Interview with Neelie Kroes*
* Now Dutch Special Envoy for the Development of the Digital Economy, Neelie Kroes was Vice-President in charge of the EU's digital agenda in the Barroso 2 Commission (2010-2014) and Competition Commissioner in the Barroso 1 Commission (2004-2010). An economist by training and a member of the Dutch liberal party (VDD), she was Secretary of State for Transport, Public Works and Water Management (1977-1989) for twelve years.
THE TWILIGHT OF THE BANKING ECONOMY
Interview conducted byFlorence Autret**
** Journalist. Brussels correspondent for La Tribune.
For eight years, the European Commission press room sparkled in the glint of the multi-coloured brooches pinned to her suit lapels. First arriving in The Hague in 2004, Neelie Kroes started her EU career at the age of 63 in one of Brussels' highest profile jobs, Competition Commissioner. Her predecessor, Mario Monti, handed on to her two strategic dossiers: Microsoft, ordered a few months previously to pay a record fine for abuse of a dominant position; and the Visa/MasterCard duopoly, from which the European competition regulator had been trying for years to wring the money made from the commissions charged to merchants and consumers for card payments. Ms Kroes forced them both to cap interchange fees, in other words to set the price of card payment services. A confirmed liberal, she has a proven track record in consumer protection. She used the same method a few years later to deal with the problem of roaming and the overbilling of calls and data transfer in European cross-border communications.
It was the financial crisis that first projected her into the limelight. From 2008, the collapse of the banking sector brought a deluge of applications for state aid to Brussels. In total, almost 2,000 billion euros of new money and public guarantees were poured into the banking sector. Other dossiers were side-lined. The worst of the storm had already passed when, in 2010, The Hague asked José Manuel Barroso, then starting his second period of office as Commission President, to keep Neelie Kroes on his team. She became Vice-President in charge of the Digital Economy.
Today, at the age of 74, she travels back and forth between Europe and the United States as the Netherlands' "special envoy", promoting her country in the world of new technologies. She arranged to meet me at the Stationshuiskamer, a noisy, trendy café perched above the tracks at The Hague's central railway station, where the average age is no more than 35. That is where she gave me her account of the 2008 crisis and explained how the digital economy is ousting the old banking order and why European leaders need to "bite the bullet".
Florence Autret - Payment services were already on the agenda when you arrived in Brussels as Competition Commissioner in 2004 and the MasterCard and Visa dossiers had been on-going for several years. How did you approach the issue?
Neelie Kroes - The competition portfolio was new to me and very wide-ranging. It goes well beyond financial services, ranging from beer cartels to telecommunications via state subsidies. There was plenty to keep me busy! The financial crisis came knocking at my door almost from the start. I had been a member of the board of directors of NIB, a Dutch investment bank. I knew how banks operated and the painstaking process by which new products were introduced into the system. But I needed a refresher course. So, when I arrived, I spent a long time talking with Commission staff, with my cabinet and with my predecessor, Mario Monti, not to reproduce what he had been doing, but to understand his way of working.
F. A. - We will come back to the banking crisis later. On the issue of card payments, in 2013 the European Union suggested regulating the interchange fees by which the card networks make their money. You had decided beforehand to cap these fees in the individual cases that came under your jurisdiction. In other words, you set the prices. This was very unusual for the Commission and a little unexpected from a liberal politician like yourself. How did you come to make such a decision?
N. K. - As a liberal, I believe that if the market is not working properly, you have to intervene. In general, people think that the investigations carried out by the European competition authority are designed to serve the interests of one company against another (1). That is wrong. They are designed, above all, to protect the consumer. That was very clear to me. But it was not easy because being convinced was not enough: in each case we had to find the evidence. And that is just as it should be. Any business under investigation, just like any of the other interested parties, can ask the European Court of Justice in Luxembourg to review the decision. So you have to be very confident in what you are doing.
F. A. - The crisis came along in 2007/2008. Billions of euros worth of state subsidy were poured into the banking sector. The European competition authority found itself on the front line. What was your experience of these banking dossiers?
