Fluffy on the Facts and the Future – A Reflection on Competitiveness, Competition and Sustainability in the Letta and Draghi Reports and the EU’s responses – Go Health Pro

Introduction

The last year has seen the publication of the Letta and Draghi Reports and a flurry of EU Deals all concerning the EU’s competitiveness. The recurring theme is the imminent demise of Europe. This pessimism is fed by industrial decline, the election of Donald Trump and the impact of that on the liberal world order in which Europe and European integration have flourished. Central to this flourishing is the social market economy or sustainable growth. In a nutshell, both reports argue that Europe’s declining competitiveness will render it irrelevant as a force to enhance the sustainability of growth globally. The Brussels effect – whereby the EU exports norms because of its economic clout as an internal market – may thus be at risk. However, any cure depends on a diagnosis which in turn relies on the correct identification of symptoms and that’s where I find plenty of fluffiness, which is my way of saying that the facts are unclear and underresearched.

So, there we have the three main ingredients for today’s course: the internal market, competitiveness and sustainability.  The sauce, however, is fluffiness as I find both reports and the EU’s response to be fluffy on the facts and the future.

Three ingredients: internal market, competitiveness and sustainability

To start with the first ingredient: the internal market is an area with free movement and undistorted competition that is underpinned by the economic theories of comparative advantages and economies of scale and scope. As markets increase in size, producers will establish themselves where they can produce most efficiently and thus cater even better to the needs of an even greater number of consumers. It is precisely why the Treaty drafters envisaged that abolishing borders between the Member States must go hand in hand with the creation of a new regulatory framework through harmonisation. Article 114 is just as integral to the internal market as are Articles 34 and 101 TFEU.

The second ingredient, competitiveness, is closely connected to harmonisation and Articles 101 – 108 TFEU. Competitiveness describes the ability of an actor or group of actors to engage in effective competition. Competitiveness, thus, has to do with what is colloquially referred to as the level playing field whereby the level of protection (of e.g. workers, consumers, the environment) needs to be largely comparable. Ensuring a level playing field within the European Union is integral to the internal market and explains many harmonising measures. However, there’s also competitiveness at the global scale, with European industries seeking a level playing field internationally. Beyond harmonisation, competitiveness also results from the competition laws that apply to companies and the Member States. By protecting undistorted competition, competition law both enables and incentivises market actors to behave in a competitive manner that will make the companies behave in an efficient manner. They will reduce costs, manufacture their products in the optimal quality and quantity and innovate in framework that ensures sustainability.

That’s exactly where the third ingredient enters the mix: the values of the European Union and sustainability in particular. The levels of protection, whether of consumers, the environment, workers or media pluralism, are constituent elements of sustainability. To achieve sustainable growth, Europe will need to protect the level playing field and this is where both Letta and Draghi take their cue.

Letta: Much more than a market for sure, but what role for competition?

Enrico Letta has taken the internal market as a point of departure and uses competitiveness as a frame. Competition is often mentioned as ‘fair competition’. Letta mentions this in relation to market access for new entrants and outcomes such as consumer protection and economic progress. In this regard Letta also states that the principle of fair competition does not mean that we should allow European companies to be dominated by foreign companies (pp. 8, 50). He further argues for European companies to ‘play big’ and thus to grow. This immediately reminded me of the pleas for rethinking EU competition law in view of the greater scale of the markets involved. Indeed, much of Letta’s arguments are reminiscent of the German and French governments arguments (in the wake of Siemens and Alstom) when they called for European Champions. Letta initially positions this policy suggestion in the framework of market definition, but then casts the net wider and identifies fragmentation and red tape as reasons for the smallness of many European companies. And this is where things do get a tad fluffy.

