This week, Mario Draghi presented his long-anticipated report on European Competitiveness to European Commission President Ursula von der Leyen. Reporters were quick to say that Mr Draghi’s plans already looked impossible after the German Finance Minister dismissed his recommendation for more joint borrowing in the EU.
But this may miss the point of reports like these. They are welcome tools for policymakers. The depth of the analysis (over 300 pages in length) and the reputation of its author give the report authority. Because the report has no binding force, policymakers can adopt recommendations they like and quietly ignore ideas that are political hot potatoes.
Such reports can be a starting point for a course correction, see for example the “Furman Review” in the UK. They can also re-ignite the debate around certain topics. For instance, Mr Draghi recommends the creation of a “New Competition Tool”, an EU version of the UK’s market investigations. The concept was shelved in favour of the Digital Markets Act (DMA), but Mr Draghi has reintroduced it as something for policymakers to consider. It is therefore important seriously to consider the recommendations made in such reports.
The Draghi report contains many recommendations relating to competition policy, both to enhance competition enforcement and to rein it in. It is an attempt to answer Europe’s Goldilocks dilemma: how much competition is “just right”? Competition brings many benefits, but vigorous merger control can prevent the emergence of companies with sufficient scale to compete at a global level with US and Chinese companies. Mr Draghi tries to strike the right balance between these interests. This is important, as an informed debate about where that balance should lie is long overdue.
It remains to be seen how the new Commission takes Draghi’s recommendations forward. Much will depend on the identity of the new Commissioner for competition policy, and the brief she or he is given by Ms Von der Leyen. Executive Vice President Vestager was successful at taking the first steps to “tame” Big Tech, to the benefit of introducing more competition in digital markets. The new Commissioner will be expected to take more account of issues like resilience, building scale, and increasing Europe’s competitiveness. Inevitably, this will involve difficult trade-offs between protecting existing competition and promoting the scale necessary to innovate and compete.
In this blog post, we first set out Mr Draghi’s general findings, after which we dive into his recommendations on competition law and policy.
General findings
While Europe has a lot to be proud of, it is plagued by slow economic growth, and due to its aging population, it can no longer rely on general population growth to contribute to the economy. Save for some notable exceptions, its companies play no meaningful role in today’s digital markets that drive growth and innovation. It has become dependent on other countries for its critical raw materials and microchips. It does not produce new entrants that achieve the same successes as American and Chinese companies. Meanwhile, the transition to a cleaner economy is difficult and despite lofty ambitions and a good start, Chinese cleantech is beating European suppliers. Mr Draghi paints a dreary picture, but it is a realistic one.
His report identifies three major transformations that have contributed to the recent slowdown, which can be expected to continue to have effects:
- The need to accelerate innovation and find new growth engines. The EU faces both weaker foreign demand, especially from China, and a weakening position in the advanced technologies that drive future growth.
- High energy prices due to an irreversible change in the energy landscape with the Russian invasion of Ukraine while continuing to decarbonise and shift to a circular economy.
- Less stable geopolitics, where dependencies are becoming vulnerabilities, and Europe can no longer rely on others for its security.
Mr Draghi then presents several recommendations, both at “horizontal” (cross-sector) level and for specific strategic sectors, to try to turn the ship around.
Recommendations relating to competition policy in general
Chapter 4 of Mr Draghi’s detailed recommendations, entitled “Revamping competition”, deals with competition policy. The Chapter is based on two themes. The first is the idea that while competition is good, “vigorous competition policy” may conflict with European companies’ need for sufficient scale to compete with Chinese and American “superstar companies”. The second and possibly conflicting theme is that stronger competition generally delivers lower prices and greater productivity, investment, and innovation, meaning that stronger competition enforcement, and more agile competition enforcers, are necessary.
The report tries to tread a fine balance between on the one hand ensuring that competition law does not “become a barrier to Europe’s goals”, while on the other hand enhancing competition enforcement to reap the benefits of competition.
