Cristina Caffarra is an Honorary Professor at University College London
The Draghi report on The Future of European Competitiveness (Draghi 2024) is a milestone – 400 pages of dense analyses and prescriptions to address a profound crisis of productivity and growth in Europe (major loss of ground in digital technologies, persistent focus on ‘mid tech’, lack of suitable capital, fragmentation and lack of coordination at multiple levels)1.
The broad thrust is a call for muscular industrial policy led from the centre, options for funding, and simplification of an ever-expanding maize of regulations that European businesses struggle with. The report has been well received, although developing a central vision and action plan for industrial policy hits against the reality that we don’t have a federal government making industrial policy decisions for the bloc, and we have no one-stop shop role for the European Commission (except for state aid to curb national excesses).
What has captured much attention is a perception that Draghi is also prescribing a rollback of competition enforcement and regulation, a much more laissez-faire approach particularly in telecoms and digital – music to the ears of US tech giants subject to European Commission scrutiny (eg. Washington Post 2024).
This is in fact not the case. It is a misrepresentation of what Draghi says, weaponised by Big Tech proxies and telecoms incumbents in their campaign to stave off merger vetos and curb regulation. Draghi does say “there is a question about whether vigorous competition policy conflicts with European companies’ need for sufficient scale”, and “lack of innovation in Europe is sometimes blamed on competition enforcement” (p. 298).
However, he also stands by the received wisdom that “stronger competition not only delivers lower prices, but also tends to stimulate greater productivity, investment and innovation” (ibid), and puts forward proposals which would do anything but relax competition.
His competition recommendations do not involve reforming existing laws, but adopting a more “innovation and growth-focused” posture in selecting and investigating cases. In practice, enforcers will argue this is nothing much new and they are either already doing that, or have tried to do that. But the recommendations are also not a prescriptive manual.
The message to be taken from Draghi is really this (paraphrasing): whatever competition enforcers are doing, it is not really working to help innovation and growth in Europe. It is not delivering on that goal. We need more and different. Go back to the drawing board, antitrusters, and rethink.
Competition policy “must continue to adapt to changes in the economy so that it does not become a barrier to Europe’s goals.” And it must align “industrial, competition and trade policies, which interact closely and must be part of an overall strategy” (p.9). No siloes. Joined-up thinking.
Are Draghi’s suggestions for “revamping competition” promising and actionable?
The chapter in the report on ‘Revamping Competition’ is short (eight pages) and refreshingly free of the usual baggage antitrust writing always comes with. It gets straight to the point. Competition enforcement “needs to be adapted to a radically changing world”, with “competition authorities (needing) to be more forward-looking and agile” (pp. 298-9).
The report puts forward ten recommendations which are hard to disagree with in principle, though the “antitrust bubble” will suck teeth and drag feet. But Draghi is essentially inviting us to “think again.” It cannot be the case that “we know all there is to know” and the methods and practices we developed over a decade ago in a different political economy hold today as Moses Tablets, immanent truths we cannot move beyond.
For instance, the first proposal is for an ‘innovation defence’ in mergers – allowing parties to argue that a deal should be approved because it will enable more innovation. The proposal includes conditionalities and guardrails: the defence would not be allowed in already concentrated industries, and the deal approval could be subject to a commitment to a given level of investment, to be monitored ex post.
Sounds creative, though in reality – as those who have been in the trenches on mergers know well – an ‘innovation defence’ is put forward every single time, and fails. Why? Because a commitment to ‘innovate’ is not credible, because merging parties will argue anything during merger review, and because ex-post policing of behavioural investment commitments will fail as companies have 101 ways of claiming ‘circumstances have changed’.
‘Innovation defences’ were traversed in Dow/Dupont, Bayer/Monsanto, and more recently in Illumina/Grail and many others, but never fly. The presumption is that the parties’ promises are vacuous, and the immediate short-term effect of a deal will just be to increase prices/lower quality, with no longer-term ‘innovation’ benefit (indeed, innovation may decline if one is no longer running ‘neck and neck’ with a close rival).
There is deeply ingrained scepticism in antitrust agencies that mergers enable innovation, which will be hard to reverse. Draghi is nonetheless putting the case once more: Is that it? Can you think harder? Fair.
Proposal 2 is to “provide guidance and templates on novel agreements, coordination and co-deployment between competitors” – also not new, this is the old claim that competition rules against collusion deter companies from doing something new and creative together. Perhaps, but we also know about ‘greenwashing’, and how guidelines have been around for some time on green initiatives – but very few applications for exemption have been made. Again, regulators are highly sceptical – legitimately, based on experience – that companies, given half a chance to meet, will tend to agree on unsavoury practices. Think harder? Maybe.