Fragmentation, European Champions and Market Access

As regards defence Letta posits that fragmentation of defence markets costs € 100 billion annually. This seems like a nice facty thing, so I checked it. On p. 73 Letta refers to a European Parliament source for this. I think that I have located this source (the absence of functional references is very annoying) and an EPRS study prepared for the European Parliament doesn’t contain the 100 billion figure, but instead a 24.5 and a 75.5 billion savings potential depending on whether a moderate or an ambitious approach to defragmentation would be adopted (pp. 313, 314). It seems that Letta has just added the figures for two alternative approaches which inflates the cost savings potential. This could of course just be me picking nits, so let’s stick to the fact that we’re looking for integration, consolidation, concentration or whatever word is used to describe the greater scale of operation. This where economics in general gets a bit fluffy in the sense that – at least to the best of my knowledge – no convincing and precise relation between industry structure and innovation has been proven beyond the inverted U relationship. As a result, Letta doesn’t really drive the ‘European champion-point’ home. This wouldn’t make too much sense because Letta also calls for more and easier market access (pp. 58, 72, 85 and 86). However, Letta does argue for a reduced focus on market entry in telecoms because the intensity of competition in that market drives down income to the detriment of the ability to invest in new networks. The idea of too much competition piqued my interest. Where Letta (unfortunately) remains fluffy on the facts, the Report on the State of Digital Communications published by ETNO can shed some light. It shows that average download link speed in the EU is a measly 64 Mbit/s whereas the median speed in the USA was a whopping 97 Mbit/s. However, in return for this Joe the Plumber results in an ARPU of € 42,5/month for US based telcos whereas the average European consumer’s ARPU is € 15/month (pp. 19, 20). That means 50% faster internet in return for a profit for telcos that is nearly three times higher. It could just be me, but that’s not really selling the point that we should perhaps tone down a bit on the competition from a consumer perspective at least.

Red tape

Red tape is mentioned a few times as the reason Europe’s lacking industrial prowess (pp. 9, 107, 120) Unfortunately, Letta confines himself to simply stating that there is red tape and unnecessary regulation or repeating talking points from industry organisations. It is unfortunate that the report doesn’t even mention an example of such excessive bureaucracy (spoiler alert: this is a recurring theme).

From state aid to Union aid

Letta knows perfectly well that industrial success at least in part relies on the state to fund some of the costs. This is why state aid is a significant part of his recipe for a more competitive European economy. The biggest downside to state aid is that it may well threaten the level playing field in the internal market if some Member States are able and willing to spend more state aid than others. Letta’s solution for this problem is to have a stricter regime for state aid connected to greater flexibility for Union aid. Specifically, Letta ‘could envision a State aid contribution mechanism, requiring Member States to allocate a portion of their national funding to financing pan-European initiatives and investments’ (pp. 11, 26, 27 and 40). For Letta, this transformation of state aid to Union aid is just the first step leading to ‘the adoption of a more European approach’ for the EU’s industrial strategy (p. 39). In this regard, he envisages ex ante eligibility rules and conditionalities in the European Union’s framework state aid for exempting state aids. Interestingly, this will put the Commission, rather than the Member States in the drivers’ seat. As most of you will already have guessed, transferring part of the national state aid budget to a Union aid budget is unlikely to be overly enthusiastically endorsed by the Member States. However, defining state aid exemption policy is the Commission’s near-exclusive domain. The Commission’s central role in state aid policy makes it more likely that this actually happens. As to the substance of this new state aid governance framework, Letta refers to the US Inflation Reduction Act and its local content and social conditionalities (p. 40).

Draghi: The Future of European Competitiveness, but what about Competition policy?

Apparently, one report wasn’t enough. Draghi continues where Letta stopped and notably pushes the economics more. The Draghi report, which consists of an A-part that has an executive summary and the more elaborate B-part, contains far more specific numbers and figures to further substantiate this claim in relation to the three main themes. First, Europe needs to close the innovation gap. Second, Europe needs a joint plan for decarbonisation and competitiveness and third, Europe must focus on security and reduce dependencies. This largely follows from what Letta had also identified in his report. Draghi mentions facts such as that Europe operates twelve types of main battle tank whereas the US has only one (A, p. 3). The message here is identical to that in Letta’s report: the fragmentation is a problem and as a competition lawyer that gets me thinking whether instead of consolidation we should actually be looking for interoperability.

