Not a ‘side dish’
Cristina Caffarra is Honorary Professor at University College London, and Nathaniel Lane is Associate Professor and Post-doctoral researcher, Department of Economics, at Massachusetts Institute of Technology; and Associate Professor at the University of Oxford
Speaking recently to an audience in Brussels (at an event that has since become known as the ‘Anti-Davos’)1 the European Commission’s top competition enforcer provocatively remarked that, “[w]hen it comes to the big issues of our times, I am afraid competition policy is neither the problem, nor the solution – it’s a side dish.”
The statement triggered a cascade of reactions and responses. Weeks away from a European election that may change Europe’s political landscape, in this column we discuss why competition policy has a broader role than the comment credits it for. Far from being a ‘side dish’, antitrust will be important to the transformative role that resurgent industrial policy will need to play, particularly in Europe.
Beyond digital regulation
Digital enforcement (‘taming Big Tech’) has assumed totemic value in Europe: it is the test of our credibility, resolve, and effectiveness in confronting surveillance business models and the entrenched market power of Big Tech. As antitrust enforcement in digital has failed, regulation is now the beach on which we fight.
If Europe can achieve results here, it shows the world what can be done. But digital enforcement is also getting too much attention in relation to the scale of Europe’s real structural problems. While we pride ourselves of our efforts to ‘tame Big Tech’, policymakers must urgently confront Europe’s underwhelming economic performance across sectors.
Europe is falling behind on multiple fronts: productivity, competitiveness, R&D, IT investments, and more. This view is not controversial: many have been sounding the alarm, from the ECB (Schnabel 2024) to the Bruegel think tank with their recent report for the Commission’s EGov Directorate (the ‘Bruegel EGOV report’; Pinkus et al 2024)2.
Digital enforcement will do its thing, and it is underway. Yet on the eve of a European election, deep structural problems are urgently on the table for the incoming 2024-29 Commission. The European Commission has tasked two former Italian prime ministers, Mario Draghi and Enrico Letta, to report on competitiveness and progress towards the Single Market, respectively.
Their reports will inevitably discuss the causes of Europe’s fragmentation – its multitude of languages, cultures, rules, financial markets, capital markets, and economic trajectories – and what can be done to reduce those barriers and address our ‘competitiveness crisis’ (Schnabel 2024).
The reports are also expected to highlight the need for massive ramp-up of investment in multiple strategic sectors, to promote green transition and digitalisation, to increase Europe’s resilience in the global economy, and curb de-industrialisation. The future demands and scope of these investments will be unprecedented.
While Europe has experience with large-scale government spending, both historically and with the pandemic and its aftermath (eg. the EU Recovery and Resilience Facility), calls for state-led investment are now much more expansive. The confluence of post-pandemic emergencies and the waning of the Washington Consensus have created a further sense of urgency in two dimensions.
First, a global resurgence of economic interest in the design of appropriate industrial policies (eg. Juhász et al 2022); and second, a significant pivot in the US away from the traditional aversion to the state playing a role in markets (Armstrong and Wu 2024). What does this all mean for Europe, and the role of competition policy?
The ‘New Industrial Policy’
Industrial policy has returned as a major object of interest, with a proliferation of new thinking over the last five years by academics and practitioners (Rodrik et al 2023). Questions around industrial policy have turned from ‘whether’ (ie. ‘should governments carry out industrial policy?’) to ‘how’ (‘how should industrial policy be carried out?’).
A recent wave of research, the ‘New Economics of Industrial Policy’, has generated more nuanced views, and nascent work is tempering historical concerns that industrial policies are necessarily harmful: because ‘losers pick governments’, and state support necessarily produces ‘zombie companies’ – inefficient national champions.
While these risks are real, recent empirical work has also established key episodes where industrial strategies likely “shifted resources in the desired direction, often producing large long-term effects in the structure of economic activity” (Juhász et al 2023).
A diverse community of industrial policy thinkers is coalescing around critical themes. There are undoubtedly differences in the ‘how’ (from Mazzucato 2020, urgent advocacy for mission-oriented ‘moonshots’, to more mainstream economic theories of intervention in Juhász et al 2023), but there are also key commonalities: the importance of focusing on strategic sectors, the need to go beyond blunt instruments of post-war policy, and a focus on collaborative and deliberative policymaking, with input from the private sector.
Scholars are also emphasising the importance of averting government failures through the design of guard rails and conditionalities (Lane 2021, Mazzucato and Rodrik 2023).
What makes the rethink all the more salient is the big ‘pivot’ of the current US administration towards ‘industrial strategy’, with large public funds being allocated and disbursed to support a variety of goals: green transition, rebuilding domestic capacity offshored in the neoliberal era, supporting deindustrialised areas, reducing dependency on concentrated and brittle supply chains, and ‘crowding in’ complementary private investments.
Foroohar (2024) argues this does not yet amount to a fully coherent industrial policy, but we would be inclined to be indulgent given the magnitude of the pivot.
Europe is falling behind on multiple fronts: productivity, competitiveness, R&D, IT investments, and more. This view is not controversial: many have been sounding the alarm
‘Antimonopoly’ thinking as foundational
The focus on averting the misadventures of past industrial policy (in particular, support for ‘national champions’) is an important reason why antitrust thinking has a major role to play in the new landscape.
