Opinion

What can the EU do to keep its firms globally relevant?

There is a fear that EU companies will find it increasingly difficult to be on top of global value chains. Many argue that EU-based firms simply lack the critical scale to compete and, in order to address this problem, that Europe’s merger control should become less strict. But the real question is where the EU can strengthen itself beyond the realm of competition policy.

By: and Date: February 15, 2019 Topic: European Macroeconomics & Governance

This article was published by the Berlin Policy Journal, La Repubblica, Handelsblatt, Le Monde, Hospodárske noviny, El País and Capital.

berlin policy journal logo

La Repubblica logo

Le Monde logo

Hospodárske noviny logo

El País logo

Capital (Bulgaria) logo

Big is beautiful – so goes the claim of many European business leaders and Peter Altmaier, the German economics minister, when they talk about Europe’s corporate position in the world.

It is true that EU companies remain highly competitive globally and very successful exporters. It is also true that the EU continues to be a very open economy with a trade surplus. Yet, despite this, there is a fear that EU companies will 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 EU companies, among the top 50 Fortune 500 global companies there are only 10 firms from the EU, while there are 21 firms from the US and 11 from China.

Europe clearly lags behind its global competitors in the platform business (Evans and Gawer, 2016) and forecasts are no better while 70% 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.

A recurring argument made to address this problem is that Europe’s competition policy should change. Merger control should become less strict, so says 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, or more “flexible”, to address concerns beyond potential anti-competitive effects – such as environmental, social or other concerns. Most recently, this was discussed in the Siemens-Alstom merger case.

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 in order to avoid undesired effects of political intervention in specific cases.

European consumers still benefit from relatively low mark-ups thanks to high competition, which could be easily undermined by relaxing merger control. 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. In our view, the following avenues are more promising for European companies as well as European consumers.

Sharpening state aid control instruments

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; the criteria for pursuing cases should be where markets are distorted. The Commission could become more confident in its enforcement, but to do so the EU’s legal framework will have to evolve significantly, a point also recently made by the BDI.

Europe should go beyond defensive measures and more actively pursue a strategy that bolsters investment and innovation

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 in the case of 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 unfair competitive advantage that European companies cannot match. EU law should seek to ensure a level playing field for all companies.

To this effect, the WTO agreement on subsidies and countervailing measures can provide a platform for an international collaboration that can help the EU to react in the case of 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. One important reason is state owned enterprises are not considered. Second, remedial action is slow and complex. Third, EU state-aid rules apply to both goods and services, while the WTO rules apply only to goods. In our economies – which are increasingly driven by services, by networks and data – focusing only on subsidies in the goods sector is insufficient.

Regulation can be used to restrict the entry of foreign corporations that receive distortionary state support. Its existence, as such, can discourage unwarranted behaviour. Yet, it is and must be clearly restricted to well-defined concerns, such as security matters, to prevent it becoming just a simple tool for protectionism. It is thus not suited as a general state-aid control mechanism.

Towards a proactive investment agenda

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.

A multidimensional mix should consist of policies to strengthen and deepen the single market, which is still fragmented in services. Sufficient market financing should also be ensured for firms to be able to expand their operations and compete efficiently in a global scale – for which integrated and deep capital markets, including for venture capital, are needed. There is a need to improve risk-taking and also to improve business and investment conditions in a number of countries.

Global competition is indeed becoming tougher. Defensive instruments to address state-subsidy concerns are part of the solution; relaxing merger control is probably not the answer.

The EU’s R&D spending is still at only 2%, compared to 2.8% overall in the US. Moreover, North America and Asia are the front-runners in private investments on AI. 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 much earlier adopted ambitious AI plans, where industrial policies and public/private investments have a prominent role. After Brexit, the EU’s picture on AI will look much worse, as London remains in the lead for AI companies, making a European strategy all the more important.

Europe also needs a clear industrial policy strategy to achieve a degree of technological independence in critical digital infrastructure. In a world where not only individuals but also more and more industrial processes are fully interconnected, certain key technologies need to be produced and understood in Europe to ensure economic security. This requires strong European technology companies.

