Is the European economy fit to fight against the giants of globalized markets? Even though market concentration increased after the liberalization of the 1990s, according to some, European firms are too small to compete successfully. Public authorities can favour the creation of “champions” through industrial policies or simply by guaranteeing an undistorted competition in wider and liberalized markets. In this commentary we cast light on EU industrial policy and its relationship with competition policy.
The industrial policy in the EU
Industrial policy is usually understood as the strategy of a public authority to develop a particular activity with the aim to increase a country’s competitiveness. When the public intervention is to develop specific sectors (eg, shipbuilding and automotive) then it is industrial policy in its traditional sense, which is known as “vertical”. If the public intervention is transversal with respect to the sectors (eg, support to R&D and to small businesses), industrial policy can get a “horizontal” dimension.
For purists, a horizontal policy might lose the nature of “industrial”; however, it is preferred in advanced economies as opposed to a vertical one. First, it is not accepted that a public authority enjoys a superior knowledge, vis-a-vis a private firm, about which sector will boost the economy in the years ahead. Second, an erroneous intervention causes a loss for citizens both as taxpayers and as consumers. Third, a vertical intervention is not usually warmly welcomed by other countries. For example, in sectors where the size is a driver for competitiveness, due to economies of scale, a Government can: a) subsidize national firms to favour them against international competitors; b) protect them with tariffs until it reaches a dimension such that it can defeat international competitors; c) allow their dimensional growth also through mergers and acquisitions. The first two options – a) and b) – violate the principles of the World Trade Organization (WTO) and of the EU that prohibit subsidies that distort competition and that promote trade liberalization. The third option – c) – is actually the lack of vertical intervention since growth is physiological for efficient firms in market economies that promote the geographical expansion of the liberalized markets.
Consistently with the considerations exposed above, EU industrial policy is mainly horizontal, since it intends to create the conditions that favor business activity without setting differentiated treatment for firms depending on the sector to which they belong. Market forces have already "verticalized" the European economy. The single market and the single currency, by integrating national markets and fostering competition, have allowed a growing specialization of the member countries, that is a less homogeneous distribution of the sectors throughout the continent.
The interest in a more proactive industrial policy in the EU emerged at the turn of the millennium when, after the completion of the single market and the introduction of the euro, the EU formulated a strategy for its competitiveness. As part of the “Lisbon Strategy” – which later became “Growth and Employment” and “Europe 2020” – the Commission proposed sectoral and intersectoral initiatives: enriching existing horizontal instruments with the aim of improving the supply of raw materials, developing an economy with low environmental impact, boosting investments in transportation, energy and digital networks. However, the action of the Commission is limited by a EU budget that weighs about 1% of the Union’s GDP mostly dedicated to agriculture and cohesion policy.
Is competition policy an obstacle to the establishment of European champions?
Competition policy, like industrial policy, is in principle aimed at the competitiveness of the European economy. The firms that are successful thanks to their greater efficiency on a competitive European market will certainly be the ones best positioned to face global competition. However, when it is necessary to exploit economies of scale to fight on equal terms with the world giants, then European firms must sport an adequate size; for example Airbus, the European aeronautical champion opposing the American Boeing. However, firms that dominate their markets may find it easier to reduce consumers’ welfare by increasing prices and slowing innovation.
This last concern explain the European Commission's stop to the acquisition of the French firm Alstom by the German Siemens (6 February 2019). That operation would have created a European champion in the railway sector but, according to the Commission, competition in the market for high-speed trains and signaling systems would have been eliminated. The two firms are in fact already European giants and non-European firms, such as the rising Chinese CRRC, are not yet at a quality level to enter the European market.
After criticizing the Commission's decision, French and German governments published a manifesto for a European industrial policy fit for the 21st century (19 February 2019). In the document the two governments propose, for the competition policy, to “Consider whether a right of appeal of the Council which could ultimately override Commission decisions could be appropriate in well-defined cases, subject to strict conditions.” According to the proposal, Commission’s decisions in the field of competition, already appealable before the Court of Justice, could be reviewed by a political body such as the Council; this would presumably allow governments to break down the Commission’s obstacles to the growth of European firms. What is the evidence of that alleged Commission’s behavior so far?
From 1990 to date, out of the 7,311 notified concentrations only 29 were blocked (Siemens-Alstom among them), while 442 were approved only after having envisaged a reduction in the anti-competitive impact; for example, the sale of assets to reduce power of the firms involved in the transaction. This means that the Commission is not worried by the mere growth of a firm but by the dominance in its market, with negative consequences for consumers, due to the absence of effective and potential competitors.
Moreover, the data show that in recent years large firms have grown in their respective sectors both in the United States and in the EU with a more marked trend in the US (OECD, 2019 and IMF, 2019).
How can the EU help firms keeping the right balance between industrial and competition policy?
From the point of view of industrial policy it is necessary to maintain the horizontal approach (e.g., investing in R&D and in human capital) and a vertical approach dedicated, where necessary, to infrastructure for transport, energy and telecommunications; services that public authorities identify as particularly vital for all citizens and businesses.
However, champions are needed in globalized markets where size is the main driver of competitiveness. The European economy, with its growing specialization, is adapting in this sense. To avoid that the growth in size of firms, even with mergers and acquisitions, contrasts with the principles of competition policy. Thus to reduce the probability of stopped mergers and acquisitions, it is necessary to guarantee or to increase markets contestability by reducing entry barriers; a dominant firm cannot harm consumers if its market is open and easily accessible. As recalled by the Council (27 May 2019) it is a priority to complete the single market by reducing bureaucratic obstacles and eliminating discrimination based on nationality that still persist for some services. Beyond the European border, it is necessary to promote the integration of international markets to create a level playing field. The optimal context is when firms are rooted in market economies. The problem is when some players heavily intervene by subsidizing national champions to make them win in international markets. For this reason, the European Council (22 March 2019) declared that “the EU must also safeguard its interests in the light of unfair practices of third countries, making full use of trade defence instruments and our public procurement rules, as well as ensuring effective reciprocity for public procurement with third countries”. Hence, in ensuring reciprocity, the EU should promote its model without aligning with non-market economies. To reach that goal the EU should increase the bargaining power of market economy as a model, safeguarding the WTO’s role and extending the network of bilateral agreements with like-minded countries.
