European industrial policy vs. European competition law: state of play 18 months after the Siemens-Alstom decision

By Thomas Oster

11-2020

The European Commission's decision to block the Siemens-Alstom[1] mega-merger in February 2019 provoked the anger of the French and German governments that had backed the deal. They accused the Commission of playing against the interests of the European economy by preventing the emergence of a European champion capable of competing with major foreign rivals in the global economy, particularly state-subsidised Chinese companies. 

Critics of the decision argued that Europe's economic sovereignty was at stake. Intense political pressure and lobbying activity ensued with a view to reforming European competition law or, on the contrary, to shield competition law from political instrumentalization. 

Eighteen months after this decision and an intense political battle, have the advocates of a more industry-oriented competition law been heard and will EU competition policy be radically overhauled? Probably not. While the Commission has given assurances that it has heard the message, it seems that it is only prepared to consider adjustments to the current competition law framework rather than radically changing its direction, pointing to legal instruments other than competition law to ensure a level playing field in the global economy.

The Siemens-Alstom decision 

In February 2019, the Commission announced its decision to prohibit the proposed acquisition of Alstom by Siemens due to very significant overlaps in the companies' activities in the fields of railway signalling and very high-speed trains and the risk of creating a dominant player in these markets. The Commission took the view that the relevant market on which competition takes place was essentially EU wide and that the Chinese giant CRRC was not likely to enter the EU market in the near future. The Commission did not consider that CRRC could exert a competitive pressure nor than the combined market shares of the parties should be diluted by considering a worldwide market. The Commission underlined that the parties have not proposed sufficient remedies to address these concerns.

This was heavily criticised by the parties and their respective governments, who criticized the Commission for having a short-sighted view and a rigid technical approach and for not taking into account the dynamics of global competition. 

The call for reform

Two weeks after the publication of the Siemens-Alstom decision, the French and German governments jointly issued a manifesto[2] calling for a reform of EU competition law to adequately take into account industrial policy considerations to enable European companies to successfully compete on the world stage. The manifesto was followed by a series of declarations and policy initiatives, with the publication of further position papers, with Poland and Italy joining the fray alongside France and Germany. 

The proposals for change have taken two dimensions: one technical and one more political. 

On the technical side, critics of the Commission consider that the analytical framework used by the Commission for merger control is obsolete and no longer adapted to the reality of the global economy. They claim that the Commission should amend its competition rulebook in four main ways: 

  • Extend the time frame taken into account when assessing potential market entry by competitors. According to the Commission's Merger Control Guidelines, the Commission generally only takes into account market entry that may take place within two years[3], although this is not a strict rule and the Commission has already derogated from this principle in the past when justified by specific market dynamics. Proponents of a reform argue that the Commission should adopt a much more flexible approach to the assessment of potential competition and future market entry and that the analysis should be carried out over a longer period of time, also taking into account the industrial and political landscape.
  • Broaden the geographical dimension of market definition to take account of increasing globalisation. In the Siemens-Alstom decision, the Commission considered that the relevant market for the assessment of the concentration was the European market or, for certain products, a more global market, but excluding in particular the Chinese market which is not open to competition. Critics of the decision point out that the outcome of the decision would have been different if the analysis had been based on a global market.
  • Give greater weight to economic efficiencies that may result from mergers and that could offset possible restrictions of competition.
  • Adopt a more flexible approach to behavioural remedies. The Commission is known to favour structural remedies, i.e. divestments of assets or businesses, over behavioural remedies and this approach is sometimes considered dogmatic to the detriment of notifying parties.

On the political level, the Franco-German couple advocated the possibility of allowing the European Council to override the decision taken by the Commission. The Council is the political body of the EU institutions where the Heads of State of the 28 Member States sit and which decides on the general political guidelines and priorities of the European Union. In other words, the intent would be to give back power to politics over technical experts.

The political game

The lobbying by Franco-German governments to bend competition law rules when they impede industrial objectives has met with strong resistance from many stakeholders.

Unsurprisingly, DG Comp defended its decision and argued that the current competition framework is well suited to address competition concerns in the global economy. More interestingly, the head of the French and German competition authorities sided with DG Competition, saying that the EU competition rules are sound, and that competition law should not be relegated to the side of industrial policy.

They rightly stressed that the expansion of European champions abroad should not be at the expense of European consumers. The dominant players in Europe could indeed abuse their market power to impose supra-competitive prices on European consumers in order to finance their international expansion and competitiveness abroad. This illustrates the tension between an industrial policy that favours the growth of industrial champions and a competition policy that has consumers' interests at heart.  

More importantly, the Franco-German push came up against the open hostility of other smaller EU Member States, who feared being sidelined by their two powerful partners and were afraid that they could play the system to promote their own national interests and impose their political agenda. 

In a letter of 10 March 2020[4] to the Commission, the representatives of the governments of the Czech Republic, Estonia, Finland, Ireland, Latvia, Lithuania and the Netherlands warned the Commission against any radical changes to EU competition law, stressing that any review of EU competition rules must be "based on proven principles, evidence and economic research" and that "any moves to soften and politicise EU competition rules would be detrimental for the whole of the European Union".

