Year LXI, 2019, Single Issue, Page 16

 

 

Competition Protection
and European Industrial Policy

 

FABIO MASINI

 

 

Introduction.

Last February’s refusal, by Danish European Competition Commissioner Margrethe Vestager, to give the go-ahead to the proposed merger between two high-speed rail sector giants, Alstom (French) and Siemens (German), provides some food for thought. Although an exemplary decision in terms of its adherence to EU law — designed to protect the citizens from abuses of monopoly positions, the regulation of competition in the European market is an exclusive competence of the EU —, it also seems to be a somewhat paradoxical one, if considered in the context of the much vaster global market.

Furthermore, it raises a question that, as is becoming increasingly clear, must inevitably be addressed when considering the long-term outlook for the European economy: Is it still realistic and acceptable, today, to continue reasoning solely in terms of the internal European market, and allowing this narrow vision to prevent the emergence of industrial and financial giants able to compete on the world market? There can be no arguing that the Commission’s decision protected the right of European citizens to be defended against a potential monopoly; but the fact is, it also had the effect of damaging the prospects, in terms of global competitiveness, of a European industry. In short, it led to a conflict of objectives that would have been far better avoided, whereas what is needed is a solution capable of safeguarding both the European citizens and the global competitive capacity of European companies.

Basically, it has become crucial to work out how, without abandoning our defence (“constitutionally” enshrined in the Treaties) of competition as a means of guaranteeing free and fair trade, we can succeed in introducing and promoting a genuine European industrial policy. To examine this problem, I divide my reflections into three interconnected parts. I begin by outlining the theoretical basis (section 1) and historical evolution (section 2) of Europe’s pro-competition policy, before examining the prospects, at different levels, for a possible European industrial policy or, more simply, for European development (section 3). Finally, I look at the institutional difficulties, seeking to identify the institutional or leadership formula that might allow the implementation of a unitary strategic European development plan (section 4).
 

  1. The Theoretical Basis of Europe’s Antitrust Policy.

The policy of protecting market competition in Europe began with the 1957 Treaties of Rome. Subsequently, in 1990, ahead of the launch of the single European market, responsibility for implementing it was assigned to the European Commission; more recently, in 2003 and 2004, this competence was enhanced through the introduction of new regulations.

The economic rationale for the policy is obvious: defending market competition, and thus ensuring that the market is as far removed as possible from any kind of monopoly or collusive oligopoly, is clearly a way of protecting consumers, who would otherwise find themselves at a disadvantage, in terms of their bargaining power, when purchasing a good or service from a single seller (or small group of sellers). Accordingly, the further removed a market is from what microeconomics textbooks call perfect competition, the easier it is for sellers to fix their prices at levels higher than their average long-term costs, and thus make extra profits at the buyers’ expense.

Actually, there is no such thing as perfect competition, given that it is an idealised model based on the assumption that all products are perfectly homogeneous, i.e. identical and equally appealing to all consumers, which, of course, is never the case. Take toothpaste: even though all toothpastes serve the same purpose, when we buy a tube, we likely display inertial behaviour (choosing one we previously purchased, if we were satisfied with it), or allow ourselves to be influenced by marketing (deciding that toothpaste containing micro-granules, for example, is more effective, or that one particular type will give us fresher breath, and so on), and therefore do not make our choice solely on the basis of price.

In this way, the (I would say, virtual) model of perfect competition leaves room for what is the truly dominant model of market competition, namely, monopolistic competition; in such a market, single producers can manage to act almost like monopolists in their own niche of the broader market for a given product, yet without this resulting in barriers to the entry of new businesses. For example, if I have I invented and patented a particular toothpaste containing micro-granules, I will (as long as my patent applies) be the monopolist within that specific niche market, with the broader toothpaste market continuing to remain open: consumers can always decide to stop purchasing my toothpaste containing micro-granules and switch to another type.

The monopolistic competition model is the foundation of the modern capitalist economy, because it allows innovation to be exploited in order to generate, temporarily, extra profits sufficient to remunerate research and development efforts and cover the costs of product promotion. Extremely subtle and difficult for average consumers to spot, this is a form of competition that is impossible to eliminate and difficult to regulate. The situation is therefore different from that of a monopoly (which is fairly easily identified and sanctioned), where the seller, being the only one on the market, is free to fix the sale price and decide the supply (quantity produced), gauging these factors in order to generate maximum profit, to the detriment of collectivity.

This is the reason why an effective policy to combat the rise and abuse of dominant positions constitutes a strategic competence. And the European Commission, which (quite rightly) exercises it exclusively for the entire European single market, serves as a guarantee that consumers, who are the market’s weakest players, will be protected.

