We test and confirm these predictions in our paper (2018a). I have already described in this chapter a long list of deregulation efforts spurred by the European Commission. These efforts were—and still are—critical to the success of the Single Market.
Product Market Reforms
Regarding product market regulations (PMR), data in Figures 8.1–8.4 indicate the efforts made by EU countries toward reform. We can conclude that they are catching up (at the very least) with the US. These reforms are the result of deliberate policy choices. Figure 8.5 plots the average number of product market reforms across EU countries. The creation of the Single Market was clearly accompanied by significant reform efforts.
FIGURE 8.5 Product market reforms in Europe. Data source: Duval et al. (2018)
FIGURE 8.6 Global convergence of product market regulations. Data source: OECD
Detailed data on PMR convergence provide further support for our theory. Figure 8.6 plots the change in PMR from 1998 to 2013 against the starting value in 1998. The negative slope illustrates the process of convergence. Countries with initially high levels of regulation experience a stronger decrease in regulation. In other words, they are catching up with the US and the UK. The convergence toward less regulation is global, but the convergence is faster for EU countries than for non-EU countries. Portugal and the Czech Republic had approximately the same level of regulation as Mexico in 1998, and Poland had the same level as Turkey. Today these European markets are significantly freer than their foreign counterparts. The difference in the slopes of the two lines for EU and non-EU countries is statistically significant and consistent with our theory.
EU countries with initially weak institutions have experienced large improvements in antitrust and product market regulation. Moreover, the relative improvement is larger for EU countries than for non-EU countries with similar initial institutions. This shows the positive impact of EU-level enforcement and influence.
Antitrust
Antitrust activities play a significant role in market regulation, and their political impact is large and visible. To be clear, I don’t think antitrust is necessarily the main channel through which Europe has freed its markets. The broad Single Market agenda goes beyond antitrust, and the lifting of entry restrictions has probably had more impact than merger reviews. Still, merger control is important.
Using indicators of competition law and policy from the OECD and from Hylton and Deng (2007), we find that DG Comp is more independent and more pro-competition than any of the national regulators. In fact, DG Comp is more independent than the DoJ and the FTC.
Figure 8.7 shows indicators of restrictions to antitrust enforcement from the OECD: the lower the bar, the tougher and more independent the regulator. DG Comp is represented by the dashed horizontal line. The US is represented on the far right of each bar graph. DG Comp attains the lowest possible index of restrictions in the three categories that directly map into our theory: scope of action, policy on anticompetitiveness, and probity of investigation. Probity of investigation measures the scope for government interference in antitrust policy. DG Comp is essentially free from interference by national governments, and its score is much lower than the average score of national authorities. The fourth dimension, advocacy (whether the regulator can advocate for a more competitive environment), is a bit less straightforward to map into our model. On that dimension, only the UK and Denmark offer more freedom than the EU.
FIGURE 8.7 Restrictions on antitrust enforcement. Data source: OECD
Figure 8.7 depicts formal rules and policies. Perhaps these are all words and no action. Do tougher policies actually translate into tougher enforcement?
Let us start with merger enforcement because it is simpler to define and has been more extensively studied. We have already noted, following the work of John Kwoka, the decrease in antitrust enforcement in the US. We see no similar trend in Europe. We find that enforcement has remained stable (or even tightened) in Europe. For instance, DG Comp Abuse of Dominance enforcement has remained stable or increased since the 1970s, whereas the DoJ has brought only ten cases since 1990 and only one case since 2000.
Comparing antitrust enforcement across jurisdictions is difficult. In that respect the work of Mats Bergman and co-authors (2010) is particularly useful because they control for the specifics of each case. They ask the conceptually correct question: what would have been the outcome of the same case if it had been investigated by the other regulator? They study a detailed sample of EU and US merger investigations from 1993 to 2003 and find that the EU was tougher than the US for dominance mergers, in particular those involving moderate market shares. The differences are less stark following the 2004 EU Merger Reform, but the EU is still tougher on mergers involving moderate market shares, and it applies a more aggressive collusion policy than the US.
Cartel enforcement is one area where the US has historically been very tough and efficient. In recent years, DoJ has increased its focus on charging individuals as well as corporations—which has resulted in more individuals being incarcerated and for longer periods of time. In that domain, the EU has benefited and borrowed good ideas from the US. In addition, the EU commission appears to learn quickly over time, so enforcement has improved steadily (Duso, Gugler, and Yurtoglu, 2011).
Europe Means to Keep Its Markets Free
Comparing market regulation in the US and the EU is illuminating. If globalization or technology were responsible for declining enforcement in the US, we should observe similar trends on both sides of the Atlantic. However, this does not appear to be the case. European antitrust enforcement has remained active in recent years. Martin Carree, Andrea Günster, and Maarten Pieter Schinkel (2010) show that, on average, 264 cases of antitrust, 284 mergers, and 1,075 cases of state aid were investigated in Europe every year from 2000 to 2004. The commission made several controversial decisions, such as blocking the merger of General Electric and Honeywell that had been approved by US competition authorities. It also recently ruled against Google in a case that was dismissed by US authorities five years prior. Carree and co-authors find that the decisions are not biased against foreign firms, however. In fact, “firms from non-European countries have fewer infringements, lower fines, and also lower appeal rates.” Moreover, there is virtually no discussion of weak antitrust enforcement in Europe—either in academia or the media—compared to a growing body of work in the US.
