Europe needs competition, not national champions

In recent years, European leaders have increasingly debated whether competition enforcement should give way to industrial policy. A growing number of politicians argue that Europe should favor creating European “national champions” over enforcing the European Union’s (EU) competition laws. This, they say, is the only way to reinvigorate the European economy and challenge American and Chinese behemoths on the world stage. Experience and industrial organization economics teach that this is a questionable premise. But that seems not to deter its proponents.

While national champion policy advocates—not just in Europe but also in the U.S., Japan, and China—have been around for a long time, 2019 saw new momentum after the European Commission (EC) blocked a proposed merger between Europe’s two leading railcar and train signaling systems manufacturers—France’s Alstom and Germany’s Siemens. The decision to block should have surprised no one: The combined firm would have dominated the market in Europe, the U.S., and much of the rest of the world.

But not everyone agreed. That year, Peter Altmaier, then-Minister for Economic Affairs and Energy of Germany, unveiled a new national industrial strategy for Germany that included calls for Europe as a whole to prioritize the formation and protection of European national champions to compete with China and the United States. Around the same time, President Emmanuel Macron of France pledged “to recreate competition policy to avoid the mistake of the Siemens-Alstom prohibition.” Macron followed up by nominating as an EC commissioner Thierry Breton who previously called for “a true industrial policy at EU level,” which he contrasted with a status quo of “competition policy imposing its will.”

The argument today is that Europe faces a “competitiveness crisis” relative to the U.S. and China. Europe’s shrinking share of the global economy and its lagging public and private investments, income, and productivity growth as compared to the United States have fueled this crisis and convinced some in Europe of the need for radical change. Current and former European leaders—particularly from France, Germany, and Italy— continue to call to for relaxed limits on mergers and state aid to promote consolidation in some sectors and create “European champions”—large companies that could more effectively compete with American behemoths. In 2022, Bruno Le Maire and Robert Habeck—the economic ministers of France and Germany, respectively—called for an increase in industry subsidies through state aid programs, a cause that Thierry Breton also championed in his role as European commissioner.

This strategy of “national champions” has met opposition from government leaders and experts on both sides of the Atlantic. Margrethe Vestager, the current EU Executive Vice President of a Europe Fit for the Digital Age and Commissioner for Competition, defended the EU’s current merger rules at a conference in April against calls to reform them in order to foster national champions. Vestager argued that the rules do not prevent “pro-competitive consolidation” and that European firms will only be able to compete with others on the global stage when pressured to improve by competition at home. In her view, “Competitiveness within the single market translates into external competitiveness.” Mario Monti, a former EU antitrust chief and former Italian prime minister, warned at an OECD conference in March that national champions could simply be ineffective due to the possibility that they could be prohibited from operating in other countries.

In the U.S., FTC Chair Lina Khan urged skepticism of this strategy in her remarks in March 2024 to the Carnegie Endowment for International Peace, arguing that the protection of monopolies can threaten national interests by concentrating risk in supply chains, weaking industry resiliency, lowering production, and raising prices. Chair Khan pointed to antitrust lawsuits against IBM and AT&T in the 1970s as examples of the success of promoting competition, arguing that those lawsuits sparked “waves of innovation” that surpassed the national champions of Japan and Europe at the time, while referring to the embattled Boeing as an example of the negative consequences of enabling consolidation.

Earlier this month, Max von Thun of the Open Markets Institute agreed in ProMarket that European leaders who call for merger regulation reform are accurately diagnosing the problem Europe faces—that “Europe’s economic and political institutions remain too divided and fragmented, and too dependent on others, to adequately respond to the challenges of the day, be these geopolitical, economic, or environmental”—but that their calls to rethink competition policy to enable consolidation are misplaced. Von Thun used the United States as an example of the harms of consolidation in the defense and telecommunications sectors specifically and argued that, beyond high prices, consolidation causes harms in the form of weaker resilience, less innovation, and reduced investment.

The critics of a national champions policy gained significant support from a recently released EU report, based on research by members of the EC Directorate-General for Competition and the Organization for Economic Cooperation and Development. “Protecting competition in a changing world” found that concentration has already been increasing in the EU market, along with markups and profits, while “business dynamism”—measured, in part, by the rate of turnover in market leaders—is declining. Critical to this debate is the report’s finding that firms exposed to more competition demonstrate increased productivity which fuels overall competitiveness, reinforcing Vestager’s argument that domestic competition is an aid, not an obstacle, to international competitiveness.

Overall, a policy of fostering national champions is both harmful and ineffective. National champions are born from market consolidation, and concentrated markets means higher prices for consumers and greater inequality in the market overall. A monopoly or oligopoly in a particular industry often translates to a monopsony or oligopsony in the labor market for that industry, driving down wages for workers. Most pertinent to this debate is that national champions are ineffective at their own goals. Industrial policy that reduces competition in an effort to drive more resources toward a single, globally competitive firm ends up insulating that firm from the very market forces that would enable its success. A firm that is granted a monopoly over a domestic market will lack incentives not only to offer low prices but also to innovate or improve its efficiency. This lack of domestic pressure leaves national champions ill-prepared to compete in the global market, to say nothing of whether other countries will even allow such subsidized firms to operate in their markets.

The recent EC commission’s report surveyed 398 firms from 11 member states. According to the survey, “a large majority of respondents (80%) confirms—in line with consistent prior economic research on the importance of competitive sourcing of manufacturing inputs—that effective competition in domestic (i.e., EU) upstream markets for physical input goods is important for their success on export markets.” As Margrethe Vestager puts it, “Local champions… are competitive abroad when they are pushed to be efficient, lean, innovative because they are faced with competition at home.”

As its share of the global economy continues to dwindle, Europe is indeed at a crossroads. Its leaders may very well need to take bold steps to promote its economy’s growth and compete with the U.S. and China on the global market. But gutting its own antitrust regime is not the way forward. A policy of promoting consolidation will sacrifice European consumers, workers, and market resiliency in a bid to compete abroad that will ultimately fail without the crucible of domestic market competition. A firm that arises from such policies, bloated with subsidies, may dominate its own national market, but it will be no champion.