This brief theoretical digression is useful for understanding both why efforts are made to protect competition, and why it is important to promote competitiveness, too, especially in sectors where fixed costs (plants, research) and economies of scale are key factors. Higher levels of competitiveness, which firms achieve by investing any extra profits in research, development and innovation activities, usually result in distortions of market competition; accordingly, a single firm’s competitiveness is not necessarily compatible with the maintenance of competition within its particular field.

Consequently, if competition, which does not even exist in its textbook form, is a public good to be protected, the same should apply to competitiveness, meaning the ability of one or more companies to equip and organise themselves, perhaps even merging, in order to be able to withstand the competition from other market players; this idea is even supported by ideological currents that, in theory, are more inclined to leave it to the market alone to determine who should be its winners and losers, completely avoiding state interference. Even the nineteenth-century liberal economists, for example, recognised the importance of providing nascent industries with public support, to enable them to equip themselves to compete on the market. Similarly, the prevailing neoliberalism of recent decades has systematically promoted market deregulation and the privatisation of public assets, both seen as weapons to be deployed in the struggle (Hobbesian, devoid of rules) on the market — a setting where the players that come out on top are those that are better equipped (i.e. stronger, able to benefit from a broader network of economic and political relations, and greater financial resources, allowing them to achieve their desired marketing mix, and so on).

The problem, and it is a tricky and delicate one, is that it is not easy to distinguish between a measure that complies with this need to equip one or more companies to compete, and one that, constituting a violation of competition law, should instead be sanctioned. In December 2018, for example, the European Commission judged that the French German, Italian and British project to support research and innovation in the microelectronics sector was compliant with the regulations against state aid as it concerned “key enabling technology”.[1]

While it is hard to argue with the decision reached in the case of this seemingly objectively strategic sector, one cannot help but wonder why the high-speed rail sector (trains and infrastructure) should, in comparison, have been deemed less strategic, especially considering that the high-speed rail market is now a global market. All countries now want high-speed rail lines and naturally turn to the suppliers that can offer them the best guarantees, and these are often (although not always) the ones that have reached critical mass by optimising their resources available for research and development (crucial for survival in this sector), production and marketing.

One possible solution, in order to balance out these two important objectives (competition and competitiveness), might be to consider offering economic and tax incentives to companies able to demonstrate that they are investing in research and development of possible frontier technologies; this would be a way of ensuring that companies give something back — in the form of collectivity’s capacity for competition — in return for the extra profits that, perhaps as a result of operating on markets that do not guarantee perfect competition, they have made from consumers’ pockets. Viewed from this perspective, the Alstom-Siemens merger might have been deemed acceptable.
 

  1. The European Antitrust Policy: Intellectual Influences.

There is, as mentioned earlier, another factor that needs to be borne in mind when evaluating current EU policy on competition, and what the future might hold for it. I refer to the way in which the historical process of European integration has been influenced by the power relations (on a cultural, but also ideological and political level) between French interventionism and German ordoliberalism, the latter being aimed at laying the constitutional foundations of an economic order in which the state (or a public power at least) acts as the guarantor of competition, seen as central to justice in economic and social relations.

Ever since the years of the negotiations culminating in the formation of the Common Market, and indeed right up to the present day, Europe has continued to be pulled in two different directions by these distinct and in many ways opposite cultural models of the relationship between the markets and public powers. The French have always been committed to the idea that public powers should play a positive and prominent role on the markets, even going so far as to attempt to transfer to European level competences typically exercised by national governments (as Marjolin, European Commissioner for Economic and Financial Affairs, did in the late 1950s). This kind of close involvement of public powers in European policies was certainly seen in the 1960s, as shown by a European industrial policy geared at “promoting the creation of firms large enough to compete with the giants of the US”;[2] this policy, helped in part by the fact that antitrust legislation was still fragmented at national level, led to a real boom in mergers. Furthermore, “as a consequence of this fragmentation of the internal market, aggregate concentration developed without any similar increase in competition. The merger wave led to the creation of big national champions enjoying substantial market power”.[3] At this point, there opened a second phase that was, instead, dominated by German thinking, namely the idea that there should be very little state intervention in the economy, the primary role of the state being to safeguard competition, seen as the crucial condition to ensure fair and legitimate exchange mechanisms. The single European Act was a first step in this direction.