In the US, the worlds of industrial policy and antitrust have recently been colliding. With the major shift in antitrust thinking in Washington over the past few years has come recognition that antimonopoly values (fairness, equality, citizenry) must pervade and motivate other economic policy tools – including trade an industrial policy.
As the Chair of the Federal Trade Commission, Lina Khan, recently articulated, “we are hearing arguments that America must protect its domestic monopolies to ensure that we stay ahead on the global stage. (…) we should be extraordinarily sceptical of these arguments, and instead recognize that monopoly power is a major threat to America’s national interest.”
Further, “the choice to bring antitrust lawsuits against AT&T and IBM ended up fostering waves of innovation” (Khan 2024). And yet further: “competition policy will be a key complement to achieve industrial policy goals. As we’re handing out subsidies, are there going to be strings attached, that create trajectories on an open and competitive path, rather than a closed and monopolistic path? If the industrial policy vision is one of government as a more active participant in ‘market making’ and ‘market shaping’, we need to make sure that our values and our vision around competition policy are wholly a part of that decision making.”3
Tim Wu, a key architect of Biden-era thinking on antitrust, also describes antitrust (and, in particular, past lawsuits breaking up monopolies) as ‘industrial policy’.
Indeed, where antimonopoly promotes intentional economic change, it is, by definition, “an industrial policy” (Juhász et al 2022). Making antimonopoly thinking part of the industrial policy toolbox can help break with the past: there is clear recognition among industrial policy scholars that where strategic investments are made, markets must remain ‘oxygenated’ – not favour dominant players; and that the more successful industrial policies are those which have supported competition (Aghion et al 2015, Nahm 2021).
Just like the ‘efficiency paradigm’ of the neoliberal era has been superseded in antitrust, efficiency goals may not sufficiently capture the broader aims of an industrial policy – for suppliers, regional economies, communities, citizens, and more.
‘Antimonopoly’, the fight against market power and its pathologies, is a fundamental value that must underpin also the direction of investments to lift entire sectors and communities. What may not be ‘efficient’ may have other social benefits.
The European predicament
Europe has responded to the pandemic and the ‘polycrisis’ also with a large increase in public spending initiatives, but we continue to face a large and widening gap in economic performance with the US and other blocks.
This reflects in part a deep structural problem of persistent fragmentation along national borders, which has been Europe’s ‘Sisyphean rock’ for decades notwithstanding major past efforts (Pinkus et al 2024).
Confronting our declining economic performance will require a major increase in public spending in selected strategic sectors, which is hard for a collection of sovereign countries, with limited federal-level resources and persistent fears that common public spending could benefit some countries more than others.
The Bruegel EGOV Study suggests as a possible way forward what they describe as “coordination for competitiveness” – the European Commission performing a central coordination role to “cooperate in areas that offer the greatest gains on a sector-by-sector basis, supported by some EU-level funding. Energy policy coordination and an EU Advanced Research Projects Agency (ARPA) are two examples.”4
What should competition policy do?
What should be the role of competition policy in designing these policies? Pushing back against ‘national champions’ is certainly not new in Europe, where European Commission state aid policy has been traditionally tasked to control excess spending by national governments, and their incentives to prop up their own ‘zombie firms’ with state funds.
State aid is a large part of Directorate-General (DG) for Competition, systematically vetting national schemes dreamt up by member states to support local interests, with the objective of avoiding distortions to ‘competition in the Internal Market’. The traditional requirement for state support not to fall foul of state aid rules is that it ‘addresses a market failure’ in the ‘most efficient way possible’.
It is thus unsurprising that in a recent contribution to the debate on the need for more industrial policy, senior DG Competition officials drawing from their state aids experience recommended that each industrial policy intervention be justified by a specific market failure, and adopted measures be ‘efficiency-enhancing’ (Piechucka et al 2023).
The paper mentions ‘efficiency’ over 100 times, ‘efficiency-enhancing’ over 30 times, and ‘market failure’ 80 times. While of course we want to avoid wasteful effort, this focus seems out of line with the evolution of current thinking both in antitrust and industrial policy.
For instance, efficiency criteria are at odds with the rationales driving policy discussions on place-based policies and ‘good jobs’, which are aimed to produce larger social benefits. Efficiency criteria are also empirically incomplete: how do we prove something is ‘efficiency enhancing’, particularly in the case of policies with long gestation periods and whose benefits are borne in the future (Lane 2020).
But more fundamentally, the usefulness of ‘efficiency’ as a principled goal has come deeply into question. As put by Deaton (2024), “we valorize (efficiency) over other ends. Many subscribe to (the vision) that says economists should focus on efficiency and leave equity to others, politicians or administrators. But the others regularly fail to materialise, so when efficiency comes with upward redistribution – frequently though not inevitably – our recommendations become little more than a license for plunder.”
Simply put, extending traditional ‘state aid’ thinking to industrial policy is undesirable at a time when thinking and practice around interventions are evolving. We don’t need to reassure ourselves we are being ‘orthodox’ by casting everything as a market failure (which is easy to do, in any event, if one tries – but so what?).
