European Champions: competition and industrial policies at a crossroads?

EU politicians, lawmakers, enforcers and practitioners are waging a lively debate about whether competition enforcement should become more lenient in favour of European or national champions to build a rampart against negative influences from non-EEA countries or more tightened to mitigate anticompetitive effects that could be the result of historic underenforcement.

In 2019, the European Commission blocked a proposed rail industry merger between Siemens and Alstom. The decision was a major setback for the French and German governments. Politicians have repeatedly proposed to bend competition policy to create a European champion that can effectively compete with foreign state-owned or supported industries.

Free competition ensures innovation and growth

Over the last months and years, key discussions centred around the question of to what extent Europe's industrial policy requires a relaxed competition policy. This includes allowing the approval of mergers that may be anticompetitive. These discussions undermine the dogma according to which market and competition would be sufficient to maintain Europe and its Member States in the global dynamics of innovation and growth.

Undoubtedly, a free and independent competition environment increases incentives for innovation, which currently is a key focus of European competition watchdogs. It removes barriers to market entry imposed by incumbents. "Competition policy ensures that we have open and fair competition in the European Single Market," Commissioner Margrethe Vestager emphasised with a view to the Siemens/Alstom prohibition decision. "It keeps our companies on their toes. A company is not going to be competitive abroad if it does not have any competition at home. Unchallenged companies are not likely to be innovative, flexible or efficient in the global marketplace." She is right.

Importantly, the EU's competition policy is based on the principle of the rule of law, which is one of the foundations of the EU. It is important not to lose sight of this principle. Especially at a time when populism has become increasingly fashionable, this principle should be carefully defended.

A healthy economy requires both competition and industrial policies

Even in a competitive environment, however, imperfections may exist, such as capital-market imperfections and credit constraints, administrative burdens, or overly complicated labour or tax rules. These impose constraints on investment in innovation and growth. In these cases, industrial policies can remove constraints and motivate investments to enlarge capacity. This becomes even more crucial in the current energy crisis, where any form of deindustrialisation needs to be avoided at all costs.

In "Competition Policy and Industrial Policy: Towards a new era?" (Competition Forum, 2021), Deffains and Perroud provide an illustrative example of why excessive interference of purely industrial policy is not compatible with our values: "A good industrial policy is not to catch up with trains that have already started and are going much too fast to be caught up with, or those that are much too big to be stopped. A good industrial policy chooses the right trains from among those that are already in the station thanks to an efficient research policy."

The current discussions should therefore not be a question of either/or. Both competition policy and industrial policy should be regarded as complements rather than substitutes. Europe needs both: a clearly defined and well-established competition policy as the basis along with a carefully designed industrial policy that does not violate competition rules.

Competition authorities to remain independent

The dominance of foreign conglomerates cannot simply be balanced by allowing European "mega mergers" influenced by politics. In fact, politicians' activities are based on a temporary political mandate. Politicians serve a variety of conflicting interests and are subject to tense lobbying. Competition authorities, in turn, benefit from a long-standing, independent setup backed by numerous experts in competition law and economics. This should not be altered. "Competition policy independence is worth fighting for", French economist and Nobel laureate Jean Tirole pointed out in 2019 at the OECD. We couldn't agree more.

author: Johannes Frank