Despite this new, ordoliberal-type approach, the idea that Europe should be allowed play a positive role in industrial policy was still alive in early 1990s. The 1993 Delors White Paper on “Growth, competitiveness, and employment” was indeed an attempt (probably already belated) to identify and promote strategic investment sectors at European level, in order to better withstand the global competition, which was becoming increasingly widespread and fierce. However, as we know, that document was shelved, and European industrial policy thus amounted to little more than a commitment to protecting competition on the single European market. And while it was a policy that bore excellent fruits, defending citizens, as consumers, against the formation and potential abuse of positions of oligopoly and monopoly, it cannot be considered to constitute a true industrial policy. A true industrial policy addresses the need, across all production sectors, to provide, at every level of the reference market, a strategic framework and regulatory tools to better equip the industry’s players to compete, remembering that the framework of the competition may not necessarily be continental, but global. And this brings us on to the crucial, but rather intricate, concept of the reference market.
 

  1. Multilevel Markets, Institutions and Policies.

How big is the market? That might seem like a straightforward question, but it is actually rather complex. Let us look at some concrete examples, the apple market, say. Apples grown and harvested locally, on a small scale, will probably have a local outlet market, probably at district or municipal level. Instead, those grown, harvested and distributed by large consortia (such as Val di Non, in Trentino) have a national or even transnational reference market. Several years ago, a designer and producer of retractable stairs, who initially sold this innovative product in a remote part of Australia, went on to become a global monopolist thanks to the creativity of the design, the materials used and the decision to relocate new production facilities so as to be able to produce and distribute the product worldwide. Similarly, as a result of today’s digital platforms, a nougat producer in Gennargentu who usually traded at local fairs and markets was suddenly faced with orders from all over the world.

The market, therefore, is a constantly evolving concept that refers to specific products linked to specific spatiotemporal settings (which, too, are constantly evolving). It is determined by the relationship between fixed and variable costs (which change the minimum efficient scale of production, and thus influence the optimal market size), the type of producer and its type of organisation, the responses of purchasers, the enterprise’s marketing capabilities, and many other factors besides. One thing is certain, however: although it is true that the markets continue to be segmented and structured in a concentric manner, starting with those at local level, it is also true that every product’s potential market is global.

No market can function without some institution that gives it rules and enforces these. In every state, the market is regulated by national institutions, although the European states are an exception, given that, in Europe, this competence has been transferred exclusively to the EU. Instead, at international level there exist multilateral agreements that strive to replicate the regulatory and enforcement capacity of the national legal frameworks. Some of these have proved successful and others, inevitably, have not.

Therefore, a development strategy, to be effective, must necessarily take into account the multilevel scale (from local to global) of the markets, and thus of the need to embrace multilevel governance in Europe. In short, when it comes to industrial policy, it is no longer possible, today, to think solely in national terms. While a national industrial policy might be appropriate in some sectors, and in others the pursuit of local industrial policies (or development strategies) is appropriate or even preferable, on the global market, where it is necessary to compete with giants — this applies especially in the digital sector, where we find names like Amazon, Google, Alibaba, Apple and Microsoft, but also in other sectors (one need only think of Nestlé, Wal-mart, Coca-Cola, JPMorgan, etc.) —, there absolutely has to be a European industrial policy.

The Galileo project, which was allowed to languish for decades, was supposed to address this need, as was the Airbus project, which was meant to counter the competition from Boeing. Last year, the European Commission fined Google for abusing its dominant market position, and this can be seen as a great outcome for Europe’s citizens; but it would be an even greater achievement were it to prove the prelude to the creation of a research and development hub for digital platforms in Europe, capable of competing, on an equal footing, with the American tech giants and the emerging Chinese and Russian ones.

Basically, the strategic industries for development must be enabled to compete on the market, even if this leads to the creation of monopolies; it should then fall to the political bodies of the EU to regulate the latter on the internal market and also (perhaps, this is just one possible idea) find a way of compensating consumers for any losses incurred, so that they are in no way penalised by the absence of a competitive internal market.

In short, deploying all the legal instruments necessary in order to protect European citizens from abuse of monopoly positions cannot and must not be allowed to interfere with the creation of production, financial and research groupings at any level at which the reference market demands this; naturally, this must be done adopting a synergistic and systemic approach. Rethinking and implementing precise industrial policy guidelines, at national level too, should not be incompatible with a European industrial policy. What this means, in practical terms, is that the whole approach to European development needs to be reviewed in order to try and enhance the competitive advantages of each country and each geographical area, aligning them with a coherent and comprehensive vision of the strategic positioning of European industry as a whole. As we have said, this means adopting a systemic and multilevel vision of development whose definition and implementation, however, to avoid generating conflicts of interest, would need to be decided by all the European countries together. And this leads us on to the institutional difficulties.
 