This framework leads to 10 recommendations which are relevant to merger control, antitrust enforcement and state aid, discussed briefly below:
- Emphasise the weight of innovation and future competition, enhancing progress in areas where the development of new technologies would make a difference for consumers.
DG COMP should update its merger guidelines to allow parties to submit an “innovation defence”. This would entail that they prove that the merger has innovation-enhancing effects by demonstrating the need in certain sectors to pool resources to cover large fixed costs and achieve the scale needed to compete at the global level. An example given in the report is Airbus.
To prevent improper uses of the defence, the merging parties must commit to levels of investment that can be monitored after the merger. Failure to comply would lead to “adequate disincentives” which are not further defined. The defence would not be open for use to justify further concentration by already dominant companies or in cases in which the concentration poses significant risk of entrenching a dominant position. In addition, because scale and network effects can increase barriers to entry, any innovation-enhancing effects in the short-term must be tested against longer-term risks of reduced incentives to innovate by the merging parties, their rivals, clients, and suppliers. The defence is unlikely to apply in “non-tradeable sectors”, i.e. sectors where it is unlikely that there will be significant international competition.
- Provide clear guidance and templates on novel agreements, coordination and co-deployment between competitors.
Second, the report calls for a simple, streamlined process to allow groups of companies to work together in the fields of R&D investment, sustainability transitions, and other initiatives that require standardisation and coordination of solutions across players and that would benefit European consumers. The process should “provide complete clarity” to companies regarding the risk that their cooperation infringes competition law.
As an example of where this process would be useful, he points to the need for standardisation in the defence sector. However, the report is not 100% clear about what is meant by a “process”, and whether this would involve a means to obtain positive clearance for the cooperation.
- Develop security and resilience criteria by expert authorities and include them in DG COMP assessments.
A further innovation proposed in the report is the recommendation to give more weight in competition assessments to security and resilience. A review of security and resilience should take place where these dimensions are relevant and for sectors and firms that are strategic. It should be carried out outside DG COMP, by a “Resilience Assessment Body”. Its assessment would then be an additional public interest criterion for DG COMP to assess in its overall determination of the merger. This additional step would be limited to sensitive sectors, including security, defence, energy and space. The public interest in security and resilience would therefore be weighed alongside other considerations. In devising remedies, DG COMP would aim not to weaken, and where possible enhance, security and resilience.
It is important not to read this recommendation only as a means to clear mergers. In fact, the only example Mr Draghi gives, at the footnote on page 301, is the need to limit the potential for a single company controlling key upstream inputs. Dealmakers in sensitive sectors should therefore see this as a potential additional hurdle, coming on top of FDR issues, and meaning that deals in sensitive sectors will even be assessed on public interest grounds where they do not involve a foreign investor.
- State aid control as a competition tool for efficiency enhancing industrial policies.
In relation to State aid, Mr Draghi calls for a return to normal enforcement following a period of upheaval caused by the Covid-19 pandemic and the energy crisis caused by Russia’s invasion of Ukraine. He notes that state interventions during the past years have fragmented the common market, distorted competition, deteriorated public finances and triggered inefficient subsidy races.
This would imply strong enforcement of State aid controls, and coordination of aid at EU level to enhance productivity and growth in strategic sectors. The report also calls for State aid controls to more closely consider the coherence of the aid with any EU-wide industrial policy. Finally, in the analysis of proposed State aid measures, innovation and resilience should be given greater weight, as discussed in recommendations 1 and 3, above.
- Reform and expand Important Projects of Common European Interest (“IPCEIs”).
IPCEIs are a form of state aid aimed at supporting breakthrough innovation. So that IPCEIs can play a greater role in closing the innovation gap with the U.S., the Draghi report proposes to expand the conditions to finance projects to include a broader notion of innovation. The condition would be that the innovation offers the potential for Europe to “jump to the technological frontier” in strategic areas where it is lagging behind. Administrative procedures for approval would also be sped up.
