Will Germany, France and Poland reform the EU’s industrial policy?

The recent European Commission decision to block the merger between Siemens and Alstom’s rolling stock manufacture departments raised frustration in Germany and France and prompted them to seek allies in reforming EU competition law. It seems that Poland has a chance to become a relevant actor in this process. Any changes must be part of a more comprehensive reform of the EU industrial policy, which will enable European enterprises to have equal conditions to compete with the tycoons from China or the United States.

Are France and Germany losing the global competition?

In February this year, an unusual thing happened to say the least, which caused the outrage in both Germany and France. Despite Berlin and Paris’ insistence, the EU Directorate-General for Competition refused to agree to merge the Siemens and Alstom’s rolling stock manufacture departments. The EC was afraid that the German-French railway giant would gain a monopolistic position on the EU market. The arguments of both companies that the Chinese HAD carried out a similar operation at home, creating a railway leader, which, thanks to its monopolistic profits derived from the Chinese market, will soon be able to conquer the European market, were to no avail. Their complaints by the French Minister of Economy, Bruno Le Maire, who doubted the analytical abilities of EC officials and considered EU competition rules to be outdated, also achieved nothing. Peter Altmaier, the German Minister of Economy and Energy, joined this criticism, even though German representatives have always avoided undermining the principles of EU competition policy, considering it as the foundation of EU integration. However, both ministers could do nothing but accept the EC’s decision, while casting a word that the competition rules would be changed.

France and Germany’s outrage is justified by the growing sense of uncertainty in both countries. A feeling that their economic power is at risk. On the one hand, Chinese companies supported by significant subsidies, as well as often having a monopolistic position on the huge Chinese market, are increasingly pushing European companies on other markets.

On the other hand, American Internet giants are not content with their dominant position in the digital economy sectors but want to use their financial strength and technological advantage to expand in traditional sectors as well. Examples of the increasingly advanced works of Google’s subsidiary Waymo, to create an autonomous car, or even Facebook’s attempts at developing their global currency, make the heads of many European corporations lose their sleep.

So far, France has had more trouble maintaining competitiveness in an increasingly globalized world, whose one symptom was its difficulty in maintaining financial discipline during the eurozone crisis. Whereas a complete novelty is increasing anxiety in Germany, whether the pillars of their power, i.e. automotive and electrotechnical companies, will manage to defend their strong position amidst increasing pressure from Americans and Chinese. Germany strongly felt the global slowdown, and many of their companies are facing a significant drop in profits this year. According to forecasts by the European Commission, Germany, whose GDP is to increase by 0.5% this year, is to be the second slowest-growing EU economy this year, after Italy (0.1%), while France is to grow at a rate of 1.3%. For comparison, Poland’s GDP is expected to increase by 4.4%.

European champions – the devil is in the detail

Germany and France’s idea that the way to balance the power of American and Chinese companies would be to create European monopolies, dubbed ‘European champions’ as a disguise, is not appreciated by smaller Member States. The Danish Commissioner Margrethe Vestager has become the face of resistance to this concept, although her attitude also expressed the concerns of many smaller countries – whether loosening the competition rules on the EU market is a good way to strengthen European companies.

Whether this won’t, in fact, become an excuse to create champions purely based on German and French companies, which will gain a monopolistic position and be able to reap significant profits at the expense of European consumers, also raises doubts. Admittedly, European integrators are needed, as they create demand for products and services from other EU countries. However, excessive monopolization of individual industries in the EU may lead to it permanently losing its innovation capacity, which is most often the domain of smaller businesses, as well as a high degree of competition between them in the EU.

The increasingly frequent attempts to drag Poland to the German-French side show that after Brexit, Poland is the only large country capable of building a coalition of smaller and medium-sized countries blocking a thorough reconstruction of the competition policy. Only two years ago, the French and German ministers of economy sought Italy’s support in this matter, wanting to reform the rules of taking over EU enterprises by outside investors (mainly from China). However, it seems that the Visegrad Group, whose foundation is Poland, has proved in recent years that it is the only political force in the EU able to bash some of the German-French intentions. Although the Netherlands, which has built a group of Hansa countries (which included Benelux, Scandinavia and some Eastern European countries), has been pushing to play the role of defender of the single market principles, it has been unable to block the project to create a eurozone budget.

