The Draghi report and competition policy

Former Italian Prime Minister Mario Draghi’s 9 September report on the future of EU competitiveness contained a welcome innovation: a balanced chapter on competition that does not pit competition regulation and enforcement against competitiveness. The report – an important contribution to the strategic direction that the European Commission will take over the next five years – clearly explains why competition in the market must be protected and how to best use the tools to achieve the EU’s objectives. It is packed with well-founded suggestions for EU competition policy that will enable it to further contribute to productivity, innovation and resilience.

Innovation is a big theme in the report and appears in the competition chapter as well. Draghi’s calls to include innovation in the examination of mergers, as is already done, will be useful to courts because the tests for innovation are more qualitative in nature. Draghi’s approach takes the protection of innovation very seriously by ensuring that the application of competition rules does not accidentally harm innovation.

The first of ten related proposals he makes suggests allowing merging firms that are not dominant and face competition to justify their merger by showing that it will increase innovation. Draghi is not naive about the potential abuse of this new argument, and calls for evidence on the innovation-enhancing effects of a merger that is “specific enough to limit the risk of companies abusing this defense strategy, while still giving them the opportunity to justify their merger.” These points strike a nice balance.

In another proposal, Draghi offers a sophisticated take on the controversial idea of ​​building resilience into competition policy. Some resilience problems directly impact consumers through shortages, for example of critical medicines or chips in transport products. This risk of high prices or shortages can already be built into the existing framework for merger control, and Draghi recommends doing so more often.

But some resilience issues arise in the areas of security and defence, where a competition authority does not have the power to assess or make concessions. Draghi is therefore proposing a separate agency that would provide input to the competition authority in these special cases, although he could have been clearer in setting out which factors can be dealt with through existing competition procedures and which by an external body, and how the two should be balanced.

As regards state aid, the report is refreshing and creative. Draghi said that State aid at Member State level should be stopped and replaced by subsidies at EU level because they are less distorting and contribute to deepening the single market. This is a long-debated point. Their report explains how EU funds could be used to tackle problems that undermine the functioning of the market, whether insufficient R&D, coordination problems or lack of regulatory harmonisation.

“As more and more markets involve big data, digital standards and networks that can benefit all businesses, interoperability will be a competitive advantage.”

The EU already has a programme to subsidise cutting-edge technologies (Important Projects of Common Interest European Commission (IPCEI). By extending it to a broader set of projects, Draghi explains how EU funds can deepen the single market and help companies reach greater scale.

Competition is sometimes difficult to achieve because a market works more efficiently if there is a network or a standard, and this can lead to a monopolistic market structure. In this case, competition can be achieved through interoperability: many companies can compete using the same network or standard (or possibly the same set of data). Another of Draghi’s proposals explains that in some cases companies should be forced to open their networks through regulation (such as the Digital Markets Act EU subsidies), or require them to do so if they want to access EU subsidies. For example, if the EU allocates public funds to help an industry, it can make subsidies conditional on interoperability to increase competition. One strength of Europe is that it is willing and able to regulate in this way. As more and more markets involve big data, digital standards and networks that can benefit all businesses, EU regulation of openness and interoperability will be a competitive advantage.

Draghi is also right to bet decisively on more competition enforcement tools. He suggests a “New Competition Tool”” for research in four areas that lack application today: poorly functioning markets due to tacit collusion by firms; poor market performance related to behavioral biases by consumers; insufficient investment in the public good; and failures of previous efforts to “fix”” a market. The first two areas are notoriously difficult for competition authorities to address. A tool to collect information only when the authority suspects one of these serious problems would balance the cost of the investigation with its benefits.

In terms of competition, Draghi’s recommendations are therefore important. However, he is not entirely consistent. In a separate chapter on telecommunications, he criticises “the remedies imposed on attempts to consolidate the market into larger players”although such remedies protect consumers from cosy oligopolies and high prices following an anti-competitive merger. In this matter, Draghi seems to complain about the very conduct – the application of competition rules – that in the competition chapter he praises and wants to reinforce. The European Commission should take the principles articulated in the competition chapter very seriously and implement Draghi’s recommendations.

Article translated from English from the website of Bruegel.

Activity subsidized by the Secretary of State for Foreign and Global Affairs.