Squaring Off Against European Industrial Champions and their Fans
An Alstom EMU250 Pendolino Train. Source: Wikimedia Commons
A small panic has seized the economic policy minds of Europe this year. Once the United Kingdom breaks from the European Union, only 12 of the world’s top 100 companies will be “European,” down from 28 a mere decade ago. Against this backdrop, onlookers imbued the recent merger proposal between Germany’s Siemens and France’s Alstom with elevated importance. The merger sought to create a multinational high-speed train and railroad signaling technologies conglomerate large enough to rival China’s state-owned CRRC Corporation, but was ultimately blocked in February by the European Commission.
In the wake of the Siemens-Alstom decision, France and Germany jointly authored a manifesto calling for the EU to revise its industrial competition policy, arguing that Europe otherwise stands to lose to increasingly large Chinese and American corporations on the world stage. Names like Google and Alibaba are often thrown around as examples of large foreign bogeymen. To correct this imbalance, the manifesto proposes that the EU ease its merger crackdown and adopt a more lenient stance towards state aid for businesses. Such calls amount to advocating for Europe to advance national champions of its own, companies that are leaders in their field and are supported by close government ties. The suggested pivot towards an era of European industry champions and relaxed merger policy is misguided. Not only does it contradict basic economic principles of efficient markets, but it defies the political tenets on which the EU itself was founded.
Claims that the EU overly restricts the growth of large corporations are hardly fair. Since 1989, the European Commission has reviewed over 6000 transactions through the EU Merger Control Regulation. Of those, it only intervened to prevent fewer than 30. That represents a merger success rate upwards of 99.5 percent and includes more than just small, under-the-radar deals. In 2019, for instance, a merger between the German and Belgian companies, BASF and part of Solvay, the 8th and 93rd largest global chemicals producers, received a green light. Merger regulators do not simply slam their gavels at any proposal that they loosely intuit to be too large. Rather, the decision to intervene occurs through a predictable process. Regulators consider the size of the market in which the merger would occur to see how much market share it would occupy, assess the potential for abuse of a dominant position post-merger, and then weigh those drawbacks against the possibility for the merged company’s increased scale to drive down product prices. When they block a merger, chances are good that the evidence heavily indicated potential for market abuse at the expense of consumers.
If anything, Europe’s economy currently teeters towards being too concentrated. Between 2012 and 2018, the European Commission saw a steady increase from 272 annual merger cases to 395, with a rising number of acceptances. The EU therefore stands to benefit from promoting more competition in its single market, not less. Conventional textbook economic arguments illustrate why: competitive markets increase product variety, lower prices, and divert investment away from stale underperformers towards the most promising new innovators. Selecting one company and pumping state aid into it reduces the incentive for the chosen incumbent to innovate and slash costs, since the government guarantees it a monetary or regulatory crutch. Moreover, they gain an incentive to devote resources towards lobbying policymakers to sustain their status as national darling, behavior known as “rent-seeking” in economics, which squanders resources on efforts that do not add to any inherent productivity in the market.
Proponents of state sponsorship of European champions argue that if Europe does not sport industrial giants of its own, its companies will be outmaneuvered in foreign and domestic markets by U.S. and Chinese competitors, rendering the benefits of competition moot. Such reasoning falsely assumes that bigger is better, regardless of how that is achieved. Evidence from European economic history ought to lay this belief to rest. In the 1970s, for example, Great Britain doled out ineffective grants and conducted expensive nationalization efforts for companies like British Leyland and International Computers Limited. The fact that these entities and others like them effectively no longer exist attests to their inefficient management, stale product lines, or financial woes. Even Airbus SE, the aerospace conglomerate held up as an example of what the Siemens-Alstom merger could have aspired to, has had historically required massive cash injections to keep it afloat, only succeeding once governments stopped their micro-management.
Impervious to these concerns, the EU released a draft in August of a plan to create a €100 billion EUR sovereign wealth fund, which would allow the EU to purchase shares in EU-based corporations. A new European industrial policy that abandons its competition ideals in favor of a “bigger is better” philosophy risks losing sight of the EU’s political purpose. Ever since the early days of the European Coal and Steel Community, the deal was to hand over tariffs, customs, and protectionist policy and in return receive unimpeded market access for exports, cheaper imports, and freely flowing capital. Such terms were steeped in a pro-competitive worldview and required trust in the supra-national governing body to ensure that each member played by the rules. Picking industrial winners, however, lends itself to favoritism and bureaucratic opacity, which erodes the EU’s image as a neutral, nonpolitical arbiter. Moreover, Europe’s largest companies are already overwhelmingly Western European. If these should grow to dominate trade in their respective sectors across the European single market on the back of EU-sponsorship, smaller and less prosperous member states would rightly feel betrayed, given that their own domestic industries require the most support. The funds Western European champions would repatriate back to their home countries risks further increasing the regional wealth imbalance.
Those in favor of propping up champions would do well not to lose sight of the fact that the EU, molded in the ashes of post-war Europe, was created for countries to agree on economic means towards meta-economic ends. For the founding Western European economies, this meant political cohesion. Southern and Eastern European countries, in turn, were sold on a dream of convergence in living standards towards those of the rapidly growing existing member states. The adverse political effects that can accompany sponsoring European champions may ultimately threaten the EU’s ability to fulfill either of those.