Europe Short Read

Europe’s Struggle to Compete

Europe’s inability to innovate is holding them back today, more than ever. To emulate the best though may be equally problematic.

E ver since the industrial revolution of the 18th century, Europe has been dearly lacking any industrial strength. Of the top 15 world’s largest digital firms, all are American or Chinese. Of the top 200, only eight are European. No European company has reached a value of $100bn in the last four decades, with the youngest European company to be worth that being SAP, founded back in 1972, compared with the dozens that China and the US have produced in recent years.

Over two centuries later, the people are in the mood for change. Dominant online platforms, for example, are rewriting the rulebook of the new economy just as the innovations of John Cockerill into manufacturing did in his day.
To Angela Merkel and Emmanuel Macron, the secret lies in allowing more European companies to merge, creating “European champions,” that are capable of taking on rivals in China and America.

There are several problems with this method of letting European companies return to the centre stage. With more companies merging, there could possibly be a decrease in choice for consumers and without suitable regulation, it provides less incentive for companies to innovate. Ultimately though, consumers, with a lower quality product and higher prices, become vulnerable to an oligopolistic market coupled with few incentives to innovate for firms.

Moreover, Europe has long had a problem competing in the international ground. From eyeglasses to steelmaking, stock markets to railways, proposed cross-border mergers are being backed by politicians, as the only way to take on Chinese and American rivals. With rising concentration and high profits, the answer may not be to make big firms even bigger. Regulation instead must ensure a competitive market.

The second issue facing European politicians is how to encourage start-ups and small companies to stay within the EU until they can grow enough to merge into these “European Champions”. With global titans such as Google, Amazon, and Facebook hoovering up as many start-ups as they can, they are creating what is known as a “Black Hole” economy.

Swiss economist Stephane Garelli explains the crux of the problem as being based in the short term longevity of home-grown European companies, especially due to them being bought by bigger technology giants. For the government alone, tax revenues will continue to suffer and European workers will also be left without a job.

If these mergers are not the way to create Champion companies, then what is? European firms may struggle to compete with their counterparts rivals because all of the markets are so fragmented. Therefore we need to unify these markets, allowing companies to move between markets more fluidly.

Moreover, there is talk of greater integration of capital markets and digital services and this urgently needs to be turned into action. More funding for basic research is also needed to help foster innovation. There are complaints that China and the US help their own companies through protectionist policies or soft loans.

It is no way to solve Europe’s problem by copying these policies. While protectionism provides benefits to some companies, it disproportionately harms the economy and consumers. The answer lies in the ability to foster competition.

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