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The credit crunch and associated economic downturn have created new challenges for governments and regulatory authorities around the world.

Issues to be addressed include what role, if any, should be played by competition law and policy in dealing with the current crisis, and what impact there will be on levels of enforcement.

On the one hand, it could be argued that competition principles should be subordinated to macroeconomic imperatives, and thus should not be applied to prevent measures that are necessary for economic stability even if inconsistent with promoting competition. On the other hand, it is possible to contemplate an even greater role for competition enforcement in times of economic difficulty, given the temptation for competitors to seek collective ways to maintain “industry stability.”

To date, the approach of competition agencies worldwide has been anything but uniform. Several agencies have addressed the issue head on. In Korea, for example, the Federal Trade Commission has announced that it will allow competitors to form temporary cartels to deal with the country’s worst financial crisis in decades. In the EU, the European Commission has demanded an active role for itself in both merger reviews and the review of state aid proposals.

Other agencies have been less pro-active, the Canadian Competition Bureau among them. Notwithstanding the bureau’s silence to date, however, the question must be asked in Canada as well: Will the Competition Bureau handle its duties going forward in the usual fashion, particularly in the area of merger review, or will it relax its enforcement standards in order to accommodate broader economic concerns not strictly related to competition law principles?

As a general matter, there is no formal role for extrinsic, non-competition considerations in the Competition Bureau’s review process. The bureau also prides itself on its independence and imperviousness to political pressure.

That said, there are two key industries — banking and transportation — where mergers are subject to parallel “public interest” reviews in addition to Competition Bureau consideration. Moreover, ultimate approval rests in those cases with the responsible minister, rather than being determined by the Competition Act process.

The track record involving mergers in these industries also hints at how competition issues could be treated in future cases. In 1998, for example, it was the Minister of Finance who ultimately decided to veto proposed mergers among four of Canada’s five leading banks. While the bureau identified concerns, discussions with the parties went no further because of the minister’s decision. Similarly, when the Canadian domestic airline industry was in crisis in 1999, a provision of the Canada Transportation Act was invoked to temporarily suspend the Competition Act’s application.

Even for industries where no “public interest” override exists, Canadian competition law incorporates other forms of exceptions or defences that may be relevant in difficult economic times. For example, the Competition Act provides that it is appropriate to consider whether the target of a merger “has failed or is likely to fail” when assessing a transaction’s effect on competition. Although the bureau’s criteria for accepting a “failing firm” argument are quite onerous on their face, it has shown flexibility in the past when required to deal with pressing circumstances (most notably when it decided in 1999 not to challenge Air Canada’s acquisition of Canadian Airlines, which was in dire financial straits).

Canadian competition law also explicitly provides for an “efficiency defence,” which allows anti-competitive mergers to be cleared if they are likely to generate gains in efficiency that “will be greater than, and will offset the effects of any prevention or lessening of competition.” Reliance on the “efficiencies” defence has been very infrequent to date, and debate continues over the appropriate standards to be used in measuring and weighing the efficiencies arising from a transaction. However, given the current economic climate and the likely consolidation in certain industries, it can be assumed that parties will increasingly invoke and test the application of this defence.

All of these issues will now have to be confronted by a new commissioner of competition, the former commissioner (Sheridan Scott) having announced her departure from the position in December 2008. Scott was criticized for her lacklustre enforcement record. Does this mean that the next commissioner will feel impelled to take a tougher line on enforcement, or will he or she be required to hold back until the economic dust clears? Only time will tell.

However, enforcement is unlikely to wane in the prosecution of cartels. Combating collusive behaviour will remain a priority for the bureau and could even be stepped up if the number of mergers declines and the bureau shifts resources to this arena.

Mark Katz is a partner in the Competition & Foreign Investment Review Group of Davies Ward Phillips & Vineberg LLP in Toronto.