Draghi further argues that competition policy should ‘continue to adapt to changes in the economy so that it does not become a barrier to Europe’s goals’. The next sentence provides a glimpse of what is further elaborated in the competition chapter in Part B of his report: a rethinking of merger control to take into account the necessity of larger budgets for innovation. We also read that the competition rules ‘possibly inhibit[..] intra-industry cooperation’. (A, p. 26). Continuing that theme, he posits that the current competition rules stand in the way of the vertical integration that may be required for big investments in the new energy value chain (B, p. 62). In relation to telecoms Draghi follows Letta which emanates into a call for less country-specific ex ante regulation and a greater role for ex post application of the competition rules and notably Article 102 TFEU (B, p. 75). This boils down to ten proposals that are more or less radical.

On the more radical side: an innovation and resilience defence

Draghi’s first and third concrete proposals entail an innovation defence and a resilience defence. For the innovation defence, Draghi, amongst others, indicates that the parties must substantiate their claim that they need to be allowed to merge through a commitment to invest that can be supervised ex post (B, p. 299). This immediately raises the biggest hypothetical: what if parties don’t actually commit to that investment? That’s where Draghi comes to the rescue by stating that there should be ‘adequate disincentives to deviate’. Let’s see. The Commission clears a merger on the condition that X billion will be invested in innovation. Guess what, a few years later, the merger doesn’t deliver and cost cuts are required in – guess again – the R & D department. So, what will be the disincentive? Will the Commission order the divestiture of the merger? Just to be clear: in an innovation defence case the innovation effect is needed to offset the harm to competition B, p. 299). Or will the Commission then impose a fine on the company involved (which won’t really help its competitiveness)? More fundamentally, this innovation defence is part of a plan to enhance the innovation capabilities of European industries. Will the Commission only entertain an innovation defence by European companies? That seems quite problematic. On a connected and equally fundamental note: what good will a successful innovation defence by, say, Siemens and Alstom do where the competition authorities of third countries may not accept this innovation defence?

The same holds, probably even more so, for the resilience defence. This is where Draghi envisages a separate unit of the Commission to come up with a security and resilience assessment that is then to be taken into account by the Commission in its assessments. A first thing to note is that this includes the full breadth of competition law instruments. Again, it makes the (apparent) differentiation between EU and third-country companies even more poignant, raising amongst others the question what third-country competition authorities would think of an EU-based cartel that is good for the resilience of the European industry?

Less radical: more and smarter state aid, better governance and a New Competition Tool

The other eight proposals are seen by Draghi as less radical. They take a page from Letta’s playbook in calling for better state aid governance to avoid subsidy races, relying on the IPCEI-method to allow for state aid and suggest imposing open access and interoperability conditionalities in the Commission’s exemption policy. As regards the better governance, Draghi calls for quicker decisions, more guidance on the possibilities for cooperation and the effective application of the Foreign Subsidies Regulation and DMA. However, it is far from clear to me how the decade long Intel-saga that he refers to, could have been shortened by means of a streamlining procedure. Some cases simply are complex and thus take a lot of time and effort. This will only increase when competition authorities, dixit Draghi, need to become more agile and forward-looking and need to make assessments of innovation and resilience effects in relation to effects on competition and consumer harm. All in all, the proposals aren’t too elaborate, with the exception of footnote 9. That’s where we find an amazingly detailed list of things that need urgent solutions. They range from the scope of merger control, the excessive discretion in the draft(sic!) guidelines on exclusionary abuse (why he would comment on draft guidelines in his report is beyond me) and the exact scope of Article 1(6)(b) DMA. Either Draghi is a stickler for detail or someone has gotten their wish list copied by him.