Nor is efficiency the ‘north star’ we need to be pursuing. We will need major increases in spending from the centre, and coordination of spending at the national level to ensure that collective objectives are not undermined. But if the aim is to build capacity and improve performance in Europe, industrial policy intervention that benefits citizens (not merely as consumers) cannot be held to a ‘market failure/efficiency-enhancing’ paradigm.
Competition insights and capabilities can and should be involved in industrial policy design to provide not just an assessment of state plans along traditional state aids lines, but also affirmative values of antimonopoly, de-concentration, fairness, and distribution.
Traditionalists will say ‘but what is the limiting principle?’ – this the generic objection to everything by those who want no change. We cannot be stuck with ‘efficiency’ when we need to accomplish so much more, and neoliberal ‘trickle down’ has been shown to be a chimera.
Urgent proof of concept: a digital industrial policy
Major focus needs to be placed on powering Europe’s digital infrastructure. Europe has set huge store by its ability to ‘tame Big Tech’ via multiple laws: the Digital Markets Act (DMA), Digital Services Act (DSA), Data Act, and AI Act. Whether this effort will truly enable European challengers to acquire more than a marginal role remains to be seen.
But we need more than extracting from Big Tech concessions to provide better deals to app developers, search rivals, ad-tech companies and e-commerce sellers, and create access regimes to platforms that are now critical infrastructure. We also need to invest locally in an independent, federated, decentralised digital infrastructure on which Europeans can build.
Europe has lower advanced technology adoption than the US, and the productivity divergence between high- and low-productivity firms has widened more in digital-intensive sectors (Criuscolo 2021). On the positive side, the number of EU-based start-ups is high, and there is vitality in terms of researchers, digital skills, and emerging technologies (Meyer 2024). Yet Europe’s fragmentation and its dependencies on US giants make it challenging to implement, commercialise, and scale hi-tech activity.
We thus need a robust digital industrial policy alongside the existing diet of EU regulation and innovation policies. This means coordinating national and EU-level efforts to create autonomous infrastructures and reduce the dependency on Big Tech. These goals also align with narratives on ‘sovereignty’.
As summarised by Bria (2023), “to strengthen our economic and political sovereignty in a complex geopolitical environment, Europe needs a combination of regulatory frameworks and active digital industrial policies. This objective goes beyond merely crafting regulations. It’s about building new markets and industries, creating innovative institutions, and fostering ecosystems that truly serve the public interest.”
Investing in a ‘Europe stack’ tech ecosystem should be an attractive candidate for EU-level funding because the crossborder externalities are high. Bria (2023) suggests a €10 billion EU Digital Sovereignty Fund, which would “blend grants and equity investments, fostering pan-European collaboration among our national innovation agencies (…) to establish robust digital public infrastructures and digital commons, offering viable alternatives to current monopolistic digital platform models, supporting the deployment of open AI models and decentralized applications, sovereign data spaces, open knowledge tools and content, privacy-preserving digital IDs, and digital payment systems.”
The Bruegel EGOV Study (Pinkus et al 2024) suggests an ‘EU ARPA’ involving the creation of an independent agency with a €5 billion budget to pool investment projects and coordinate spending at national level, to be topped up with additional funds from EU programmes. Objectives would be set by the EU Council and the European Parliament, but the agency would be autonomous in policy implementation.
While prior initiatives have proven insufficient for multiple reasons (for example, the Juncker Plan of 2015 and the European Fund for Strategic Investments), and significant obstacles remain – not least risk-taking appetite and competencies – we need to double down now that we have more scholarship, experience, and expertise.
Critically, the experience and expertise of DG Competition in digital markets will be critical here: successful investment in federated decentralised infrastructures requires understanding of the regulatory environment, and of competitive dynamics which can facilitate private complementary investment and innovation on these infrastructures.
Overall, getting Europe to improve performance will require a massive, concerted effort at national and EU levels to identify strategic sectors and disburse funds in a targeted way that will crowd in private investment.
Competition thinking has a key role to play, not to enforce narrow and nebulous efficiency goals, but to ensure initiatives are consistent with antimonopoly values, fairness, and opportunities. Not a ‘side dish’.
Endnotes
2. The analysis of the causes of the gap in the Bruegel EGOV report includes: low labour and total factor productivity growth relative to the US especially since 2020, with large intra-EU differences; especially dramatic difference in productivity with the US in information and communication technology (ICT); slower accumulation of IT capital and better technology adoption in the US; much lower intensity of R&D spending especially in three key sectors – pharma/biotech, software and IT; significantly higher industrial electricity retail prices than the US; higher hourly labour costs; much higher cost of equity finance and lower volume of venture capital funding and therefore much greater restrictions in accessing risk capital; and finally, much lower trade across national borders than one would expect to see given past effort at market integration.
3. https://cepr.org/events/competition-policy-rpn-reinvigorating-antitrust-citizens-not-just-consumers.
4. The reference is to the US ARPA, which has been instrumental in mobilising resources and investing them in high-risk, high-reward projects.
References
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This article was originally published on VoxEU.org.