- Incentivising the adoption of open access, interoperability, and adherence to EU standards through State aid and other competition tools.
The report recommends expanding the benefits of open access and interoperability beyond the core platform services regulated by the DMA. Mr Draghi identifies three ways to achieve this:
- By linking State aid contributions and their review process by DG COMP to the enhancement of open access and interoperable solutions, and to the development of EU-wide standards. This approach would not be limited to digital markets but could involve sectors such as energy, connectivity and transportation.
- New requirements involving open access and interoperability should be imposed when strong network effects and barriers to entry impede competition. This could be done through the New Competition Tool, discussed at recommendation 9, below.
- Sector-specific rules on common standards could be adopted through regulation.
The report therefore recognises that network effects and high barriers to entry can be problematic outside of the “core platform services” provided by gatekeepers regulated under the DMA. Mr Draghi calls for the use of a market investigation tool (discussed below) to identify these issues and then remedy them through increasing open access and interoperability.
- Apply effectively the new powers associated with the enforcement of the DMA and the Foreign Subsidies Regulation (FSR).
DMA and FSR inquiries can be notoriously complex. Mr Draghi warns that this complexity must not stand in the way of effective enforcement, otherwise the credibility of the EU as a regulator would be hurt, and economic damages could follow, such as reduced appetite to invest in Europe and delayed deployment of technological advancement.
He therefore calls for adequate resources to be provided to DG COMP, and for specific training to be rolled out both in relation to technology and international taxation and finance. At the same time, he considers it crucial that the enforcement of new instruments does not come at the expense of general competition enforcement.
- Reinforce ex-post versus ex-ante regulation and monitoring.
Mr Draghi also proposes a new tool for DG COMP, involving the imposition of a requirement on the parties involved in mergers or antitrust cases to report “metrics useful for evaluating the extent of competition ex post”. Competition authorities would then be able to intervene based on concerns arising from these reports.
- Introduce a “New Competition Tool” in four areas.
Buried away as the ninth out of 10 recommendations, the New Competition Tool (NCT) makes its return. The NCT is essentially a market investigation tool, giving DG COMP the power to investigate market-wide issues, and to impose remedies to resolve those issues. Several EU Member States have started to introduce such a tool in their national laws (and it has been a feature of UK competition law for many years).
Mr Draghi identifies four areas where existing competition tools are insufficient and the NCT would help: (i) tacit collusion; (ii) markets where consumer protection is badly needed, such as markets involving vulnerable consumers or involving behavioural biases; (iii) markets where economic resilience is weak; and (iv) markets that have involved competition interventions in the past, and where information shows that the commitments or remedies adopted are ineffective.
- Accelerate the decision-making processes and increase the predictability of decisions.
The final general recommendation is for DG COMP to continue to revise the processes through which competition policy is enforced. Initiatives like the 2023 Merger Simplification Package could be expanded to all areas of competition enforcement. In a footnote on page 304, Mr Draghi identifies three “concrete examples of areas that need to be urgently streamlined”, namely:
- Various issues in merger control, including the use of Article 22 of the EU Merger Regulation to below-threshold mergers (particularly after the Illumina/GRAIL judgment) and the application of Articles 101 and 102 TFEU to below-threshold mergers;
- The draft Guidelines on exclusionary abuses of dominance leave excessive discretion to find such exclusionary abuses; and
- The rule that the DMA leaves scope for additional obligations to be imposed on gatekeepers under national laws should be clarified to limit the risk of fragmenting the EU’s regulatory landscape.
Sector-specific competition recommendations
In addition to these general recommendations, the Draghi report contains a number of specific recommendations for competition policy in certain sectors. In particular, it concerns digital markets (which do not have their own section, but are discussed throughout), telecoms, defence, and labour markets.
