All in the name of cross-border industry consolidation.
“Sometimes there is nothing more stupid than European rules.” So said Bruno Le Maire, France’s Minister of the Economy and Finance, at a press conference on Tuesday. Le Maire and the government he serves are still smarting from the European Competition Commission’s decision two weeks ago to reject, on antitrust grounds, the long-anticipated merger of German and French industrial giants Siemens and Alstom.
The EU’s competition authority ruled that the proposed tie-up would have spawned an “undisputed” market leader in several mainline signalling markets, while also reducing the number of suppliers of high-speed rolling stock. Over the past 30 or so years the Commission has approved more than 6,000 merger deals and blocked fewer than 30.
What makes this one special is that it was greatly sought after by the governments of the EU’s two most influential Member States, Germany and France. And rather than take no for an answer, they now want to radically rewrite European competition policy.
“These rules were invented in the 20th century, and they are leading to economic and political mistakes,” Le Maire said. “We will not succeed without a European champion that’s capable of investing, innovating and keeping value-add at home.” The Siemens-Alstom tie up was supposed to do just that by creating a global rail champion with the heft to compete with the likes of China’s CRRC.
“In order to be able to create a new European champion, it is necessary to change the European regulatory framework,” Le Maire said. To that end, the German and French economy ministers have jointly published a five-page, 14-point manifesto for a “European industrial policy fit for the 21st century.”
One of its key proposals is that EU competition regulations should “take greater account of competition at the global level”, rather than just focus on mergers’ competition effects — i.e. how they impact businesses and consumers in Europe.
Just five of the 40 biggest companies in the world are European, the text laments, though it’s not clear where the data for that claim comes from. On the basis of market cap alone, just three EU-based companies make it into the top 40, according to Statista. And one of those (HSBC) is British while the other two are British-Dutch (Royal Dutch Shell and Proctor & Gamble). If instead one ranks companies by global revenue, as Fortune magazine does for its Global 500 list, eight EU-based companies place among the 40 top positions, in the following descending order:
- Royal Dutch Shell (5th)
- Volkswagen (7th)
- BP (8th)
- Daimler (16th)
- Exor Group (19th)
- Axa (27th)
- Total (28th)
- Allianz (38th)
By contrast, the U.S. boasts 17 entrants and China nine. But it’s the latter that France and Germany appear to be most concerned about — in particular the Chinese government’s propensity to financially support the country’s largest, most strategically valuable companies. “When some countries heavily subsidize their own companies, how can companies operating mainly in Europe compete fairly?” the manifesto asks.
The obvious, albeit unspoken, answer is to do exactly the same — i.e. provide huge buckets of state aid to strategic champions — thereby “ensur[ing] our companies can actually grow and compete”. In other words, if you can’t beat China, just emulate it.
What the manifesto conveniently fails to mention is that:
- Some of Europe’s biggest companies, particularly those in France, are already partly state-owned. As a result, public-private behemoths like Italy’s Enel and Électricité de France (EdF) enjoy huge funding benefits over their rivals, especially with the Eurozone’s sovereign bond market having been propped up by the ECB’s QE program over the last four years. Now, those companies, if considered strategically important enough, could
- Many of Europe’s biggest companies, including partly state-owned ones like Enel and EdF as well as publicly listed utilities, oil majors and automakers, have also benefited from the €178 billion of funds the European Central Bank has splashed on their corporate debt as part of the bank’s corporate sector purchase program, or CSPP for short. It’s the equivalent of roughly a fifth of all eligible euro corporate bonds issued since June 2016, when the program was first launched.
Besides an overhaul of the regulatory rules, the French-German industrial manifesto also calls for “massive investment in innovation,” in particular artificial intelligence, as well as measures to protect European technologies, companies, and markets. To that end, it calls for “the full implementation of the recently agreed European foreign investment screening framework,… to protect Europe’s strategic technologies and assets”.
Those assets include Europe’s giant automotive industry, which is beginning to splutter as diesel vehicles — until recently the industry’s bread and butter — lose their allure, while electric vehicles (EVs) continue their seemingly unstoppable rise. The problem for Europe is that EVs’ core technology — the vehicle’s battery cell — is dominated by Asian producers. Over the past six years China has poured more than €10 billion of subsidies into domestic battery producers to kick start the industry.
But Paris and Berlin are determined to catch up. Speaking at a political event on Tuesday, Le Maire unveiled a new €1.7 billion Franco-German battery initiative aimed at reducing European automakers’ dependence on Asian electric vehicle battery suppliers. “It is dangerous to depend on foreign suppliers, particularly from Asia,” Le Maire said. “What we want, is to keep the whole value chain European.”
It’s perhaps an understandable goal, especially in these times of heightened protectionism. But to pull it off, Germany and France are effectively demanding that in the future Brussels turn a blind eye to any threat to competition if it is deemed to be strategically valuable. The price for it will ultimately be borne by smaller businesses, consumers and taxpayers, which all too often are one and the same thing.