The concept of European champions raises doubts not only because of the risk of monopolies arising. If we allow German-French companies to control selected markets, why should prospective companies from other EU countries not dominate other markets? Why not call dibs on the European 5G technology market for Ericsson and Nokia only, and leave the European road transport sector for some Polish company to dominate. For now, it can be seen that Germany and France’s thinking in this area is extremely selective. Representatives of these countries complain about outdated competition rules concerning the Alstom-Siemens transaction, and at the same time were the first to complain about social dumping by Polish posted workers and carriers from Central Europe. They did not seem to notice that the lower labour costs are still an advantage of Central European enterprises and the only way for them to contend with competitors from Western Europe, who have a significant capital advantage.

Time for a new EU industrial policy

It would seem that the prerequisite for reforming the EU competition law should be the construction of a new comprehensive EU industrial policy. An attempt to coordinate work on developing a European technology for the manufacture of electric batteries is a step in the right direction. Many EU manufacturers were surprised by the revolutionary changes in the automotive industry. Not only that many leading EU companies still do not offer too many electric car models; their key component, i.e. batteries, are made exclusively by Asian manufacturers. If this trend continues, up to 40% of the value of any EU-made electric car will go to Asian battery manufacturers. Worse still, until recently, none of the European manufacturers saw a chance to catch up with Asian competition, the distance to which was estimated at 10 years. In this situation, the EU has proposed a comprehensive strategy for supporting EU battery manufacture, including ensuring access to raw materials, supporting factory construction projects, research and development funding, as well as training specialized staff. Brussels has also relieved the prerequisites for granting public aid for battery technology projects developed by consortia of companies from more than one EU country.

A much bigger problem will involve reforming policies regarding the development of the digital economy. Unfortunately, over the last decade, EU countries have been primarily focused on reforms of the eurozone, making no major progress in terms of deepening the single market. And it is the shortcomings of the single market that are one of the key barriers to the development of the digital economy. After all, Europeans do not struggle from a lack of talent and ingenuity for good businesses in virtual space, but with problems with scaling businesses due to the fragmentation of the EU digital market.

Only digital giants can navigate the maze of radically different national laws, as they can afford to analyze the conditions of functioning on each market. Furthermore, such a situation is favourable for them, as they can demand much higher prices by setting prices for digital services for each market individually. Moreover, even if an interesting business concept pops up, such as the booking.com portal established in the Netherlands, it is quickly bought out by competitors from the USA due to the difficulty of expanding on the EU market.  The EU’s task to support the development of the digital economy was well mapped by a letter from 17 EU leaders to the President of the European Council (signed by Poland as well), where attention was drawn e.g. to the need to build a digital infrastructure, create an environment conducive to IT innovation, the EU’s struggle for technical standards, as well as to develop regulations enabling the appropriate use of data. Although Juncker’s European Commission has begun efforts to restrict abuse by digital giants such as Apple and Google, and has also tried to determine the conditions for the use of consumer data (under the General Data Protection Regulation), it has done little to solve the underlying problem, i.e. the weakness of EU economy due to the incompleteness of the digital single market.

The time has come to finally ask ourselves whether the EU’s way of economic rivalry with China should be to adopt Chinese methods of organizing the economy. Or, rather, should the alternative be to require Beijing to have equivalent trading policies. Unlike EU businesses, Chinese companies entering the EU market do not need to establish joint ventures with local partners, provide sensitive data to public administration, or enter specific sectors only. Also, European companies are not supported by system subsidies and cannot rely on the intervention of the central bank to increase the price competitiveness of their exports. Perhaps President Donald Trump is right about China becoming too big an economy to continue to be privileged. A paradox that illustrates this situation well is the fact that, in the development of 5G technology, the United States is ready to support the only major Western companies, the Finnish Nokia and the Swedish Ericsson, due to fear of espionage by the Chinese market leader – Huawei. In the EU, however, more and more countries intend to develop the next generation Internet-based on Huawei technology. So the question is whether the EU should follow the Chinese example in this respect and support European technology leaders first.

The author is a co-author of the report Industry 4.0: Germany’s new industrial policy

Polish version is available here.