Europe’s Merger Reset Gets One Big Thing Right

After years of treating corporate scale with entrenched regulatory hostility, the European Union (EU) may have begun to acknowledge that scale helps firms compete. Indeed, scale achieved through competition results from and further promotes innovation and efficiency––and ought to be distinguished and separated from politically favored consolidation. The latter is often a result of industrial policy, in which Europe has engaged for a long time. The size of a firm alone does not prove anticompetitive conduct. To the contrary, scale can help firms compete by giving them the resources to innovate, invest, and challenge global rivals.

The European Commission is updating its merger guidelines for the first time in around two decades. The draft reflects changes in modern markets, including digitalization, globalization, supply-chain concerns, and competition increasingly defined by innovation. Most importantly, the Commission’s draft Merger Guidelines recognize that mergers can produce benefits, not only harms. The final guidelines should make clear that large companies are not the enemy of competition when their scale, earned through innovation and efficiency, ultimately benefits consumers.

Europe’s competitiveness problem is real. The problem is a result of the EU’s long-standing presumption that consolidation is inherently harmful––alongside the economic zone’s onerous regulation––and the solution to that problem is the opposite of punishing firms for growing. The draft guidelines suggest the Commission is beginning to recognize this reality.

The draft Merger Guidelines broaden the scope of the EU’s antitrust scrutiny beyond long-term harms to give greater weight to long-term benefits such as innovation, investment, and merger efficiencies. Mergers enable companies to combine complementary assets, generate economies of scale, improve access to financing, and bring new products to market. Considering the benefits of greater scale is especially important in sectors with high fixed costs, heavy spending on research and development, and global competition.

Static market shares often do not capture the realities of dynamic competition. Therefore, it is essential that dynamic analysis not become dynamic speculation. The Commission remains committed to using theories of harm.

Some of these theories are forward-looking, including harms to future innovation, the loss of potential competition, reduced investment, and entrenchment. While being forward-looking is not wrong, doing so with the presumption that consolidation necessarily creates such harms instead creates a risk of speculation. Regulators who consider future harms to competition more likely than future benefits give the potential harmful effects of mergers more weight. This calculus is not supported by evidence of increasingly dynamic and competitive industries in which America’s corporate giants, such as Amazon, Netflix, or Apple have to relentlessly defend their market shares against ambitious smaller rivals and potential new entrants. Dynamic efficiencies, therefore, should not face a higher evidentiary burden than dynamic harms.

A recent argument that EU needs “European champions” to compete on an equal footing with American and Chinese firms is based on a valid concern about European global competitiveness. After the Commission blocked the Siemens-Alstom rail merger in 2019, some European officials argued that merger rules should be more flexible if Europe were to become home again to industrial champions large enough to compete globally. The draft Merger Guidelines could thus spur a shift to a regulatory approach that frames scale as a solution and allows EU firms to consolidate within the single European market and thus compete more effectively against foreign giants.

Yet “competitiveness” cannot be accomplished by protecting European firms from competition. Bigger domestic firms do not automatically become more innovative or globally competitive if they are a product of government protectionism. Shielding favored firms only encourages stagnation and complacency. When a firm lacks domestic competition, it lacks incentives to cut costs and improve products. The EU should be careful not to replace aggressive antitrust enforcement with crony industrial policy.

The draft Merger Guidelines are a step in the right direction; they recognize that competition is about more than current market shares. Nevertheless, the final guidelines need clearer guardrails for government intervention, including, above all, a proper standard for evaluating theories of harm, which the draft still lacks. Consumer welfare ought to be the antitrust standard for determining whether a merger harms competition, not whether it creates a larger firm.