'European champions' policy likely to focus on more competition, not less

18 February 2020 8:25am

17 February 2020 by Michael Acton and Arezki Yaiche

Don't be fooled by the latest eruption of fire and brimstone from big EU countries pushing for a loosening of the bloc's merger rules to allow the creation of "European champions."

France and Germany may have recruited Italy to their cause, and kept Poland onboard, but a close reading of their recent comments suggests that they have toned down their position — abandoning the idea of a ministerial veto on the European Commission's merger decisions, for example.

Behind that shift probably lies the realization that the commission and smaller EU countries alike will block any major changes to the EU's competition rules — and that many of the arguments in favor of such changes, such as the conflation of digital and industrial champions, don't stand up to scrutiny.

The push for reform has undeniably changed the political context in which the EU will make merger decisions in future, but it's unlikely to yield concrete policy changes. Any overhaul of the bloc's merger rules will require the unanimous support of the bloc's member states, and that's not likely to happen any time soon.

That's not to deny the pressure on Europe as US tech giants secure their grip on digital markets and Chinese companies scamper up the industrial value chain. EU policymakers can and will respond; but they are more likely to push for tighter regulation of foreign companies than to create behemoths of their own.

On the surface, the debate over European champions is raging as strongly as ever. France and Germany have been pushing for change since shortly before EU competition chief Margrethe Vestager blocked the Siemens-Alstom megamerger a year ago.

Earlier this month, they were joined by Italy and Poland in writing a letter to Vestager calling for new merger-control guidelines "in the coming weeks." There are no prizes for guessing which subject French economy minister Bruno Le Maire is likely to raise at a scheduled meeting with Vestager tomorrow.

Italian Prime Minister Giuseppe Conte now seems to be fully onboard, having emphasized that the EU's rulebook is outdated. "EU competition rules were elaborated a long time ago, when there was not yet a global market," he told reporters in Brussels on Feb. 4. "To propose those same rules now, and to continue to apply them slavishly, is a mistake because this begins to be self-limiting for our European industrial champions."

Opposition

But the message isn't hitting home with smaller EU countries, which detect a whiff of self-interest in their larger neighbors' position. Merging Siemens and Alstom might be good for Germany and France, but perhaps not for smaller manufacturers of trains or signaling equipment in Spain or Belgium.

Similarly, Conte's sudden interest in reforming merger rules comes as Italian shipbuilder Fincantieri is trying to get a merger with French rival Chantiers d'Atlantique approved by EU merger officials — who are putting up a fight.

Smaller EU member states including Denmark, Portugal and the Netherlands have warned against weakening merger rules to explicitly allow for more consolidation in Europe's big, traditional industries. So too have competition regulators, top judges, small and medium-sized business associations, and many leading economists.

Vestager herself has repeatedly insisted that favoring horizontal mergers in large European industries, at the expense of smaller European competitors and consumers, is not the way to strengthen the EU's global competitiveness.

And Olivier Guersent, the EU competition department's top civil servant, couldn't resist a nod to the authoritarian pedigree of state-sponsored monopolies at a hearing in the European Parliament last month. There he argued that if such a policy was a good idea, "the USSR's industries would have been thriving."

Another way

Still, the 21st century's global economy has brought legitimate concerns for European companies, which may require a policy response. These can be divided broadly between the increasing manufacturing prowess of China and other Asian economies; and the prevalence of US tech companies in Europe's digital markets.

The China argument wasn't enough to get the Siemens-Alstom deal approved: The competitive threat from Chinese rail giant CRRC was years away at best and entirely theoretical at worst, EU officials decided.

But the direction of travel is clear: Chinese industry, backed by the state, has graduated from manufacturing steel bars and plastic knick-knacks and can now compete globally on quality — and win on price — in high-tech products from smartphones to electric cars.

Chinese companies are also increasingly establishing a presence within Europe, which can make it harder for regulators to crack down on unfair behavior. The import of subsidized goods, for example, can be controlled by tariffs; but there are fewer options to curtail a company making things in Europe while receiving subsidies from abroad.

Given that, Vestager has moved to review the EU's state aid and public procurement rules, as well as the rules governing horizontal and vertical agreements. She's also considering Dutch government proposals that would allow closer vetting of foreign state-subsidized companies operating in Europe.

There's also a realization in the EU that sometimes, new, innovative industries need a leg-up to get going. Industry commissioner Thierry Breton is pushing for the EU to support the development of the hydrogen sector, for example, which promises to make power generation and storage more environmentally friendly.

The EU's state aid rules allow this in certain circumstances, and officials have shown themselves receptive to investing in new technologies. In December, the commission approved a massive investment by some member states in a common electric battery project.

Policymakers are nevertheless pushing for more clarity on and perhaps more leeway in when rules permit state funding. The commission is expected to announce an industrial strategy in March, to align with the Green Deal that aims to ease the transition to a climate-neutral economy.

More competition, not less

As for European companies' lackluster performance in digital markets, the commission's answer is likely to be more support for smaller companies and stricter enforcement of competition rules — in other words, precisely the opposite of what supporters of merger reform are advocating.

Vestager has vigorously pursued US tech companies that exploit their dominance in one service to give themselves an unfair advantage in adjacent markets: See, for example, the trio of huge fines she has levied on Google since 2017, the first of which was appealed in the EU courts last week.

Elsewhere, EU policymakers are looking to crack down on what they call "killer acquisitions," whereby a tech giant buys out a young potential rival — often at great cost — to eliminate future competition.

And it's not just antitrust policy that is being used to curtail the power of these tech giants. Vestager used state aid law to unravel Apple's sweetheart tax deal with Ireland in 2016. In the realm of data privacy, the General Data Protection Regulation has limited the extent to which big tech companies can monetize the data they harvest from EU citizens.

Next month's industrial strategy could see an increase in start-up funding or R&D expenditure to support small, innovative EU companies. But no-one in the commission is talking about loosening merger rules. As Vestager has noted, you don't become more competitive globally by reducing competition locally.

Stepping back

Reading between the lines, the advocates of loosening EU merger law appear to have realized this, even as they continue to make their case.

Gone is the radical talk of a ministerial veto on EU decisions, which France and Germany suggested in a joint memorandum last year.

Le Maire is now careful to lace his interventions with assurances that he is against harmful monopolies, and he has stopped railing against the Siemens-Alstom decision. Instead, he pitched the idea this month that mergers could initially be cleared and then vetted some years later to see the effects.

In their letter to the commission, France, Germany, Italy and Poland urged the regulator to use behavioral remedies more often, monitoring a company's conduct instead of requiring structural remedies that offer an immediate and permanent solution to its concerns.

This might turn out to be easier said than done — it would entail a substantial extra workload for EU officials — but it does show a shift away from the earlier rhetoric around the need to create industrial champions.

Vestager has agreed to meet them halfway, by looking again at the EU's market definition guidelines to see whether global competitive threats should be considered more in both antitrust and merger cases.

If they aren't going to get direct changes to the merger rules, then expect the advocates of "industrial champions" to fight tooth and nail over the coming months to get their views on the global economy into this key document.

In the second half of this year, Germany will take its turn chairing the EU Council, meaning it will oversee meetings between national officials. This gives it a platform to drive the industrial policy agenda.

It has a choice of paths ahead: use the role as an opportunity to build on common ground with the commission by offering support to the digital and high-tech sectors of the economy; or choose instead to double down on the argument over creating old-school industrial champions.

But the French, German, Italian and Polish governments might ask themselves if it would be better to climb down the merger-reform hill, rather than dying on it.

*Additional reporting by Natalie McNelis and Giulia Bedini