Slightly more radical is the plea for a New Competition Tool (NCT). The NCT is something that’s been on the wish list of competition authorities for some time and would address some of the lacunae that are felt at the moment. The NCT begins with a market investigation and is envisaged to be cooperative instrument whereas Articles 101 and 102 are inquisitorial punitive instruments. Again, the proposal is relatively well-developed (albeit in a footnote) and thus seems to indicate that someone was successful in convincing Draghi that their proposal should be adopted. The NCT is envisaged firstly where there are indications of collusive behaviour that cannot be addressed on the basis of Arts. 101 and 102. Secondly, the NCT should apply to markets in need of consumer protection. These would be markets with fragile consumers (e.g. elderly individuals) or where ‘consumer biases and bounded rationality are pervasive’, which could entail a very broad array of markets. The third area is the weak resilience sectors. This denotes markets where economic resiliency is weak, for example because of excessive reliance on a single source of supplies. This looks, barks and smells a lot like the pharmaceutical industry where shortages are particularly problematic but where I’m unsure what a competition instrument would add. Finally, the NCT could be used where the analysis of previous enforcement actions shows that consumer welfare benefits are not being delivered.

The ultimate question, of course, is what happens to these proposals. That’s where we turn to the November 2024 meeting of the European Council and Von der Leyen II.

European Council: a new competitiveness deal

Letta and Draghi produced nice and provocative reports. But what has happened to this call to arms? Not terribly much. During the Budapest European Council we got the Budapest Declaration on the New European Competitiveness Deal. This takes fluffiness to a level that would put the love-child of an Angora Rabbit and a Ragamuffin Cat to shame. I’ll just quote one sentence: ‘We will explore the development of new instruments’. Sure, explore that development all the way. This clearly did not garner the political support that Letta and Draghi wanted.

Von der Leyen II: Competitiveness Compass and Ribeira’s Brief

The lukewarm response by the Member States was to be expected, just as the Commission’s wholehearted endorsement. Competition commissioner Teresa Ribeira is instructed to develop a new state aid framework for the twin transition and work on swift proposals for IPCEIs and support for social housing and energy efficiency. No worries, this doesn’t mean opening up the floodgates of state aid as the brief reiterates that strong state aid control is key to avoid inefficiencies in public spending. The clear signal is that state aid law will become more policy intensive. Changes are also envisaged for merger control where an overhaul of the horizontal merger policy is announced. This should be more permissive where resilience, efficiency and innovation are concerned, but more restrictive where killer acquisitions are involved. Finally, she is tasked with strengthening and speeding-up competition law enforcement. Von der Leyen II clearly didn’t embrace the European champion idea floated by Letta and Draghi, but there will be some interesting policy developments.

These can also be seen in the Competitiveness Compass, the Commission’s most recent response to the challenges identified by Draghi and Letta. Unfortunately, the Commission continues the fluffiness on the facts as regards the red tape reasoning. Claiming that regulatory burden is the key obstacle to investment for two out of three companies is plain misleading (p. 16). The EIB Investment Survey referred to in this regard indeed mentions that 60% of EU respondents indicate that regulations are a (major) obstacle. This percentage, however, is higher for US companies. It also ignores that 80% list the availability of skilled staff and energy prices as (major) obstacles (p. 32). Ignoring symptoms is likely to lead to fluffy diagnosis and that’s not a recipe for a good cure.

In terms of competition policy, it basically repeats what we know from Ribeira’s brief: an overhaul of merger guidelines ‘so that innovation, resilience and the investment intensity of competition in certain strategic sectors are given adequate weight in light of the European economy’s acute needs’. I’d call that decidedly fluffy, also because it is the only flagship policy listed without a deadline (p. 8). The same holds for the announced review of the rules on technology transfer that is not even mentioned as a (flagship) action. The clearest policy direction repeats the wider use of the IPCEI-instrument and contains the announcement of a new state aid policy for decarbonisation and renewables for Q2 2025 (p. 11). The NCT is nowhere to be found, and the Commission is thus clearly capitalising upon its role in state aid supervision. That we’ll have more state aid policy is where it is least fluffy on the future. Whether these new policies will get us sustainable growth is perhaps most fluffy of all.

Hans Vedder is professor of economic law at the University of Groningen.