From the Death of Railbus, A Manifesto to Change European Antitrust Rulings


A Franco-German proposal to change EU antritrust rulings seems to disregard economic reality.


Since early 2019, bureaucrats in Berlin and Paris have been angry, very angry. In February, a merger between Siemens and Alstom, Europe’s largest suppliers in the rail market, was blocked by European Commissioner for Competition and full-time strongwoman Margrethe Vestager. Why? The Commissioner for Competition said that “the merger would have harmed competition in markets for railway signaling systems and very high-speed trains.”

The Commission’s decision may seem like a normal application of antitrust practices, but it is, in fact, rare that the Commission choose to block mergers in the EU. French Economist Jean Tirole note that “the Commission approved 370 mergers unconditionally, and a further 23 with conditions attached” whereas it “blocked only two mergers in 2017, none in 2018, and fewer than 30 since the EU Merger Regulation was adopted in 1990.” Berlin and Paris are therefore angry because they are shocked.

A European Champion

The merger of Siemens Mobility and Alstom was to create a massive “European champion” able to compete with the rise of the CRRC, the Chinese behemoth of the railway sector, which has enjoyed a rapidly growing market at home. The fear of being outcompeted by the Chinese on the world stage is, at least partly, justified. Where Alstom and Siemens compete over production of 35 high-speed trains a year, the CRRC spits out 230. To make things worse, the European high-speed market has stagnated, whereas China already has plans to add up to 25000 kilometers of railway network at home.[1] In other words, for the Europeans, the real markets are abroad and competition between them hurt their competitiveness on the world stage. Economic theory may tell us that monopoly power causes market failure in so far its limits competition, but some monopoly power can be necessary if companies need to benefit from economies of scale and efficiency gains to compete worldwide, especially in capital-intensive industries.

Prominent European politicians have pushed the idea of a “European Champion” to prevent a CRRC hegemony in the sector. Writing in Project Syndicate, Guy Verhofstadt, leader of ALDE, said “though Alstom and Siemens have each managed to win contracts in several Western and African countries in recent years, their luck could soon run out” and “barring a stronger response from Europe, China’s emergence as the dominant player in the global rail market is not a matter of ‘if’, but ‘when’”. [2]Other proponents of the merger have dubbed it “Railbus” in an allusion to the creation of Airbus in 1970 to compete with American Boeing in the aviation industry.

The Good, the Bad and the Ugly

Now, after the commission’s decision to block the merger, it is clear that Berlin and Paris, partly allied with Mr. Verhofstadt refuse to back down. In the aftermath of the decision, they have tabled ‘Franco-German Manifesto for a European industrial policy fit for the 21st Century’ which proposes changes to the European Competition framework. Specifically, they seek change the merger guidelines so that the Commission take greater account of global competition and future competition when assessing markets. More controversially, the paper proposes for a right of appeal of the Council, providing politicians the power to override decisions taken by the Commission under certain conditions.

Swedish Economist Martin Sandbu divides the manifesto into three parts: the good, the bad and the ugly. The good is that the paper signals a need for proper investment screening by trade partners. To Sandbu, this seems to be a defensible demand when considering worries that China can use company takeovers or tech products for industrial espionage in Europe. The bad is the call for “massive investment in innovation” without any strong institutional ideas to support that ambition. And we see the ugly in the manifesto’s design to make antitrust rulings like the Alstom-Siemens merger much more difficult in the future in the interest of national governments distaste with Europe’s current competition regime. [3] The ugly, unfortunately, becomes downright hideous when investigating how weak the case for the Alstom-Siemens merger was in the first case.

Railbus is Not Airbus

In a piece published on Project Syndicate, Economists Jean Tirole and Patrick Rey argue that European politicians allusion to Airbus in “Railbus” is misguided. “Railbus” is not “Airbus” because “whereas Airbus was a new challenger to Boeing, which had a near-monopoly in the commercial-aviation market at the time, the Alstom-Siemens merger would have reduced the number of players in the European rail industry.” In other words, Airbus was the creation of competition, not the reduction of. Additionally, the two economists critique the Franco-German proposal for enabling national politicians to define specific cases broadly in support of a favored merger.

Additionally, Bloomberg’s Chris Bryant argues that the competitive disadvantage of the two companies on the global stage is greatly overstated by the EU politicians. The CRRC’s revenue is indeed larger than Alstom and Siemens’ combined, but almost all of that revenue stems from the Chinese domestic market, while in international markets the Alstom and Siemens are three times larger than CRRC. The Siemens and Alstom rail businesses are not stalling but thriving thanks to overseas markets. [4]

Adding to this, there is nothing in the current merger control guidelines that hinders the formation of large mergers of European firms, given that there are appropriate efficiency gains to outweigh anti-competitive effects in the short-run, that is higher prices and less choice, and long-term, such as less R&D, investment and quality. However, according to economists Massimo Motta and Martin Peitz, “there is no public information that points to such synergies, and the European Commission stated that the parties have not substantiated any such efficiency claims.”[5] The potential efficiency gains in terms of international competition are just not large enough to outweigh harm done to the European consumer in the form of higher prices. Additionally, a formal agreement or joint venture to coordinate foreign sales and production between the firms could provide these efficiency gains in foreign markets without resorting to a merger.

Ultimately, the case for the Siemens-Alstom merger was weak to begin with, and the attempt to change EU competition rules because of its failure seems to be a disregard of economic reality. European politicians should be proud that the single market has freed competition policy from the sway corporate interests have on national policy-making. As Martin Sandbu notes, we have in Europe many competitive industries with fewer giants than the US, and the lack of what some politicians wish to call “European Champions” is not hindering competition, but the condition for competition to take place and our economies to thrive. [6]


References

[1] Efstathiou, Konstantinos. 2019. “The Alstom-Siemens Merger And The Need For European Champions | Bruegel”. Bruegel.Org. http://bruegel.org/2019/03/the-alstom-siemens-merger-and-the-need-for-european-champions/.

[2] Verhofstadt, Guy. 2019. “Europe’S Missing Champions | By Guy Verhofstadt”. Project Syndicate. https://www.project-syndicate.org/onpoint/europe-s-missing-champions-by-guy-verhofstadt-2019-03?barrier=accesspaylog.

[3] Sandbu, Martin. 2019. “A Mixed Manifesto For EU Industrial Policy | Financial Times”. Ft.Com. https://www.ft.com/content/8d0f2a7e-38dd-11e9-b72b-2c7f526ca5d0.

[4] Bryant, Chris. 2019. “Bloomberg – Europe’S Railway Giants Take A Fast Train To Nowhere”. Bloomberg.Com. https://www.bloomberg.com/opinion/articles/2018-11-14/france-and-germany-take-a-fast-train-to-nowhere.

[5]Motta, Massimo, and Martin Peitz. 2019. “Competition Policy And European Firms’ Competitiveness | VOX, CEPR Policy Portal”. Voxeu.Org. https://voxeu.org/content/competition-policy-and-european-firms-competitiveness.

[6] Sandbu, Martin. 2019. “A Mixed Manifesto For EU Industrial Policy | Financial Times”. Ft.Com. https://www.ft.com/content/8d0f2a7e-38dd-11e9-b72b-2c7f526ca5d0.

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