Proposal 3, to “develop security and resilience criteria and include them in DG Comp assessments”, will not be welcomed by the antitrust orthodoxy. The pushback will be that this is equivalent to ‘introducing extraneous criteria’ into enforcement. “How will we trade off disparate objectives?”, the pushback will go. Old conversation, but think harder, Draghi is saying again, this is important.
Further proposals are for more targeted focus, more agile tools, and quicker timing (if only)2. Overall a good set of ideas, per se unobjectionable but also much that has been thought of before. The main message is urgency, the need for more speed, rationalising processes, more focus on innovation and coordination around common industrial policy goals. Certainly not a call to relax competition enforcement.
The main thrust of Draghi’s report is to say out loud that Europe is sinking – we are suffocating under the combined weight of fragmentation, barriers, excess regulation, lack of adequate capital pools, and coordination problems, which mean we underinvest
Why, then, the perception that he is ‘rolling back’ enforcement?
The antitrust bubble in Europe saluted the report in its immediate aftermath with the screech that ‘Draghi wants to relax enforcement!’ (Financial Times 2024). There are two main reasons for this:
1. Draghi says the widening productivity gap between Europe and the US is due, among other things, to “regulatory barriers, especially for young companies.” He talks repeatedly about excessive proliferation of regulations, and the need to “show more self-restraint and reduce the regulatory burden” (p. 10).
2. He singles out telecoms as the poster child for the claim that fragmentation and lack of scale in Europe is holding us back in competition with the US/China. He then wades straight into the big controversy between industry and merger enforcers over the past ten years: how to approach in-country consolidation of mobile operators. He argues that with 34 telecoms groups, European assets are too fragmented and lack of scale is preventing much-needed investments in 5G. He refers to the recent history of European Commission enforcers rejecting proposals for in-country mobile concentration and suggests this could be cured by being less dogmatic on market definition and defining markets as European (in which case, shares would be lower and mergers more palatable). This is a red flag to European antitrust regulators and experts. Telecom incumbents and their lobby have argued this vocally for years: allow consolidation at national level to promote investment. But outside this circle, the strong presumption is that ‘in-country’ consolidation leads for certain to higher prices to consumers, while the claim ‘we need to merge to fund new investments’ is implausible and unsupported. And what is the evidence we need scale to compete with the US and China in telecoms? We don’t have US/Chinese operators in our market. Plus, the US market is highly concentrated, prices are high, and performance is low.
But it would be an error to conclude that what Draghi is saying is just a reflection of limited familiarity with antitrust rules, or – worse – having fallen prey to Big Tech and Big Telco lobbying. What Draghi is really saying is: there is a problem.
European companies in digital, telco and other high-tech sectors have not grown and not thrived on a world scale. Yes, there are all sorts of structural reasons. But also, maybe excessive regulation is holding them back. Maybe some mergers would not be so bad.
If we continue to fixate on short term effects and do not have a vision for the sector, we are stuck. Go figure it out. This is a legitimate message that the antitrust bubble needs to take to heart – instead of the usual defensive ‘we know everything there is to know’.
Telecoms is indeed an emblematic case. Telco mergers evaluation has remained for the last ten years mostly an effort to make up margin and diversion ratio data to ‘measure’ an ‘upward price increase’ – ie. to put some ‘science’ around a prediction of price effects.
But these methods are discredited, and predictions are hugely imprecise: margin data are accounting fictions manipulated by defence economists to be as low as possible; diversion ratios are blunt proxies for propensity to switch. These snake oil calculations predict a merger will increase prices by 2.245739%, with a margin of error of 2%.
Yes, even a small price increase is bad. But is that the end? Even if we are sceptical of claims around investments, or behavioural commitments on investments, can we take a step back? What do we want the telecoms sector to look like? I can make all the arguments against. But we also need to revisit our priors in a deepening crisis.
What change?
The main thrust of Draghi’s report is to say out loud that Europe is sinking – we are suffocating under the combined weight of fragmentation, barriers, excess regulation, lack of adequate capital pools, and coordination problems, which mean we underinvest.
He also says that industrial policy cannot be oversimplified and demonised as a version of ‘four legs good, two legs bad’ – competition is always good, industrial policy (aka national champions/picking winners) is always bad. He is saying ‘break the siloes’: “Industrial, competition and trade policies interact closely and must be aligned as part of an overall strategy” (p. 9); “trade policy needs to be fully aligned with the European industrial strategy” (p.12); and competition needs to make a major contribution to the effort’3.
When Draghi talks about the “burden of excess regulation”, he is also calling out the European single-minded focus in the last few years on ‘taming Big Tech’ though antitrust-inspired ex-ante regulation, which has in practice taken up all intellectual space and crowded out all other policy visions.
