Xavier Vives argues that to create firms that can compete on the international level, the European Union does not need to ease its merger regime or encourage market power. Rather, encouraging European market integration will allow firms to draw in investment and scale up their operations.
This article kicks off a symposium on the role of big business in a globalized economy. In an era of intensifying global competition, can states pursue policies and regulations to disperse market power and prevent consolidation at home without forfeiting international competitiveness? How can the U.S. government regulate Big Tech and other big businesses at home without hamstringing their ability to compete on the global stage? How can the EU build its own Big Tech giants without undermining its pioneering digital protections for users and society and permitting the harms that can come from market concentration? You can read the contributions from Xavier Vives, Eleanor Fox and Harry First (writing together), Cristina Caffarra, Laura Phillips Sawyer, and Beatriz Kira as they are published here.
The European Union (EU) cannot foster big business or supranational champions through changes to competition regulation. Still, it can benefit from its unique confederate structure to provide a sound environment for its development if it completes the integration of its market. This is no minor task, given that Europe has been left behind in the digital revolution. The market capitalization of each American digital giant NVIDIA, Microsoft, Apple, and Alphabet dwarfs that of the German DAX stock exchange, for example, and Amazon is very close. The Magnificent Seven (including also Meta and Tesla) have a capitalization about 8.5 times larger than the DAX.
The EU’s advantage in independent competition regulation
The EU has led the regulation of the digital world with the Digital Markets Act, the Digital Services Act, and the AI Act. Its political structure allows its competition authority, the Directorate-General for Competition (DG Comp), to have a high level of independence with minimal political interference. This is in contrast with the United States, not to mention China, where the administration decisively influences antitrust orientation and enforcement.
Take the recent history of competition enforcement in the U.S. After a more laissez-faire approach during the Clinton and Bush administrations, U.S. President Joe Biden enforced a more activist stance on competition. He signed an executive order in 2021 aimed at curbing the power of big business, which he accused of using its market power to exploit workers and consumers. From a lenient approach towards mergers, the Department of Justice Antitrust Division and the Federal Trade Commission, under the respective leadership of Jonathan Kanter and Lina Khan, became more rigorous and expansive in their enforcement policies. The new orientation met resistance in the courts.
Furthermore, the Biden DOJ and FTC issued new merger guidelines in 2023, broadening the scope of antitrust beyond the consumer welfare standard and its focus on prices and output to consider in its merger review objectives such as labor market effects and the impact on small businesses. The new guidelines also lowered concentration thresholds for presumptively illegal mergers, strengthened the scrutiny of vertical mergers, kept the focus on input foreclosure and competitive harm analysis and actions that extend a firm’s dominant position, and scrutinized minority shareholdings and serial acquisitions.
The Trump administration, in turn, may move towards a more transactional style. The EU has been more consistent over time in addressing the abuse of dominance by digital giants than the DOJ or the FTC. This is the outcome of the formation of the European space, where the inclinations and interests of France and Germany, the two main drivers of the EU, had to be balanced. For example, in building a monetary union, Germany gave up the Deutsche mark, but placed the European Central Bank (ECB) in Frankfurt, while France secured a say in Europe’s monetary policy. The EU’s need to create institutions in thrall neither to Germany nor France means that the ECB is possibly the most independent central bank in the world. The French and German heads of state cannot fire the president of the ECB, Christine Lagarde. The European Court of Justice is another example of the EU’s institutional independence from partisan politics. Its 27 judges are elected by agreement of member states for a six-year renewable period. This is very difficult to capture in a partisan way.
The temptation to use competition policy in a partisan way is much larger today in the U.S. and China than in the EU. This is an advantage for the EU and its interest in attracting business and investment in the long term. Lobbying and closeness to power can indeed yield very high benefits in the short term, as exemplified in the recent episode in the U.S., where lobbyists managed to override the concerns of senior antitrust enforcement officials in the DOJ to gain approval for a merger between Juniper Networks and HP Enterprise. However, business is then at the mercy of the whims of political power. We have seen the consequences of this in both the U.S. and China. The EU can offer a stable environment where the rule of law is respected, and big business may have certainty about regulation.
Complicating competition regulation is not the answer
However, this is not enough. EU regulation tends to be too intrusive, bureaucratic, and complex. This may compromise clarity for business and delay the implementation of technological advances. Former ECB President and Italian Prime Minister Mario Draghi has called for a pause in the proliferation of EU rules on the development of artificial intelligence and for a “radical simplification” of the General Data Protection Regulation (GDPR). Draghi’s report on European competitiveness proposes changes to DG Comp’s guidance for determining whether a merger is anticompetitive, giving more weight to the merged firm’s ability to innovate over fostering low prices for consumers. The guidance also recommends that the government allow an ex post analysis of the merger to determine first its effects before it intervenes rather than preventing it ex ante based on broad principles, as is the current regulatory regime. The ban on the merger between Alstom and Siemens, which supporters like French President Emmanuel Macron argued would create a European champion capable of facing international competition, remains a point of controversy.
It is doubtful whether a relaxation of merger control would foster European champions, as the key factor is the size of the market, which determines primarily the investment incentives and growth potential of firms. Research and development investment is limited by the extent of the market, particularly in the presence of learning curve effects, when a nascent industry must gain competitiveness. To avoid undesirable concentration effects in the market, research joint ventures can be used to foster R&D investment, internalizing spillovers, and profiting from economies of scale. However, R&D policy can only partially substitute for the benefits of a large market.
The EU must further integrate to create markets large enough to foster large competitors
The EU market is far from being fully integrated in markets for goods, and even less so in services. The internal barriers between EU countries are much larger than the external ones. This is one of the reasons, although not the only one, why Europe has not developed its digital giants. Fragmentation is also at the root of the relatively poor performance of European banks in relation to their U.S. counterparts. The lack of completion of the Banking Union, with deposit insurance and resolution (mostly) in the hands of individual states, poses significant obstacles to cross-border mergers. To this, economic nationalism should be added, as evidenced by the problems faced by Unicredit in bidding for the German Commerzbank.
Energy markets provide another example with an uncoordinated procurement policy that weakens Europe’s position. This became apparent after the start of the war in Ukraine, with Germany dependent on Russia’s gas. Telecoms markets are also fragmented, and Europe lags in the deployment of 5G technology. Spectrum auctions are designed along member state lines. In the U.S., they are developed at the national level. Mergers in member states may increase the scale of firms, but at the cost of increased market power. Market integration is the solution. Its effect would be of an order of magnitude superior to any tweaking of merger policy.
Market integration would allow achieving the economies of scale and scope necessary to raise productivity and international competitiveness. Consolidation would not impair competition once the market is integrated. Nevertheless, market integration cannot supplant the need for an increased degree of political integration which unifies fundamental policies in defense, international relations, fiscal issues, energy, and R&D. This coordination is essential for these policies to be effective and to be able to respond quickly to the changing environment. The required investment identified in the Draghi report to boost productivity in Europe, particularly in R&D, will not occur otherwise. A key lever is the issuance of common debt, which, in addition to financing investment in public goods, would put the euro on solid ground to compete with the dollar as an international reserve currency. At the end of the day, both big and small businesses need an efficient state that enforces the rule of law and provides a predictable environment for economic actors. The EU has a chance, but it has a lot of work to do.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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