Draghi’s super-league would be an own goal for Europe

The incoming leadership of the European Commission was given two important looks into its past and future last week.
One was a 400-page report from Mario Draghi, central banking titan and Brussels’ favourite technocrat, who warned of the continent’s slow economic “death” and offered a road map on how to resuscitate it over the coming decades.
The second, which came a day later, was a ruling from the European Union’s highest court that a 2016 decision to order Apple to pay €13 billion in unpaid corporate taxes to Ireland was correct, as “sweetheart” tax deals between multinationals and member states are a form of illegal state aid.
Both are pertinent reminders of the past successes and future challenges facing the union at a time when its powerhouse economy, Germany, is faltering and its traditional champion for political integration, France, is in parliamentary paralysis. The aftermath of 2022’s Europe-centric energy crisis has widened the economic divergence between the continent and the United States. Draghi’s sweeping analysis was commissioned by Ursula von der Leyen, who has said she wants to use it as a guide for her new five-year term leading the EU’s executive.
The Apple decision and the Draghi report are linked as both concern one of the most powerful tools in the EU’s armoury: the ability to police state aid and regulate market competition. Draghi’s mammoth report contains plenty of eye-catching proposals, including sweeping reforms to Europe’s energy market to ensure fairer pricing and doom-laden warnings about the dangers of stagnant productivity. This, incidentally, is also a central feature of the Office for Budget Responsibility’s latest outlook on the UK’s long-term economic health.
More controversially, Draghi waded in on the role of competition policy and how merger rules should be made “fit for purpose” for the modern age. For decades, the EU’s technocratic competition unit has wielded sweeping powers that few other policy areas can boast. Its role is threefold: to ensure fair competition for European consumers; to police mergers and break up cartels; and to monitor government support to companies to avoid distortions in the single market.
The Apple decision is the most ambitious expansion of the state aid rule book into an area where it had never gone before — cracking down on the complex corporate tax-avoidance schemes that allowed multinationals to shift profits to low-tax jurisdictions to whittle down their liabilities. Apple’s €13 billion bill is the largest state aid penalty in the history of the EU and represents the biggest scalp claimed by any regulator in the crackdown on tax avoidance.
Yet Draghi’s report makes no mention of the use of state aid rules to claw back money for governments and taxpayers, particularly as his call for massive new investment will require additional borrowing or taxes to fund it. Instead, the former central banker thinks the merger and competition rule book should be loosened to help create European “champion” companies of the scale and reach that can compete with international rivals.
“There is a question about whether vigorous competition policy conflicts with European companies’ need for sufficient scale to compete with Chinese and American superstar companies,” he writes. “Since innovation in the tech sector is rapid and requires large budgets, merger evaluations should assess how the proposed concentration will affect future innovation potential in critical innovation areas.”
If implemented, Draghi’s plan would require the EU’s technocrats to take innovation and security into account, alongside the current imperative to ensure fair consumer prices, when they decide on mergers. It would mark a radical break from the past and one that would transform the sober, rules-based competition unit into a highly politicised geopolitical endeavour.
For Draghi, Europe has no choice but to embrace the fashion for creating industrial giants if the union wants to compete with its international rivals. His hope is that fast innovation, high-skilled jobs, market power and lower consumer prices can all peacefully co-exist, as a route to win back popular support for the European project.
Yet there are few reasons to think that Europeans see the creation of giant companies as the yardstick for success. Draghi uses the example of US and Chinese telecoms, a concentrated sector with few players where firms earn juicier returns on investment, and says Europe should allow more consolidation and deregulation to do the same. He ignores the fact that Europeans consumers are the beneficiaries of the current system, with Americans paying twice more on average to access broadband and more than three times as much for monthly mobile contracts, at an average of $34 against $10 in Europe.
In Draghi’s more permissive merger regime, regulators would end up playing an even more overbearing role in corporate decisions after tie-ups are approved. He proposes a system of ex-post monitoring where Brussels would retain the power to intervene in cases of insufficient innovation or investment. This is a recipe for unpredictable political interference rather than the opposite.
Draghi’s embrace of greater market concentration to achieve strategic goals is also at odds with the current vogue in global competition and anti-trust policy. The US, usually the bastion of light-touch regulation, is taking a much tougher line on its own tech giants and platforms which are accused of abusing their market power to swallow up rivals. Google was declared a “monopoly” by a US judge last month, opening the way for regulatory moves to break up the company. Draghi should note that American consumers are looking to their regulators to protect them from market power, rather than to promote it.
It’s why the EU’s tax clawback from Apple should be celebrated as an ambitious and trust-enhancing move that shows Europeans the value of the union’s regulators and its rules-based order. If it was up to the Irish government, the €13 billion would have never returned to Dublin’s coffers. There are suggestions that other member states can also make claim on part of the money and the ruling is likely to have a chilling effect on copycat tax avoidance schemes. When applied correctly, the EU’s powerful rule book can work as intended.