N. K. - It became evident that most of the banks simply were not operating in the way we thought they were; some of the things they were doing had the potential to cause serious crises. Banks are very different animals to other businesses because they are vital cogs in the economy and know exactly how to use their power. Banking is very different to the pharmaceuticals sector, for example. Sometimes I was tempted to compare them with the big telecommunications businesses that also tended to abuse their positions. But when I asked telecoms bosses, face to face, whether they though their conduct was unfair, they agreed that it was. In the banking sector, however, I had the impression that there was a whole series of institutions that did not even realise how unsettled the economy was.
All that is going to change thanks to the digital economy. It is something I am more convinced of than ever today. Things are really beginning to move with the start-ups now. The banks simply will not be able to stay shut up in their own little world.
F. A. - Do you mean that the banks put pressure on the Commission because of the role they played in the economy?
N. K. - Exactly. At the time, they did not believe anything was going to change. They wanted to go on as before because it was making them lots of money. To be frank, there was a problem at the top of many banks, but not just at the top. The whole system was rotten. The more creative you were, the more money you earned. In politics, too, people were afraid to sound the alarm for fear of unleashing some uncontrollable force. It is understandable. But I think, given the circumstances, that we were too careful in our approach.
F. A. - Do you mean in terms of state subsidies?
N. K. - As Competition Commissioner, you have to be aware of the consequences of your decisions. I'll never forget the weekend when Northern Rock collapsed. I and everyone in the team thought we could contain the consequences of its failure. But there was a domino effect and the scenario repeated itself time and again. People could not believe their eyes. There was a mixture of incomprehension and wishful thinking. One day, the heads of a bank on the fringes of the scandal came to see me. They told me that if we helped their competitors to get themselves out of trouble, it might well harm their position in the market. And they were right.
That is why, though we did give the banks a chance to extricate themselves from their difficulties, we were also very strict in approving state subsidies. We told them that they either had to repay the subsidies or shed certain activities. Whatever the situation, the market and the players in it have to understand that misconduct will be punished. Sanctioning some helps us to limit the damage suffered by others.
F. A. - Some of the players involved were clearly at fault. But, at the end of the day, the banks ended up getting all the money they needed to pull through...
N. K. - Because they fulfil a particular function within the system, the banks think they are above the rules. But they are not. It is true that we authorised state subsidies, but with certain strict conditions and for a certain period only. After the collapse of Northern Rock and for months afterwards we were also working every weekend to identify solutions before the markets reopened on Monday morning. The level of urgency was very difficult to cope with. The national central banks and the European Central Bank were on board. We were also in daily contact with the US authorities. The people dealing with these issues had to be very vigilant. They knew that if a "client" took us to court, it would be a disaster. It was a fascinating period. And I was deeply impressed by the quality of my staff.
F. A. - Before the crisis hit, you had opened a sector investigation into retail banking services. It was the first time the European Commission had used this tool, designed to investigate a sector as a whole. Why did you do it?
N. K. - Precisely because of the bank's role in the economy and because it was difficult to understand what was really happening. Later we decided to regulate certain services, such as payments and cards.
F. A. - Did you receive the support of the rest of the European Commission at the time?
N. K. - Yes, ultimately, I did get their support. But I also had to battle with some of my colleagues who were under pressure from their own capitals. National governments were involved in intensive lobbying, I can assure you, particularly the big players like France, Germany and the United Kingdom. Personally, I was and still am totally independent. If I were not, I would not have accepted the job.
F. A. - What was the response from the people you talked to?
N. K. - They tried to persuade us that the situation was under control even in the midst of the crisis. The banks told us they we had no business poking around in their "backyards". Then I held a series of totally confidential bilateral meetings, thirteen to be precise, with sector leaders. Together with my adviser, a very intelligent young man, we asked them why it had happed, how exactly it had happened, and what their role had been. They all told us what their competitors had been doing. And they all played down their own roles in an attempt to exonerate themselves. Whey I asked them why they had sold a particular product and if the chairman of their board was aware of it, they all answered, in complete confidence, "We have no idea!" The products were very creative. The problem was that they were making lots of money. So much so that when things started to go downhill, it all snowballed.
F. A. - Did the central banks play an important role at the time?
N. K. - Absolutely. National central banks were still responsible for banking regulation and they were all playing the national card. You will not be surprised to hear that I did not make many friends!