  1. The Institutional Difficulties.

The French and German finance ministers responded to the European Commission’s rejection of the Alstom-Siemens merger by highlighting the need to review the current EU policy on competition, pointing out the logic, illustrated herein, of seeing the global market as the reference market for some production sectors. To reinforce their view, they then jointly produced A Franco-German Manifesto for a European industrial policy fit for the 21st Century.[4]

This document, after acknowledging the revolutionary nature of the digital age, calls strongly for a European industrial policy “to enable Europe to compete on the global stage” and for “the development of long-term industrial strategies” on the basis of shared funding, skills, and expertise. It is certainly hard to deny the legitimacy of these demands, or the fact that they make sense; equally legitimate and sensible are the requests advanced in relation to the first of the proposal’s three pillars. Instead, opinions will necessarily be divided on those of the other two.

The first point highlights the need for massive collective investment in innovation, especially artificial intelligence, without which Europe cannot place itself at the frontier of production possibilities. Such investment will require the creation of an ad hoc fund (the European Fund for Strategic Investments is probably not considered adequate) capable of mobilising private and public resources, and it will also need financial markets able to cope with the needs of high-risk sectors, which operate in a medium-/long-term time frame.

The second point — and here the analysis fits in perfectly with what I have already said — concerns the need to reason in relation to the global competitive market. After all, “Despite our best efforts, which we must pursue, there is no regulatory global level playing field. And there won’t be one any time soon. This puts European companies at a massive disadvantage. When some countries heavily subsidise their own companies, how can companies operating mainly in Europe compete fairly? Of course, we must continue to argue for a fairer and more effective global level playing field, but in the meantime, we need to ensure our companies can actually grow and compete”.[5]

On the policy side (second pillar), on the other hand, I would say that greater caution is warranted; the French and Germans argue that for Europe to be able to act, the rules on state aid need to change, particularly with regard to the formation of European conglomerates; they also call for a review of the criteria used to evaluate mergers. Basically, they want to see changes that would, de facto, weaken the antitrust policy thus far pursued by the Commission, which I would consider extremely dangerous.

The third pillar, which calls for “measures to protect ourselves” seems even more questionable. Despite reiterating the need to defend multilateralism and open markets, it presents ideas that are clearly geared at protecting the formation and consolidation of European sectors and companies. And while it is certainly easy to be tempted to comply with the current climate of growing global protectionism, it is important to remember that Europe’s model of production and competition is very much tied up with processing, and is therefore, in itself, necessarily open (i.e., we need imports in order to create added value, which we do through processing and exports). I would therefore argue that over-explicitly stating this de facto protectionist commercial policy direction is not the wisest of moves.

However, single aspects of this document aside, it certainly has the merit of having highlighted, in public debate, Europe’s shared objectives, and of having re-launched the idea that a European industrial policy can exist alongside its competition one. The problem it poses, though, is who should take responsibility for this: should it be the European Commission, adopting a collegial method involving all 28 (27) member states, or, instead a vanguard of countries with France and Germany at its heart. In more general terms, i.e. looking beyond the issue of industrial policy alone, the question that has to be asked is whether or not we can still have a Community-based Europe.

France and Germany, as shown by their signing of the Aachen treaty, seem to be committed to taking European integration further; and they plan to do so via intergovernmental channels, rather than (or independently of) the Community method. This is an interesting paradox, given that, in theory, the Community method is more efficient than the intergovernmental one when it comes to making collective European choices, and also the one carrying greater democratic legitimacy. But it is also true that seeking to pursue greater integration among 28 (or 27, we shall soon find out!) member states is practically impossible in a decision-making framework in which collective decisions on the most important issues continue to be largely subject to the unanimity rule (even though there have been some exceptions to this, even quite significant ones, as shown by the successes of the EFSI). This, together with the prospect of a more aggressive European policy, would seem to legitimise the efforts of these two large countries to force Brussels’ hand over the question of a shared European industrial positioning strategy on the global competitive market.

It could well turn out that the Community-based model of Europe has run its course; this is a scenario that has certainly looked plausible in recent times, especially a few months ago, when the latest European elections risked returning a majority that would be forced (to guarantee its own survival) to pander to the demands of the nationalist and sovereignist groups. However, since the governments have, to date, not really shown any real evidence of wanting to move towards greater sharing of sovereignty, the key question raised by this agreement between France and Germany is whether these two countries, whose involvement in any deepening of the process of European integration is fundamental, will prove able to draw a core group of countries into a sort of vanguard able to revive the sovereignty sharing spirit that led, in the 1950s, to the start of the European Communities, rather than pursue a simply intergovernmental strategy.