Addressing the weakness of Europe’s universities

Finally, it should not come as a surprise that Europe is losing the technology race, given that its universities are lagging 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 12 Chinese universities – according to the Shanghai ranking. Outside the UK, only Milan and Leuven rank ahead of Aachen among EU-based universities. In AI-related fields, the picture looks worse. Do Germany, France or the EU have a strategy to address this problem?

To conclude, global competition is indeed becoming tougher, in particular with China increasingly leading in key technology sectors. 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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article

Blog Post

The EU is in the US trade war crosshairs. It should further raise its game

The incoming European Commission faces a dilemma on the transatlantic trade relationship, because of the unpredictable policies of the Trump administration. The EU must rally its citizens; the greater the divides between member states and EU institutions, the lesser the chances are of forging effective policies toward the United States and China.

By: Anabel González and Nicolas Véron Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 19, 2019
Read article More on this topic

Opinion

Trump's Backfiring Trade Policy

President Trump’s radical trade policy continues, as do trade disputes with China. The president promised to sign far better trade deals, ensure fair treatment of American firms and reduce the United States’ trade deficit. None of these objectives have been met.

By: Uri Dadush and Laurence Kotlikoff Topic: Global Economics & Governance Date: September 17, 2019
Read article Download PDF More on this topic

Working Paper

EU trade policy amid the China-US clash: caught in the crossfire?

What risks face the EU with regard to China’s strategic aims in trade policy and how can the EU respond? The US effort to isolate China poses particular risks for Europe. How can the EU counter such efforts with the aim of forging its own distinct trade policy? How should the EU move forward with reform of the World Trade Organization (WTO) in light of differing demands and aims of trading blocs like China and the US?

By: Anabel González and Nicolas Véron Topic: Global Economics & Governance Date: September 17, 2019
Read article More on this topic

Opinion

China's dual banking system: consolidation as the final solution for weak small banks

There are fundamental solvency and liquidity issues for some small Chinese banks, widely influencing both the bond market as well as the broader financial sector. Given the difficulties in creating a level playing field between small and large banks, there is an expectation that small banks will continue to under-perform.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation Date: September 16, 2019
Read article More on this topic More by this author

Opinion

Germany’s Divided Soul

Eastern Germans vote, think, and feel differently than western Germans do, as the results of the September 1 regional elections make clear. To help tackle the underlying economic causes of this divide, the federal government should introduce incentives to encourage foreign investment in the east of the country.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: September 13, 2019
Read article More on this topic

Blog Post

Competing Globally: Europe’s Debate Over Trade and Sovereignty

This blog is part of a series following the 2019 Bruegel annual meetings, which brought together nearly 1,000 participants for two days of policy debate and discussion.

By: Jean Pisani-Ferry and Rebecca Christie Topic: Global Economics & Governance Date: September 12, 2019
Read article Download PDF More on this topic More by this author

Policy Brief

Collective action in a fragmented world

International collective action is in search of a new paradigm. It cannot rely anymore on global binding rules supported by universal institutions. New forms of cooperation have emerged in a number of fields. Europe should equip itself to be an effective player in this new global game. This calls for internal governance reforms.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: September 11, 2019
Read about event

Past Event

Past Event

China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Miguel Ceballos Barón, Alicia García-Herrero, Mikko Huotari, Yi Huang and Xu Sitao Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 9, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Enhancing Europe's economic sovereignty

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Jean Pisani-Ferry on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Blog Post

Truths about Trade: A speech by Cecilia Malmström

Cecilia Malmström, European Commissioner for Trade, talks on the truths of EU trade at the Bruegel Annual Meetings 2019.

By: Cecilia Malmström Topic: Global Economics & Governance Date: September 4, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Europe's trade policy

Backstage at the Bruegel Annual Meetings, Giuseppe Porcaro talks with André Sapir on European trade policy.

By: The Sound of Economics Topic: Global Economics & Governance Date: September 4, 2019
Read article More on this topic More by this author

Opinion

Why Europe needs a change of mind-set to fend off the risks of recession

Recession! This is the new worry in Europe and the US. A simple look at google trends shows that in Germany, France and the US, search interest for recession peaked in the last weeks. In Italy, the peak already occurred end of January. Whether a recession is actually occurring is difficult to gauge in real time. But there can be no doubt that significant risks such as the trade war and no-deal Brexit exist.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 2, 2019
Load more posts