/15)
China abolishes rare earth export quotas: state media Reuters (4/1/15)
Questions
- What are the benefits of free trade?
- Why do some countries choose to impose protectionist measures and what type of measures can be put in place?
- Using a diagram, explain the impact that export quotas would have on Chinese firms using these rare minerals and also on foreign firms.
- Why have other countries argued that export quotas push up prices of these minerals?
- What other policies might China put in place in order to protect its industries?
In December the European Commission (EC) fined 5 envelope makers from Sweden, France, Germany and Spain a total of almost €20m for participating in a cartel. Between 2003 and 2008 these firms had coordinated responses to tenders, fixed prices and exchanged information. This increased the prices paid by their buyers who were stationary distributors and large companies.