Industrial policy and competition have often been considered irreconcilable, but this isn't exactly the case, and a synthesis is possible. Here's why.
There was a time when the EU considered competition as industrial policy
The pursuit of strategic objectives through a common industrial policy is nothing new for Europe. However, the Commission communications on industrial policy adopted in the 1990s—aimed at fostering greater competitiveness for European companies—were predominantly based on a horizontal approach, consisting of a set of sector-neutral measures designed to improve the general environment in which companies operate. This approach was consistent with the traditional understanding of the role of public intervention in the European economy, which historically focused on limiting selective public intervention in the name of protecting market competition. With the exception of a few sector-specific initiatives, often aimed at rationalizing struggling industrial sectors, such as the Davignon Plan for the steel industry, or more far-reaching initiatives such as Esprit, European policy in recent decades has been based on the effort to implement and complete the single market. This effort encompasses the liberalizations of the 1990s, the abandonment of direct public intervention in markets, and privatizations. As Competition Commissioner Van Miert used to say in the early 1990s, Europe's industrial policy was competition.
The time of European industrial policy and the EU turning point
However, since 2010, in response to the crises affecting European economies, the Commission has progressively integrated a vertical approach, aimed at supporting specific sectors or technologies strategic to the competitiveness and transition of the European economy. A decisive turning point in this regard came with the response to the COVID-19 emergency: the need for massive public intervention to support the recovery provided an opportunity to reshape the European economic system for the dual transition, ecological and digital. The outbreak of war in Ukraine consolidated the industrial policy concept according to which public intervention in the economy—including at the European level—is a tool instrumental to the EU's strategic direction.
First, the Union assumed a central role in designing comprehensive industrial policies for the first time: initially with Next Generation EU (actually anticipated by the New Green Deal) and subsequently with the Recovery and Resilience Facility (NRRP). This first saw the mobilization of centralized European resources, albeit in support of projects developed, albeit along common lines, at the national level. Subsequently, based on the analyses contained in the Draghi Report, the Commission developed the Competitiveness Compass, which represents the political outcome of the Letta and Draghi Reports, aimed precisely at outlining a vision and a series of strategies for strengthening the EU through a renewal of the single market. This marks a new fundamental step. It outlines the three pillars—innovation, resilience, and security—on which the Commission's priorities for the period 2024–2029 are based, highlighting the desire to structuralize the EU's proactive industrial approach.
In this context, the approach to state aid policy has also changed: from an approach guided by the impact of initiatives on competition to a more flexible one, aimed at facilitating the development of key supply chains (batteries, hydrogen, semiconductors). This, of course, in the absence of common resources, poses the risk of asymmetries between countries regarding the capacity for financial support. The reasons for the recent shift in approach are, as is well known, diverse: the introduction of environmental and social sustainability among the Union's objectives and the resulting push toward decarbonization, which is also linked to energy autonomy; the issue of resilience, to respond to the threat to supply security posed first by Covid and then by developments in geoeconomic equilibrium. But above all, it stems from the perceived loss of competitiveness of the European economy compared to the United States and China, due to the delay in European industry's adaptation to the digital and AI revolution, the energy transition, and electric mobility. It is no coincidence that these were the areas most affected by the interventions envisaged by Next Generation EU to put the European industrial economic system back on the path to innovation.
Industrial policy and competition
Industrial policy encompasses all public interventions aimed at making the economic structure more efficient. These interventions, however, can have different characteristics: they can be horizontal, applying to all companies regardless of sector (R&D tax credits); or they can concern only certain sectors or locations; they can also address the specific structure of a company, encouraging mergers to achieve the appropriate scale to compete in markets or undertake the necessary large-scale investments.
Industrial policy interventions need not necessarily lead to restrictions on competition. Indeed, as we will see, there can be complementarity between industrial policy and vibrant competition. However, national experiences in the 60s and 70s were often based on the creation of "national champions" with great market power, in the belief that this could lead to positive effects on upstream and downstream markets, inevitably curbing competition. These policies, however, rarely had positive effects.
In fact, numerous analyses show that public intervention and competition are complementary. As early as the 90s, the analysis of Michael Porter, a Harvard strategic analysis guru, demonstrated how essential elements of economic systems' competitive advantages were, in addition to the provision of resources and human capital, public intervention that provides tangible and intangible infrastructure, public demand, and access to financing in innovative sectors, as well as a vibrant competitive environment that stimulates efficiency and innovation.
For example, in the case of the Japanese automotive sector, characterized by the prevalence of protectionist policies, it was the intense internal competition among manufacturers that drove innovation. Therefore, according to Porter, public intervention also served to ensure a competitive environment through the enforcement of laws protecting competition. More recent analyses focusing on the role of innovation in economic growth also reach the conclusion regarding the complementarity between competition and public intervention in the market: they emphasize the role of competition, but also of public intervention in stimulating and maintaining it.