Historically, Italy has played a crucial role in helping to find the compromises necessary to allow France and Germany to launch feasible and workable solutions to advance European integration. Therefore, Italy’s absence at this latest negotiating table and its failure, in recent months, to take part in discussions between these two countries generally (also on other topics, such as the reform of European economic governance, even though Italy needs this more than France and Germany do) has created the risk not only of Italy being excluded from the dossiers that matter, but also that its absence will result in a highly dangerous lack of mediation, likely to contribute to a maintenance of the status quo (which penalises Italy) and impede the formation of a more cohesive and genuinely supranational strategic core in Europe. From this perspective, Italy’s “Lega-Movimento 5 Stelle” coalition government (which trumpeted its rejection of the very idea of a greater sovereignty sharing as a fundamental element of European integration) had every reason to distance itself from these two historical allies; the problem is that this was a choice that went against the interests of the Italians. I therefore fervently hope that now, under the new government in Italy, the European project will once again be placed at the heart of Italian politics and Italian public choices. The early indications are that this is what can be expected.
 

Concluding Remarks.

Secured gradually and not without difficulty by the European Commission, Europe’s competition protection policy, which aims to protect the single market and European citizens from abuses of dominant market positions, is a valuable competence that must be safeguarded.

Naturally, it cannot be expected to serve the broader purpose of promoting competitiveness (just as monetary policy alone is not enough to boost growth). Moreover, protecting competition is not the same as conducting an industrial policy, and in fact the restrictions associated with the defence of competition can even undermine efforts to do so; this applies particularly to the case of European enterprises attempting to compete, on the global market, with giants that are able to move in a far more unscrupulous manner, and where there is no authority to guarantee the implementation of competition law.

Essentially, industrial policy is a complex issue; a European industrial policy has to amount to more than just protection of market competition at continental level; it must serve to promote global market competitiveness. On this basis, it is possible to make two observations.

The first is that whoever tries to set these two objectives in opposition to each other is doing the European cause a great disservice. Because we are talking about two competences that are both strategic, but different in nature and, in some ways, complementary: essentially the role of one is to referee, while the other serves to provide political and strategic guidance. It is therefore possible, indeed right, to implement them both.

The second observation, which follows on from the first, is that there is now a growing realisation that the time has come for the EU to flank the European Commission’s sacrosanct exclusive responsibility for protecting competition, with competence for promoting an industrial strategy for some key sectors of the European economy.

However, this is a step that demands the presence of some form of statehood, or capacity to express a collectively shared and supported strategic direction, and this raises a serious institutional problem. How might such an objective conceivably be reached, and who could pursue it? From the federalist perspective, espoused by this review, any move that brings some countries of the European Union closer to the creation of a democratically legitimised subject capable of taking collective strategic decisions, with a view to sharing sovereignty, must be welcomed with enthusiasm.

In this sense, both of the avenues proposed (the Community one and the intergovernmental one) are promising but also insidious. The intergovernmental approach is flawed by the lack of democratic legitimacy that is threatening to increasingly alienate the citizens from choices made at European level; and this, at the present time, would translate into a serious risk of a further weakening of the credibility of Europe’s institutions and policies. On the other hand, the greatest risk with the Community approach is a state of impasse.

In short, any move able to show the citizens that a policy is more effective when pursued at European than at national level will help to promote the cause of federalism; on this basis, we should certainly support efforts to advance a European industrial policy based on the two strategies herein examined, given that these are only seemingly (or artificially) set in opposition to and competition with each other. The important thing is not to allow the debate to culminate in yet another excuse for not changing anything.


[1] European Commission, Press Release, December 18, 2018: http://europa.eu/rapid/press-release_IP-18-6862_en.htm.

[2] Elizabeth De Gellinck, European Industrial Policy against the background of the single European act, in Peter Coffey (ed.) Main Economic Policy Areas of the EEC. Toward 1992, Dordrecht, Kluwer Academic Publishers, 1990, pp. 125-156. See p. 127.

[3] Ibid., p. 129.

[4] Macron’s letter For European renewal alludes to a similar need: https://www.elysee.fr/emmanuel-macron/2019/03/04/for-european-renewal.en.

[5] https://www.bmwi.de/Redaktion/DE/Downloads/F/franco-german-manifesto-for-a-european-industrial-policy.pdf?__blob=publicationFile&v=2.

 

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