Are competition rules bad for EU competitiveness?

Many politicians love ‘national champions’ – large companies viewed as capable of competing internationally. Many European Union politicians who feel strongly about Europe love European champions. EU competition rules, particularly merger control, are often viewed as standing in the way of building such champions. As the economy ministers of France and Germany put it in a well-known 2019 manifesto, “existing rules need to be revised … to enable European companies to successfully compete on the world stage.”

Economists are mostly unconvinced (myself included). The current merger rules allow the European Commission – the EU’s competition authority – to take into account the interests or intermediate and ultimate consumers. If a merger lowers production costs, it could be allowed. More generally, economists think that competition inside the EU tends to be good for the competitiveness of EU companies, and for the EU at large. Competition allows smaller firms to enter markets and grow, challenging incumbents, and forces incumbents to stay efficient to protect their positions. If incumbents can hold off challengers through sheer size, challengers will have no incentives to invest in product and process innovation, and big firms will become lazy.

But arguments of this type can also be challenged. Product-market entry barriers are lower in the EU today than they used to be before the global financial crisis. According to the OECD, they are also lower, in most EU countries, than in the US. Some economists think the EU has overtaken the US with respect to competition. Yet, R&D spending tends to be higher in the US, and US productivity growth is higher. Most worryingly, the French and German economy ministers were not necessarily wrong to argue that “if there is no regulatory global level playing field … 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?” Doesn’t the EU need very large firms, to avoid being crushed by Chinese and US competition?

For a discussion on these issues, join us at the next week’s event with leading experts, Is there a trade-off between competition and competitiveness?

The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy. 

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