The European Union prides itself on its tough antitrust regime. It is one of the pillars of the single market. But a recent court ruling, which overturned a Brussels decision to block a British telecoms merger, has put this at risk.
At the same time, some of the EU’s most powerful states are pushing to create “European champions” in certain industries by combining companies to better compete with global rivals such as the Chinese. Meanwhile, the Covid-19 pandemic is encouraging a more relaxed attitude toward industrial consolidation because of the fear of companies going bust. Taken together, this confluence of events means Europe’s commitment to protecting competition is wavering.
Unfortunately, there’s precious little evidence that mergers will boost efficiency, as their champions claim. Indeed, they may hurt consumers by raising prices and limiting choice.
Back in May, the EU’s second-highest court overturned the European Commission’s 2016 decision to block the takeover of O2, a British mobile operator owned by Spain’s Telefonica SA, by its rival domestic rival Three, which is owned by Hong Kong’s CK Hutchison Holdings Ltd. The General Court said Brussels hadn’t proven that the merger would damage competition and lead to an increase in prices.
The Commission is appealing to the European Court of Justice, but the ruling has prompted companies to dust off plans for mergers in telecoms and beyond. Were the ECJ to uphold the General Court’s judgement, it would be much harder for Brussels to make a case against many so-called horizontal mergers (where two companies offering similar services combine).
The ruling comes at a bad moment for EU antitrust policy. The French and the German governments were already leaning on the Commission to water down its standards after Brussels blocked a combination between the rail businesses of France’s Alstom SA and Germany’s Siemens AG last year. They’ve since been joined by Poland and Italy. The EU has promised a review of its competition regime, but this won’t happen until 2021.
The coronavirus pandemic will add to calls for a softer approach on mergers, as a deep recession will put many companies under severe financial strain. EU governments have sought to cushion the Covid blow through furlough schemes and loan guarantees. However, these steps won’t be enough, especially in sectors already facing more profound challenges, such as retail and travel. Governments might then see mergers as a palatable alternative to job-destroying bankruptcies.
There’s a danger here. As Thomas Philippon documented in his book, “The Great Reversal,” the EU has become more competitive than the US. Its antitrust regime isn’t perfect: For example, it has cleared too many horizontal mergers. However, the increase in markups (as measured by higher profit margins) after these deals has been generally less steep than in the US because the market has remained more open.
A new wave of consolidation could reverse these gains. While supporters of European champions often claim that they’ll be better at dealing with foreign competition, notably from China, there’s no evidence to support this. A bigger company can enjoy economies of scale, but the lack of intra-European competition might also allow it to be less efficient and less innovative.
Letting a company rescue a failing rival isn’t always the best course of action. In a recent paper, Massimo Motta, a professor of economics at Pompeu Fabra University in Barcelona, and two co-authors looked at the so-called “failing firm defense” in the context of the Covid-19 epidemic. They noted that there were often good reasons to be strict about mergers in declining industries.
In such sectors, one can’t count on new rivals emerging to counter the merged firm’s market power. And it might be better to let a failing company restructure and downsize, in the hope that it will become competitive again. Finally, from the point of view of consumers and taxpayers, an orderly market exit may be better than a rescue. Technology will make certain companies obsolete. That has always been the case.
Of course, politicians must help the workers of a failing firm, including short-term income-support schemes and retraining. Some countries, especially in southern Europe, have poor labor-market policies, preferring to keep zombie companies on life support to the detriment of long-term efficiency.
A lively antitrust regime is the best antidote against the European economy turning into a petrified forest. The EU should celebrate rather than suppress this success.
Bloomberg