Digital markets
The report is critical of the GDPR and AI Act, warning that their complexity and risk of overlaps and inconsistencies could undermine developments in the field of AI by EU companies. European companies risk being excluded from early AI innovations because of uncertainty of regulatory frameworks. EU researchers and innovators face higher burdens when developing homegrown AI. Draghi therefore calls for simplified rules and enforcing harmonised implementation of the GDPR, while removing regulatory overlaps with the AI Act.
The report is more positive about the aims of the DMA and DSA but warns once more that their implementation must not lead to administrative and compliance burdens similar to those generated by the GDPR, and that enforcement must happen within shorter timeframes.
Access to raw materials
Currently, competition rules make it difficult to vertically integrate projects along the value chain. However, there is growing evidence that to promote investment in new sectors, the guarantee of off-take for a period of time is critical to the final investment decision (e.g. for a lithium processing factory close to Li-ion factories). The report recommends that competition policies are reviewed to enhance the possibility to vertically integrate projects aimed at access to essential raw materials.
Telecoms
A key recommendation in the telecoms sector is to facilitate consolidation and deregulate the sector. Draghi is concerned that regulation and competition policy in the telecom sector have disincentivised consolidation. Ex ante regulation and EU and national competition policies have all favoured a plurality of players and low consumer prices. By contrast, in the US, ex post regulation – e.g. competition enforcement in case of collusion or concerted practices – has allowed consolidation to occur, with the result that both in the US and China a few large operators serve hundreds of millions of citizens each.
According to Draghi, consolidation is needed to deliver higher rates of investment in connectivity. The goal is to deliver a true Single Market, without sacrificing consumer welfare and quality of service. To encourage consolidation, the report recommends defining telecoms markets at the EU level – as opposed to the Member State level – and increasing the weight of innovation and investment commitments in the EU’s rules for clearing mergers (see above). Mr Draghi also calls for ex ante telecoms regulation to be reduced in favour of ex post competition enforcement.
In addition, Mr Draghi recommends that the Commission support commercial investment sharing between network owners and Very Large Online Platforms that use EU data networks to a massive extent but do not contribute to financing them.
Defence
Only 10 EU Member States spend the NATO target of 2% of their GDP on defence. According to the Commission, additional defence investment of around EUR 500 billion are needed over the next decade. The European defence sector also suffers from a lack of focus on technological development, and it is fragmented, limiting its scale and hindering operational effectiveness in the field. EU Member States operate twelve types of battle tanks, whereas the US produces only one.
The report recommends that EU competition policy should enable structural cross-border integration of defence assets and the selective integration and consolidation of EU industrial capacity, with the explicit aim of increasing scale, standardisation and interoperability. More plainly: merger control needs to enable the integration and consolidation of the EU defence industry, so long as increased scale would deliver efficiencies or allow the realisation of globally competitive investments.
Labour markets
Those readers interested in non-compete and no-poach agreements should take a look at p. 255, in the “Accelerating Innovation” chapter, where Mr Draghi recommends that these types of infringement are addressed by competition policy because they limit labour mobility between companies.
A Goldilocks dilemma?
Many stakeholders in the EU’s competition bubble will be able to claim victories on the basis of Mr Draghi’s report: it has something for those who want more competition enforcement, and for those who want to see checks on that enforcement. When reading it, I could not help but think of the Goldilocks dilemma, and the impossible question how much competition is “just right” for Europe. That being said, the EU faces profound difficulties in the decades ahead, and in a geopolitical world, its competition rules can sometimes seem out of touch. It is right for a cross-policies report such as Draghi’s not to treat competition as though it was sacred.
There is no reason why competition should always trump other areas of public policy, and indeed there are already rules in the EU which under certain circumstances can “switch off” competition rules, such as in the agricultural sector. At the same time, competition is a cornerstone of the Internal Market, itself a foundational element of the European Union. This is an important consideration at the EU-level, which is less of an issue for nation states, and which does give the competition rules an important status within the Union. It is welcome that the Draghi report has opened the debate on finding the right balance, and that it does so in a considered way, rather than through the age-old call for the creation of “European champions”.