If the goal is to help European companies take on US and Chinese competition, there are better ways to do it than abandoning merger control.
Big is beautiful—so goes the claim of many European business leaders and German Economy Minister Peter Altmaier, when they talk about Europe’s corporate position in the world. The European Commission’s controversial February 6 blocking of a planned merger between the rail businesses of Siemens and Alstom has brought the issue of size back into the headlines—with Altmaier and his French counterpart Bruno Le Maire arguing that the merger was necessary to compete with giant, state-supported Chinese companies.
It’s true that EU companies remain highly competitive globally and very successful exporters. It’s also true that the EU continues to be a very open economy with a trade surplus. Yet, despite this, there is a fear that European companies find it increasingly difficult to be on top of the global value chains—or, put differently, to be global leaders. And despite the successes of European companies in general, there are only nine firms from the EU in the top 50 of the Fortune 500, compared with 21 firms for the United States and twelve from China.
The picture among the top 100 Fortune 500 global companies is even more gloomy: 37 firms from the US, 23 from China and 22 from the EU. Moreover, not one of the world’s top 20 technology firms, covering sectors that are central to the success of whole economies, is from the EU, while there are eleven firms from the US and nine from China.
Europe clearly lags behind its global competitors in the platform business, and forecasts are no better: 70 percent of the global economic impact of AI is expected to be concentrated in North America and China. Many argue that EU-based firms simply lack the critical scale to compete.
Careful Thinking Needed
How can this problem be addressed? Some argue that the EU should change its competition policy. Merger control should become less strict, according to a recent study by the Federation of German Industries (BDI) on China. Moreover, merger control should become more “dynamic,” i.e. it should take account of possible future competition effects, and more “flexible,” to address concerns beyond potential anti-competitive effects, such as environmental, social, or other concerns.
Europe’s merger control laws may or may not need reform. But asking the Commission to so suddenly abandon its approach and to go against the letter of the Merger Control Regulation is certainly wrong. Moreover, careful thinking is needed as to avoid undesired effects of political intervention in specific cases.
European consumers still benefit from relatively low mark-ups thanks to high competition, but this could be easily squandered if merger control were relaxed. And one should also not be naïve about the benefits that larger companies would enjoy when entering a market like the Chinese one, where access is highly regulated and limited.
Sharpening State-Aid Control
Rather, European companies and consumers would benefit more from the following measures than from lax merger control.
First, applying a form of state-aid control to foreign companies needs to be made more effective, both in our markets as well as extraterritorially. EU competition law should be applied in a non-discriminatory way, regardless of the origin of the firm; if the market is distorted, the case should be pursued. The Commission could become more assertive in its enforcement, but for that to be possible the EU’s legal framework would have to evolve significantly, a point also recently made by BDI.
The EU cannot apply state-aid rules to foreign governments, and there is currently no systematic, effective, or well-founded way for the application of EU state rules to firms that operate in EU markets but receive state support in other jurisdictions. Yet it is possible to imagine an instrument that could be applied to foreign firms that benefit from state support in a way that creates an unfair competitive advantage that European companies cannot match. EU law should seek to ensure a level playing field for all companies.
The WTO agreement on subsidies and countervailing measures provides a platform for international collaboration that could help the EU address subsidies that distort international trade. However, it suffers from three main problems: the notification of subsidies is not fully transparent, and its efficacy is limited; the remedial action is slow and complex; and EU state-aid rules apply to both goods and services, whereas the WTO rules apply only to goods. In economies increasingly driven by services, networks, and data, focusing only on subsidies in the goods sector is insufficient.
Investment control regulation can be used to restrict the entry of foreign corporations that receive distortionary state support. But a transparent process is needed in order to avoid the misuse of instruments. Their existence, as such, can discourage unwarranted behavior. Yet, they must be clearly restricted to well-defined concerns, such as security concerns, with objective criteria, to prevent becoming just a simple tools for protectionism.
Toward a Proactive Investments
Second, Europe should go beyond defensive measures and more actively pursue a strategy that bolsters investment and innovation in Europe, while creating the conditions for firms to scale up in a well-integrated single market.
Europe needs a multidimensional mix of policies to strengthen and deepen the single market, which is still fragmented when it comes to services. Sufficient market financing should also be ensured so that firms can expand their operations and compete efficiently on a global scale—for which integrated and deep capital markets, including for venture capital, are needed. There is also a need for more risk-taking and for enhancing business and investment conditions in a number of countries.
The EU’s R&D spending is still at only 2 percent of GDP, compared with 2.8 percent overall in the US. Moreover, North America and Asia are the front-runners in private investments on Artificial Intelligence. This dark picture is a direct result of a lack of an effective strategy, not only for European investment but industrial policy as a whole. The EU’s global competitors long ago adopted ambitious AI plans, where industrial policies and public/private investments have a prominent role. And after Brexit, the state of AI in the EU will be worse, as London remains in the lead for AI companies. This makes a European strategy all the more important.
Strengthening Europe’s Universities
Finally, it should not come as a surprise that Europe is losing the technology race, given that its universities lag behind the top performers. For example, in mechanical engineering, the best German university, Aachen, ranks only in the group of 51–75-best worldwide, well behind twelve Chinese universities, according to the Shanghai ranking. Outside the United Kingdom, only Milan and Leuven rank ahead of Aachen among EU-based universities. Do Germany, France, or the EU have a strategy to address this problem?
Global competition is indeed becoming tougher, in particular with China increasingly leading in key technology sectors. And Europe needs to face that competition. Defensive instruments to address state-subsidy concerns are part of the solution; relaxing merger control is probably not the answer. But the real question is whether the EU will strengthen its single market, increase R&D spending, regain its leadership of universities and design a true and integrated AI strategy.
Big may be beautiful, but the strategic priority for the EU should be to become a front-runner in innovation and the adoption of new technologies. For that, it needs investment, research, and education rather than European champions.