The Commission also found allies in the European business community. The European Round Table for Industry, which brings together the heads of some of Europe's largest companies, including groups such as Michelin, Indetex, Solvay, Volvo and AkzoNobel, has published a position paper[5] on EU competition policy in which it states that it is not convinced that recent proposals to have certain merger control decisions reviewed by the European Council would be positive. Not surprisingly, these large multinationals do not see political interference as an improvement, as it would inevitably reduce legal certainty and predictability. 

In the face of so much resistance, the French and German governments have watered down their proposals and have notably abandoned the idea of a European Council veto. It was difficult to understand anyway how such a veto right would have worked in practice. In particular, it was not clear whether the Council's decision would have been a political review of the competition assessment, with doubts as to the outcome of that review for which the Council lacks expertise, or whether the decision would have been based on purely economic or political considerations, overriding the competition analysis. Moreover, beyond the defence of European industry there are often national economic interests and obtaining a majority in this context would have been difficult and could have given rise to heated debate between the representatives of the head of States. In this respect, it is interesting to note that the Siemens-Alstom merger that sparked the debate was also unpopular in a number of EU countries where operators feared the creation of a dominant supplier.

In any case, the EU Member States supporting this veto right quickly realised that they would not have enough allies to carry out such a reform, which would require the unanimous support of the Member States. They therefore abandoned the idea but remained vocal about the need to revise competition policy to take account of EU member states' industrial objectives.  

The outcome and the future 

Although the Commission initially took a rather defensive stance in the face of criticism from the French and German governments, it was hardly possible to ignore the message from the two most influential Member States. 

In Ursula von der Leyen's marching order to Margrethe Vestager, confirmed in her role as EU head of competition, the President-elect said the commissioner should "evaluate and review Europe’s competition rules", including an "evaluation of merger control". 

The Commission therefore had to navigate carefully in order to propose an evolution of its policy acceptable to all. In the first speech of her second mandate, Margrethe Vestager stressed that there were “many voices” in the debate and that she would seek to balance the French and German views with others. 

However, the Commission has refrained from embarking on a comprehensive review of the merger control regime. Instead, in June 2020, it launched a consultation of a more limited scope on its Notice on the definition of the relevant market, which will address in particular the issue of the geographic dimension and international competition, which was one of the bones of contention in the Siemens-Alstom case. 

However, with increasing pressure from the Franco-German couple, the rise of protectionism, the Covid-19 effect showing the dependence of European economies on Chinese supplies and the overall perception that the Commission is naïve towards less scrupulous trading partners, the Commission could not remain inactive.

In a rather smart move, the Commission instead of addressing the need to change competition policy in isolation, included the discussion as part of its broader plan for a new industrial policy presented in March 2020[6]. Putting things into perspective, this policy document shows that competition law is not the most effective tool to deal with the issue of economic sovereignty.

In a balancing exercise, the Commission reiterated its view that competitiveness requires competition both in the world and at home, and that an independent European competition policy is key to ensure a level playing field, while indicating that it is currently reviewing the European competition framework on a global scale. The evaluation of merger control will only be part of a much broader review. The Commission is thus buying time and avoiding a direct debate on concrete proposals for change in merger control. 

On the issue of economic sovereignty, the Commission is moving away from competition law and intends instead to rely on its toolbox of trade defence mechanisms. This will include a proposal for a legal instrument on foreign subsidies, a proposal for a international instrument on public procurement to address the issue of reciprocal market access, the adoption of a framework for the screening of foreign direct investment, the reinforcement of customs control for products that do not comply with EU standards and efforts to improve the world trading system.

The Commission shows that it is aware of the need to strengthen Europe’s political sovereignty against unfair competition and threats from foreign companies that do not abide by the same rules. However, this must not be to the detriment of consumers by allowing mergers that harm competition on the European market. In a speech in July this year, Olivier Guersant, one of EU's top competition officials, made it clear that in his view relaxing EU merger rules is not the way to create more European champions, warning that monopoly rents earned in protected domestic markets would benefit shareholders and international investors, but not consumers.

It remains to be seen what the outcome of the current evaluation of the competition law rules will be, but enough signals have been given to show that the Commission has no intention of making radical changes to the merger control regime.
 

 

[1]  https://ec.europa.eu/competition/mergers/cases/decisions/m8677_9376_3.pdf

[2] Manifesto for a European industrial policy fit for the 21st century available here https://www.gouvernement.fr/sites/default/files/locale/piece-jointe/2019/02/1043_-_a_franco-german_manifesto_for_a_european_industrial_policy_fit_for_the_21st_century.pdf

[3] Para. 74, European Commission Guidelines on the Assessment of Horizontal Mergers 

[4] https://www.regeringen.se/493e14/globalassets/regeringen/dokument/naringsdepartementet/letter-to-executive-vice-president-margrethe-vestager---10-march-2020.pdf

[5] https://ert.eu/wp-content/uploads/2019/11/2019-10-07-Press-Release-ERT-Position-Paper-Competing-at-Scale-1.pdf

[6] https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1593086905382&uri=CELEX:52020DC0102

 
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