This is not to say that Europe is perfect. Far from it. France used to be very good at suppressing competition and designing bad policies. A fitting example is the regulation of supermarkets in France in the mid-1990s. Prime Minister Raffarin wanted to protect small retail stores and proposed legislation to block new supermarkets larger than 300 square meters (3,000 square feet) without special authorization. Construction of new supermarkets ground to a halt for ten years. Do you think large retail chains complained? Not really. The legislation prevented competition from discount stores and limited competition among the chains. Their stock prices went up.
It is also important to keep in mind some orders of magnitude: the vast majority of mergers are approved. From 1990 to January 2019, the European Commission reviewed 7,260 mergers. Out of these, 6,401 were approved, 152 withdrawn in phase 1, and 44 in phase 2. Others were referred to other jurisdictions (such as member states). At the end of the day, only 27 were outright prohibited.q
But Europe is also illuminating precisely because it is imperfect. It gives us a way to test a simple theory of free markets. The theory says that the EU set up fiercely independent institutions precisely because this was required to get all the countries on board. Each country wanted to be sure that other countries would not be able to influence the EU institutions to their advantage. As a result, the same politicians that might have been lukewarm supporters of free markets at home became supporters of free markets at the EU level. The direct predictions of the theory are strongly supported in the data: EU institutions are systematically more independ
ent and more in favor of free markets than their domestic counterparts. As I was writing this book the case of Alstom and Siemens made the news and provided a good test of our theory. Germany’s Siemens and France’s Alstom had decided in 2017 to merge their rail activities. To be honest, I was worried because the EU Commission was under strong political pressures from its two largest and most influential member states, France and Germany. Paris and Berlin both wanted the merger approved. But Commissioner Vestager stood her ground. She and her team concluded that the merger “would have significantly reduced competition” in signaling equipment and high-speed trains, “depriving customers, including train operators and rail infrastructure managers of a choice of suppliers and products.” The commission blocked the merger in February 2019.r
The last prediction of our theory is the most controversial: if we are right, we should observe more lobbying expenditures in the US than in Europe. Lobbying should also explain at least some of the differences that we observe across time, regions, and industries. In our next chapters, we will dig into lobbying and campaign finance. For now, I simply note that US firms do spend substantially more on lobbying and campaign contributions and are far more likely to achieve their lobbying goals than European firms and lobbyists.
Before we turn to lobbying, however, I must address the elephant in the room: Brexit. Needless to say, I am saddened by the UK’s decision to leave the EU. Looking back, it is clear that the EU made progress toward free markets in part because the UK was an active participant in designing the rules of the Single Market. The market was very much a joint effort that would not have succeeded without the UK. It is then a striking paradox that the UK would choose to leave the EU after having worked hard—and succeeded—in creating the free-market environment it always wanted.
* * *
a PMR indicators are internationally comparable. They measure policies that promote or inhibit competition such as: state control of business enterprises; legal and administrative barriers to entrepreneurship; barriers to international trade and investment. The indicators are available for thirty-four OECD countries in (or around) 1998, 2003, 2008, and 2013, and in another twenty-two non-OECD countries in 2013.
b This is the famous speech of January 1995 in which he said, “Le nationalisme, c’est la guerre.” (Nationalism is war.) He would repeat the statement in his last speech as president four months later in Berlin.
c I am paraphrasing Christopher Clark’s brilliant book, The Sleepwalkers: How Europe Went to War in 1914 (London: Allen Lane, 2012).
d The estimated death toll for World War I is 10 million military and 8 million civilian deaths. For World War II, 22 million military and 50 million civilian deaths.
e Speech at the University of Zurich, Switzerland, on September 19, 1946.
f “Jean Monnet, 90, architect of European unity, dies,” New York Times, March 17, 1979. Monnet died on March 16.
g Around the same time, Germany amended its antitrust law to give merger control authority to its Bundeskartellamt (Federal Cartel Office), and the US Congress enacted the Hart–Scott–Rodino Act of 1976, which amended the Clayton Act and required premerger notification.
h The Treaty of Rome built on the Treaty of Paris, which established the ECSC in 1951. Article 3(1)(g) of the Treaty of Rome envisions “a system ensuring that competition in the internal market is not distorted.” Council Regulation 17 made the enforcement powers effective in 1962, and the EU Commission made its first decision in 1964. Article 101 (ex. 81) of the Treaty of Rome deals with horizontal conduct, vertical restraint, licensing, and joint ventures. Article 102 (ex. 82) deals with the anticompetitive effects of dominant position. Merger regulations were added in 1989.