But regulation will not put points on European GDP (Caffarra 2023), and is also proving to be a lot tougher than the breezy ‘self-executing’ ruse we had been assured it would be (Caffarra 2024a). Meanwhile, Europe has absolutely no digital assets to call its own, and its dependencies are terrifying (Caffarra 2024b, Berjon 2024, Hauser and Nakib 2024).
Draghi is calling for a major overhaul in thinking and ambitious investment in European infrastructure (from hardware to software to skills). This will require funds to be made available and directed to the right place, abating burdensome regulation, coordinating across functions. And a focus on strategic sectors, with a case-by-case approach.
In all of this, competition enforcement is a major complementary tool. It will not itself create growth but needs to be redesigned to move away from an inward-looking, self-standing pursuit with its own agenda still based on neoliberal principles and ultimately also responsible for protecting Europe from “a slow agony” (Draghi’s press conference, 9 September).
Go to the drawing board, be selective in terms of sectors, talk through industrial policy goals and how competition and trade can proactively assist. That is the message.
Endnotes
1. Consistent with Fuest et al (2024). See also Biondi et al. (2024).
2. Proposal 4 is essentially to “do better on state aid control” (after the grand bouffe of COVID and energy-related emergency measures) with less complex assessment and supporting a new industrial strategy. Again, fair: state aid is an immensely technocratic endeavour with obscure criteria that can never be credibly met – “addressing market failures in ways that improve efficiency”. A mountain of money is sunk by member states without much rhyme or reason. “Reform and expand IPCEIs” (state aid that supports cross border innovative effort) should be part of the plan, say Proposal 5, with expanded funding to more projects. Yes, good. Proposal 6 is to “incentivise open access and interoperability” not only through enforcing the DMA and extending its rules beyond “core platform services”, but also by making the approval of state aid conditional on enhancing these goals – including in other sectors, not just digital (energy, telecoms, defence). Proposal 7 is to apply DMA rules and FSR rules (foreign subsidy regulation) properly with adequate resources. All not controversial. Proposal 8 is for more ex-post assessments, to reduce the burden of ex-ante by giving companies enhanced reporting obligations for DG Comp to assess them – good intention, but for anyone who understands the “too little, too late” reality of competition enforcement (ex-post action takes forever and cannot undo harm in the market), this is a no-go. We have traversed the trade-offs: ex-post enforcement is mostly a disaster that never changes the reality on the ground. Proposal 9 is for a new competition tool allowing DG Comp to carry out a market study of a particular sector first, and then a market investigation. This is the UK model – an old, long-debated proposal for Europe which at one point three years ago was insistently pursued by DG Comp, but did not come to pass. Nothing new, other than the suggestion this might be narrowed to a few selected areas. And finally, Proposal 10 is to “accelerate decision making processes and increase the predictability of decisions” – if only. Everything takes forever, yes, and that’s not because decisions are therefore better. No, the process is just exhausting and exhausted.
3. This has been coming for some time. It’s a version of the ‘all of government’ approach of the Biden administration, for instance, which has seen a major resurgence of industrial policy and a rethink of trade policies with an antimonopoly, worker-centric philosophy (Caffarra and Lane 2024; see also Caffarra and Kilic 2024).
References
Berjon, R (2024), “The Struggle Over Digital Infrastructure”, Tech Policy.Press, 11 September.
Biondi, F, S Inferrera, M Mertens and J Miranda (2024), “Declining business dynamism in Europe: The role of shocks, market power, and responsiveness”, VoxEU.org, 21 March.
Caffarra, C (2023), “Europe’s Tech Regulation Is Not an Economic Policy”, Project Syndicate, 11 October.
Caffarra, C (2024a), “Of Hope, Reality, and the EU Digital Markets Act”, Tech Policy.Press, 6 May.
Caffarra, C (2024b), “Europe Needs to Do More than Scratch at the Ramparts of Big Tech’s Castle”, Tech Policy.Press, 26 August.
Caffarra, C and B Kilic (2024), “Re-joining trade with antitrust”, VoxEU.org, 7 March.
Caffarra, C and N Lane (2024), “Not a ‘side dish’: New industrial policy and competition”, VoxEU.org, 5 April.
Draghi, M (2024), The future of European competitiveness, European Commission.
Financial Times (2024), “Mario Draghi confronts the EU’s merger police”, 9 September.
Fuest, C, D Gros, P-L Mengel, G Presidente and J Tirole (2024), “Reforming innovation policy to help the EU escape the middle-technology trap”, VoxEU.org, 19 April.
Hauser, H and HD Nakib (2024), “The Rise of Techno-Colonialism”, Project Syndicate, 7 August.
This article was originally published on VoxEU.org.