Europe should think twice before weakening its merger rules

An air of gloom hangs over European companies. On the global stage, many are dwarfed by America's tech titans and China's industrial giants. The European Union is home to only three of the world's top 50 tech firms, by market capitalisation; its largest bank ranks 16th globally. To dispel the misery, some think the bloc's strict competition policy needs updating. The European Commission, which enforces antitrust rules, will soon publish draft guidelines that are expected to be more lenient. Encouraging firms to scale up is a laudable aim. Weaker competition policy would not achieve it.

The debate about the purpose of European competition policy is as old as the European project itself. The principled view, which came to dominate, is that a robust competition policy serves consumers, growth and innovation by ensuring that no firm achieves a controlling share of its market. A more political view is that it should serve wider goals, including national security and industrial policy.

As policymakers seek to prepare the continent for harsher geopolitical times, it is no surprise that the political view is gaining favour. Mario Draghi, a former Italian prime minister, argued in an influential report that competition policy needs to change to support innovation and secure supply chains. Ursula von der Leyen, the president of the European Commission, has gone a step further, arguing for "European champions" and "merger guidelines that reflect the realities of the global market, not just the European one".

Loosening competition policy would be misguided. The hurdles in the way of bigger European businesses are not merger rules but parochial politicians and a variety of other regulations, as the examples of banking, telecoms and defence show. Start with banks. The absence of large pan-European lenders is not because of trustbusters. Banking remains a national market. Local supervisors prevent banks from moving capital and liquidity seamlessly between a parent institution and its foreign subsidiaries. There is still no unified deposit-insurance scheme. And politicians are fiercely protective of national champions, as the attempt by UniCredit, an Italian bank, to take over Commerzbank in Germany shows. The German government opposes the merger, claiming it would undermine funding for the Mittelstand.

Telecoms is not a truly integrated market, either. Spectrum auctions are largely national, as are rules around security, emergency services and the like. More than 270 regulators oversee digital networks across the EU. As long as a customer in France cannot easily buy services from an Estonian provider, mergers are likely to increase market power and raise prices.

Defence, the third example, is similarly fragmented, even though competition policy has already been loosened. The main reason is that governments want to keep their defence industries on a tight rein. More pan-European procurement and a dose of competition from startups would do far more to spur both innovation and consolidation.

Each example shows that the barrier to scale is not competition policy, but the fact that the single market remains incomplete. Indeed, where the market is fully integrated, European firms have managed to achieve world-beating results. Just think of ASML, which has a near-monopoly on the most important chipmaking machines in the world, or of firms like Spotify and SAP, which hold their own against global rivals. European pharma is a rich ecosystem made up of research institutes, smaller upstarts and corporate giants.

Integrating financial and digital services across borders is a much gnarlier task than diluting merger rules, in large part because it means encouraging national governments to loosen their grip. But if Europe really is to compete on the global stage, there is no substitute for hard graft.