i The academic debate has evolved in three stages. At first, the common wisdom was that EU laws were direct descendants of US laws. Gerber (1998) challenged this view and showed that EU laws also had their own “indigenous” traditions. Since then, scholars have reached a more balanced view. Leucht and Marquis (2013) study the exchange of ideas between the US and Europe, and Leucht (2009) explores how the traditionally protectionist economies of Western Europe agreed on common competition rules.
j Zucman, Tørsløv, and Wier (2018) find that 40 percent of multinational profits are shifted to tax havens, and the main winners are such countries as Ireland, Luxembourg, and Singapore. The main losers are EU countries (20 percent of profits shifted) and the US (15 percent of profits shifted).
k The EU can directly prohibit certain domestic regulations, such as prohibition of golden shares and price controls in transportation industries. Otherwise, it can work with member countries to achieve mutual recognition of restrictions or can enact case law based on a treaty (for example, ongoing regulation of state aid by DG Comp). But beyond that, member states must implement reforms directly.
l The so-called Cardiff Reports from 2000 to 2004 were followed by national reform programs and implementation reports. The EU used those reports to continuously monitor and disclose progress. The EU created the microeconomic reform database (MICREF) to compile and track progress across all states.
m For illuminating discussions, see Combe (2010).
n Richard Pinkham wrote, “The Brussels-mandated liberalization on Europe’s airline sector plainly has made progress in its mission to promote enhanced competition and lower fares in the industry, as is evidenced by a net drop in fares and greatly increased levels of service. Nevertheless, the overall picture of Europe’s commercial aviation sector is disappointingly unchanged, due to a continued combination of slot allocations inherited from the less liberalized era, anticompetitive behavior on the part of the Continent’s incumbent carriers, and lingering national sentiment resulting in preferential treatment being accorded the flag carriers” (Pinkham 1999).
o The process started in 1988 and culminated in 1998 with full liberalization. The current Telecoms Regulatory Framework for electronic communications was adopted in 2002 and updated in 2009; it has subsequently been supplemented by a number of additional legislative instruments.
p One interesting historical precedent with some similar features is the Austro-Hungarian Empire. Austria and Hungary agreed to share a currency and a central bank but made the bank independent. See Flandreau (2001).
q Data at http://ec.europa.eu/competition/mergers/statistics.pdf. I am grateful to Tomaso Duso for helping me understand these facts.
r EU Commission, “Mergers: Commission prohibits Siemens’ proposed acquisition of Alstom,” press release, February 6, 2019.
[ THREE ]
POLITICAL ECONOMY
Let us summarize what we have found so far. Most US domestic markets have become less competitive, and US firms charge excessive prices to US consumers. Excess profits are used to pay out dividends and to buy back shares, not to hire and invest. At the same time, barriers to entry have increased, and antitrust enforcement has weakened. These trends in the US were not exported to Europe, and, in a stunning reversal of history, many European markets (airlines, cell phones, and internet providers, among others) are now more competitive and cheaper than their American counterparts.
My interpretation of the European experience is that it is mostly a consequence of the push for the Single Market and the necessary institutional change that entailed. The US served as a role model in the process, and many of the beneficial ideas that are now being applied in continental Europe came from the US and the UK. Europe adopted these ideas and saw competition flourish. Chapter 8 explains why Europe took a different path. It makes specific predictions about the design of regulatory institutions and about antitrust enforcement and the removal of barriers to entry. It makes specific predictions about which groups of industries and countries are most affected. All the predictions that I have been able to test have been verified. This gives me some confidence in the theory. With this in mind, I now want to come back to the US and see if the same
theory can help us understand why competition declined in American markets.
What We Can Learn by Comparing the United States and Europe
I will argue that political contributions and lobbying expenditures are responsible for some of the weakness in enforcement and the rise of regulatory barriers to competition within the US. My focus will be on lobbying and campaign finance in the US, but I will use Europe again as a control group to highlight some peculiarities of the US system. Is this a valid comparison? In Part Two of the book, I compared the US and the EU in terms of economic outcomes. I argued that this was warranted by the broad similarity of the two economies. But is this true of the two political systems? Are they similar enough or are political differences so large as to render the comparison misleading?
I see two main differences between Europe and the US in that respect. The first, and by far the most important, is that the US is a military superpower while Europe is not, nor does it aspire to be one, much to the chagrin of French diplomats. The political and technological implications of military dominance are immense and reach far beyond the scope of this book. The second difference, which follows from the first, is that the US dollar plays an outsized role in the global economic and financial system. The US dollar is the main reserve and invoicing currency. The US trade deficit reflects in part the desire by many other countries to park their wealth in US dollars.
These differences matter. American lobbying and politics might be different if the US did not have to maintain the largest military in the world. But this state of affairs is not new. It cannot by itself account for the changes that have happened in the US over the past twenty years. By the same token, I think there is much to learn from a joint analysis of lobbying and campaign finance on the two sides of the Atlantic.
The Great Reversal Page 16