F. A. - What message were they were sending you? "Financial stability first, so please keep the money moving"?
N. K. - That is it exactly. I was perfectly well aware of what was going on. That is why I was convinced that the Commission was the only body that could do the job. I pushed strongly within the Commission for more power to be given to Frankfurt (2). The role of banking regulator is not an easy one. You have to be brave enough to point the finger at the nationalist reactions of central banks. That is why I was very supportive of centralised regulation. There was no one who could do the job better than the ECB, which was headed at the time by Jean-Claude Trichet. He proved to be very firm, very competent and not political. He really kept himself above the fray.
F. A. - It nevertheless took until 2012 to bring this issue to the table and until 2014 before power was actually transferred to Frankfurt...
N. K. - True, but the discussions started during the crisis because we realised just how difficult these issues are to deal with. Financial services need to be more transparent, people must be able to understand what it is they are agreeing to. That is also why we are supporting the development of the FinTech sector (3). Some big financial institutions tend to believe that nothing will ever change. They're wrong. Government departments, central banks and other financial actors need to realise that the "big players" are no longer alone. There are now other companies competing to earn money in these markets.
F. A. - How is this change manifesting itself?
N. K. - New - and much more transparent - payment systems, for example, have managed to carve out a place for themselves in the market. All these new services operate with a simple smartphone. In France, people complain that there is no European Google. But there has been nothing to stop one being launched. We have missed numerous opportunities in the past. Now we need to stay alert and grasp any new ones that come our way. I recently asked Tim Cook (4) what new products he expected to see emerge over the next four years. He answered that his challenge was to choose one good idea from amongst the thousands of excellent ones out there. He assured me that in the near future we will be using objects and services whose existence we cannot even imagine today. Everything is moving very quickly. In the Netherlands, for example, MasterCard has set up a pilot scheme that allows users to pay with a fingerprint. The Dutch company Adyen has created a platform that collects and converts foreign currency instantaneously. It is working for Google and Amazon and others and all are impressed by its effectiveness. This system means that the banks are no longer earning a commission. It is just one example of how they are paying for being slow to innovate.
Today people are more and more aware of the problem. Some big businesses are coming up with ready-made schemes and working with start-ups. I can remember Google boss, Larry Page, explaining to me that when the inventor of the Android came to see him, he had no idea of what might come of it. But what did he do? He asked that an entire floor of the building be put at the team's disposal and left them to get on with it. That was the right attitude. There is no point in try to control everything. Big businesses, and banks in particular, should not be trying to do everything themselves; they should be joining forces with start-ups. That is what happened in the aeronautical industry in the 1970s. A few pioneers re-launched aircraft building in Europe and today Airbus is outdoing Boeing. Who would have believed it? You can't just keep on doing the same old thing.
F. A. - The high-tech sector is caught between two conflicting demands: the need to guarantee security, on one hand, and the need to create better conditions for innovation, on the other. How can we solve this dilemma?
N. K. - Life is full of dilemmas! Reality is not black and white. Look at the debate around the personal privacy issue. Sometimes politicians need to make difficult decisions, to take risks. We need leaders who are more pro-active than most of those who currently wield the power in Europe, even the US. By definition, politicians take the short view. They focus on the end of their period in office and on getting re-elected.
There are exceptions, of course. I remember a digital strategy conference in Denmark. The Danish Finance Minister, a liberal, was spending hand over fist to develop digital technologies that would enable the elderly living on Denmark's many islands to remain in their homes. He saw an opportunity and he seized it. I have known quite a few finance ministers and none of them ever took that sort of risk. But he was convinced that it was a way of dealing with the challenge of an ageing population and that, in the long term, the investment would save Denmark a lot of money.
It is all a question of leadership, vision and bravery. You have to be able to make decisions that are not connected to your personal fate. To say, "This is the job and I'm going to do it." That is all there is to it!
The businesses and individuals exploiting the potential of new technologies are transforming not only the old economy, the banks for instance, but the whole of society. And it is not over yet. Now you can get every information on your iPhone. You can keep track of your family with it when escaping a country, and it can help to navigate your way out of danger towards a safe place.
(1) In the case of card payments, supermarket chains were lobbying hard for a cap on fees.
(2) Following a decision taken by the Eurozone heads of state in June 2012, the regulation of Europe's 130 major banks (representing 85% of European banking assets) has been carried out by the Frankfurt-based European Central Bank since November 2014.
(3) Young businesses that rely on the use of digital technology to compete with the major players in the financial services sector in particular and banking in general.
(4) CEO of Apple.