The enlargement of the European Union in May has made it the world's biggest market. Its self-proclaimed aim, under the terms of its Lisbon strategy, is to become the world's most dynamic and competitive economy by 2010. But how do recent judgments on competition policy and intellectual property rights fit with this ambitious declaration?

The European Court of First Instance met earlier this month to review the EU's anti-trust case against Microsoft. The US software group is appealing against a record fine of E497m imposed by the European Commission for abuse of its dominant position.

In March, the Commission ruled that Microsoft had violated European anti-trust laws and ordered the company to pay the fine, as well as to provide rivals with software codes and offer a version of Windows without Media Player.

Microsoft must fight its own corporate battles. But, more broadly, Europe's attitude towards anti-trust law, competition and innovation has repercussions that go beyond the software industry. Tension between the US and EU is already evident across a range of trade and foreign policy issues.

There have always been differences on anti-trust law. US law identifies competition and consumer benefit as the priorities when dealing with anti-competitive behaviour. Europe, by contrast, has focused on competitor welfare, rather than the welfare of consumers.

In the Microsoft case, for example, the primary focus was on the impact of the company's products and market position on competitors such as Sun Microsystems and Real Networks.
Microsoft was accused of anti-competitive behaviour because it tied its Media Player into Windows.

But attitudes in the two continents now seem to be diverging rather than converging. If the ruling against Microsoft is upheld, Europe will widen the rift with the US, where lawyers and economists have found no evidence that tying of one product to another inherently harms competition. Even Lawrence Lessig, a known critic of Microsoft, argued in Wired magazine that "if every Microsoft innovation launches an anti-trust investigation then innovation will move to companies that don't pay such a high price".

Whether Europe provides the right climate for innovation is becoming a contentious issue for a range of industries.
Organised opposition to intellectual property protection is growing. Supporters of open-source software development are among the most vocal critics of Microsoft and its products.
The open-source concept is also being used to attack the pharmaceutical industry. Critics of high drug prices argue for such a model to be applied to drug development.

Activists are also lobbying the World Intellectual Property Organisation, with some success, to relax protection for owners of copyrights, patents and trademarks.

Yet, without intellectual property rights (IPRs), innovators who have invested time and effort in creating something new may choose never to make their work known to the public, in order to avoid theft. IPRs provide much needed incentives to invest in the development of products that are difficult to develop but easy to copy, such as computer software, music and new medicines. Without IPRs, many of the new technologies that have improved our lives would never have moved beyond the drawing board.

Neelie Kroes, Europe's new competition commissioner, with her strong business background, could help pave the way for a more subtle EU approach to anti-trust and IP protection that would encourage more vigorous competition.

But for now Europe remains at a crossroads. The climate is already shaky for innovation and IP protection in Europe. That may be scaring off investors, not to mention small software developers. The outcome of the Microsoft hearing will send a signal about Europe's position on competition and IPRs that could have even more profound implications for innovation and for global business.

Upholding the ruling would raise the political tension between Europe and the US and increase the chances of further stand-offs between the transatlantic trading partners. It would also deal a blow to believers in free markets and competition in Europe, by implying that the EU's approach to competition policy is to compensate Microsoft's competitors rather than to set up a broadly competitive market in which consumers, rather than companies, have the most to gain.

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The writer is director of the Stockholm Network, a service organisation for European think tanks and thinkers Financial Times - October 13, 2004

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