Economists like Aghion and Tirole, building on the Schumpeterian paradigm, according to which innovation is driven by the goal of capturing the extra profits resulting from achieving market dominance—whether temporary or permanent—overcome Schumpeter's pessimism, which predicted that this race would lead to monopolization and thus to bureaucratization and stagnation. They emphasize instead that an environment in which competitors compete with each other and with the leading firm generates a continuous push for innovation and is conducive to both product and technological innovation. This enables the technological leaps that overcome resistance to change.
The novelty of these contributions is not only that, unlike Schumpeter, they do not see the competitive process as ending with the dominance of the monopolist. Rather, they see monopoly continually challenged by innovation generated by competition, through the adoption of new technologies and the creation of alternative products. This avoids the path dependence that characterizes the less disruptive innovative activity of well-established firms in the market.
Two recommendations follow: public intervention must be aimed at innovation and supporting cutting-edge sectors; and it must do so by supporting competition. In particular, the availability of financial interventions for innovative and therefore high-risk sectors and for small and new businesses, as well as for supporting research and development and training activities, are important. Indeed, a key aspect of competitive pressure is the contribution of new businesses. By comparing business turnover in the US and France, Aghion shows how in more innovative economies, business birth and death rates are higher than in less innovative ones, consequently the average lifespan of businesses is shorter. Furthermore, this dynamic between businesses translates into the relative position of companies in value generation and their innovation activities, and the importance of the sectors in which they operate.
This dynamism in the sector represents a significant difference between the United States and Europe. As Draghi also points out, this is particularly true in relation to the companies most active in Research and Development. While the companies and sectors in which they operate in the United States have varied over the years, in Europe, the automotive sector and the companies operating within it remain the benchmarks.
Competition and Antitrust
In this context, it is clear that public authorities also have the task of protecting the competitive environment and therefore enforcing antitrust rules to maintain competitive pressure in the market. However, based on what we have explained, it should be emphasized that the competition paradigm that should guide the application of the rules has a specific nature, quite different from that of consumer welfare, aimed at assessing whether conduct is efficient and results in a consumer advantage.
Rather, the analysis should focus on dynamic competition, the maintenance of competitive structures in which leading firms are continually challenged by competing firms, thus giving rise to great market dynamism. This view of competition has implications for how we believe competition law, and European law in particular, should be applied: from static efficiency and consumer welfare to the competitive process and obstacles to business growth.
An example of this can be found in recent guidance regarding the application of the legislation, both in relation to the platform legislation (DMA), which requires competitors to access platforms and ensure interoperability in the provision of services, and in relation to the legislation on abuses of dominant positions, where enforcement appears to be moving in the direction of more stringent enforcement. This is demonstrated by the proposed guidelines for the application of Article 102, which scale back the reference to the AEC test, explicitly guided by the efficiency criterion, and appear to signal a shift towards more stringent protection of a competitive market structure, including through broader use of the merit-based competition criterion and through a taxonomy of conduct.
Competition in the Draghi Report
The Commission's recent industrial policy initiatives to which we have referred are based on the plan for the recovery of European competitiveness in the Draghi Report, which analyzes the causes of the loss of competitiveness of the European economy that occurred in the early 2000s and proposes strategies to incentivize innovation and horizontal and sectoral investments.
The Report also underpins a vision of competition as an essential element for restoring European competitiveness: "A review of the available empirical evidence clearly shows that strong competition not only leads to lower prices, but also tends to stimulate greater productivity, investment, and innovation." However, the Report also specifies that technologically innovative sectors, which must play a greater role in the European economy, are also those characterized by the scale necessary for innovation, which is where competition depends, much more than on pricing policies.
The Draghi Report therefore appears to explicitly embrace a vision of competition protection that takes into account the incentives to innovate and those to reach a sufficient size to be an effective innovator and competitor. From this perspective, the Draghi Report obviously emphasizes the importance of completing the Single Market, especially in the services sector, where innovation is strongest and national barriers are strongest. However, it essentially appears to endorse the new approach to European antitrust policy as outlined in the DMA and the proposed guidelines on Article 102: indeed, it proposes extending the DMA from platforms to dominant companies in the digital sector and emphasizes the importance of interoperability, also introducing conditionality in the granting of aid and financial benefits for open access.
While the Report emphasizes the importance of "coopetition," cooperation between competitors in the development of pre-competitive phases, such as large infrastructure and research and development, and therefore the need for timely guidance from the Competition DG, it nevertheless believes that the Commission should have new powers to open up to competition sectors characterized by collusive conduct, including through the granting of new powers through a "New Competition Tool."
