Europe Needs Competition More Than Industrial Giants

(Bloomberg Opinion) -- Many of Europe’s politicians are far from impressed with the European Commission’s recent ruling against the proposed rail merger of Alstom SA and Siemens AG. Some are now calling for the EU to change its whole approach to competition policy. What they want instead is “industrial policy” — a strategy that dethrones competition as a goal and promotes European economic champions.

Competition Commissioner Margrethe Vestager was right to block the merger, and her critics are mistaken. The last thing Europe’s consumers need is EU firms with greater monopoly power, especially if they’re shielded from foreign as well as domestic competition. The best spur to economic growth and higher living standards in Europe is rivalry within the EU’s single market.

National competition agencies in Belgium, The Netherlands, Spain and the U.K. had criticized the Alstom-Siemens deal. But politicians in France and Germany took a different view. “Railbus,” as the doomed linkup had been christened, was touted as necessary to defend European producers from a predatory China — in the same way that Airbus was intended to counter U.S. dominance of the aviation industry. But the commission ruled that the merger would have dominated Europe’s rail market in signalling technology and high-speed trains, leading to higher prices and less innovation. And Vestager noted that China’s state-controlled giant CRRC is not a player in those EU markets anyway.

That prompted Germany’s economy minister, Peter Altmaier, to call for a revision of EU competition rules to let merged businesses compete, as he put it, on an equal footing internationally. French Finance Minister Bruno Le Maire accused Brussels of serving “the economic and industrial interests of China.”

There’s nothing wrong with questioning the basis for competition policy. It’s as much art (and politics) as science, and striking the right balance isn’t always easy — as the controversy over some commission findings against big U.S. tech companies has shown. The test of “market dominance” depends on the market you have in mind, and isn’t always clear-cut. Nonetheless, a fixation on creating “European champions” would cause more harm than good — partly because it risks building monopolies, but also because it distracts attention from single-market reforms that would do far more to strengthen the EU’s economy.

The crucial point is that the single market isn’t yet a single market. In theory, Europe has one market for rail transportation; in practice, it’s more complicated. Systems and equipment aren’t fully interoperable and regulatory differences persist. Barriers to domestic competition act as a tax on EU consumers and a disincentive for investment and innovation. Last year, a report by the commission complained that “lack of effective competition may explain why in many EU countries rail transport has not developed customer-oriented services, innovative business models and costs/price reductions that can be witnessed after market opening in other transport modes.” The commission has taken action against both France and Germany for regulations that act to protect local transport players.

In short, lack of industrial champions isn’t the problem.

The spirit of protectionism and dirigisme seems to be on the rise in Europe, as in the U.S. In response to worries about Chinese takeovers of European firms, the EU is looking to increase scrutiny and possibly block foreign investments in a wide range of industries from biotech to data services, defense, and health care. Germany, traditionally a stalwart defender of global competition, has just published a new industrial policy around the concept of “industrial sovereignty,” advocating a greater state role in protecting key industries.

Competition is the key to economic health. It widens choices, lowers prices, encourages innovation, and leads to better products and services. That’s where Europe’s governments should keep their focus, especially since much remains to be done. An approach that originally concentrated on deeper economic integration is now in danger of being diverted. If this happens, the EU could put its biggest competitive advantage — its still-unfinished single market — in jeopardy.

Editorials are written by the Bloomberg Opinion editorial board.

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