|
|
In recent months, two major reports on the EU by former Italian prime ministers, Enrico Letta and Mario Draghi, have painted a dire picture of the bloc’s economic prospects. It is hard to argue with their diagnosis: Europe has doggedly low productivity growth, meaning it is struggling to become more efficient and produce more value for each hour worked. One reason is that established European firms are not using new technologies or innovating much themselves, while small and innovative firms are often unable to grow. Letta and Draghi conclude that one way to partly solve the problem would be for the European Commission to think more about innovation and growth in enforcing competition policy – a position that British prime minister Keir Starmer recently echoed in criticising the UK’s competition authority.
But competition policy is not the main cause of Europe’s innovation woes. If she is confirmed as the next Commission’s competition czar, Teresa Ribera should avoid sharp changes to the bloc’s antitrust policies until the EU tackles more important reforms. Adjusting competition policy now risks making Europe’s poor record on innovation even worse.
Adjusting competition policy now risks making Europe’s poor record on innovation even worse.
Tweet thisIn his report, Draghi correctly identifies the main problem behind Europe’s low productivity growth: its stagnant business environment. Europe’s largest firms are far older than America’s giants. They have focused too much on incremental innovation and have faced too little pressure to embrace radical change. Europe’s competition policy was supposed to prevent this outcome. Over recent decades, it has mostly been tougher than that of the US: more willing to block mergers and to punish dominant firms for abusing their positions. Competition was supposed to not only force firms to keep their prices low, but also to pressure them to innovate. It has performed the first task well: businesses in Europe tend to have more direct competitors and to be less profitable than US equivalents, which suggests European consumers get a good deal. But European businesses are making fewer productive investments than US ones and are investing far less in research and development.
Many economists see the relationship between competition and investment as U-shaped. If one firm becomes too dominant, it will not innovate since its position will be secure, and challengers will not innovate because they have little hope of overtaking the incumbent. However, if many small firms are competing neck-and-neck, they may focus on cutting costs, rather than making largely risky bets, and they may lack the scale needed to pull off large investments. This latter scenario describes Europe’s situation today. Europe’s competition policy has often in practice fixated on ensuring a certain number of firms in a particular market....
more at CER