The Report, however, expresses concern about the inefficient use of aid policies, noting how the instrument's expansion during the COVID-19 pandemic and the energy crisis triggered by the war in Ukraine has "fragmented the common market, distorted competition, deteriorated public finances, and created an inefficient subsidy race." It calls for a return to state aid control, designed to pursue coordinated strategic actions. From this perspective, and given the current national source of aid, the Report recommends its use within Important Projects of Common European Interest, which aim to finance cutting-edge innovations through multi-country initiatives.
Naturally, given the importance of economies of scale in innovative sectors, the Draghi Report places particular emphasis on merger control, which calls for special attention to examining the effects of mergers on efficiency and innovation. While the Report argues that these effects should not influence the analysis of companies in a dominant position, the Commission should introduce an "innovation defense," including by issuing guidelines to facilitate their presentation and analysis, and considering the possibility of imposing investment and time constraints for their implementation.
As is known, the Report's proposals were taken into account by the Commission in preparing the revision of the merger control guidelines recently submitted for consultation: in these, the attention to the objectives of resilience and innovation is to be appreciated, as well as the continued focus on maintaining a competitive structure and the introduction of particular attention to killer acquisitions aimed at consolidating market position or eliminating potential competitors.
On the “European Champions”
Although the Draghi Report explicitly opposes dominant positions, its focus on merger control methods, to account for innovation and the need for scale, has been interpreted by many as favoring the so-called "European champions," which are most often called for. In this regard, this appears to be a topic of particular concern, also in light of past experience, and therefore merits further exploration.
In a competitive environment, the emergence of European companies that are champions in their markets is certainly desirable: however, it is by no means certain that the concentration of companies on the market is necessary to create market champions: the American champions in the digital technologies and AI sectors are not the result of concentrations, but companies that have developed through internal growth, expanding into markets through innovation.
The topic seems important when considering the examples that are frequently brought up in our debate.
A prime example is Airbus, which is rightly seen as an example of Anglo-French collaboration to design and build a wide-body aircraft that could compete in a market previously dominated by American companies. As Rey and Tirole also note, Airbus was actually a new entrant, challenging the American companies that dominated the market, with a product featuring completely new features. It therefore poorly fits the concept of a European champion born from the consolidation of already established companies with significant market weight. Indeed, its success testifies to the effectiveness of the competitive paradigm, which induces a new entrant to challenge dominant companies.
A more pertinent case would have been the merger of Alstom and Siemens, two quasi-duopolistic companies, but fierce competitors offering ever-changing models in the European high-speed rail sector, and leaders in non-European markets open to competition (especially the US and some Asian markets). The transaction was banned by the Commission in 2019: in addition to creating a near-monopoly in the rolling stock and signaling markets, posing almost insurmountable barriers to potential competition, their merger would have led to a substantial reduction in market dynamics, reducing the drive for efficiency and innovation. Nor did the feared Chinese competition in European markets appear to be a credible threat.
Indeed, in the years that followed, the two companies continued to hold a leading position in global markets, winning tenders for railway projects in the US and Asia (Siemens in Vietnam), while CRRC, supported by the Chinese state, including in terms of project financing, encountered substantial problems in Indonesia. In short, the examples cited do not show any particular evidence in favor of the "European champions": indeed, a careful analysis would confirm the appropriateness of a prudent approach by the Commission. Of course, it cannot be ruled out that in particular circumstances, the aggregation of large operators could be conducive to innovation and market development. But the examples are quite different.
In 2017, the Commission blocked the proposed merger between the Eurozone's stock exchange and the London Stock Exchange, which then controlled the Italian Stock Exchange. The Commission expressed concern that the merger would create a dominant European trading venue for equities; furthermore, it expressed concern about the creation of a quasi-monopoly on the downstream markets for clearing and settling government bonds, where several operators operated. Disregarding the importance of competition with other European operators, especially American ones, the Commission failed to grasp at the time the essential nature of the infrastructure for the development of a broad and deep European capital market and the simplification of the related post-trading systems. This is an issue that twenty years later is considered central to European competitiveness.
Conclusions
Competition and industrial policy are often seen as mutually exclusive. In reality, as we have shown, this is not necessarily true: on the contrary, they complement each other in ensuring a competitive environment in which technological and product innovation can flourish. This, however, has some significant implications for the design of both industrial policy measures and the criteria by which competition protection measures are applied.
It has been argued that the measures should be designed to favor sectors with the fastest technological development and most innovative content, creating the conditions for the birth and development of new innovative companies that can challenge established firms, even using unconsolidated paradigms.
Furthermore, antitrust action should be geared toward maintaining competitive structures in which leading companies are continually challenged by competing firms, thus fostering great market dynamism. It is hoped that, despite a highly complex context, for economic, regulatory, and political reasons, the Commission's action can continue to move along these lines.
