The European Union is afraid.
It’s afraid that it’s not the home of the world’s largest and leading companies, and it’s afraid that it’s falling behind China and the United States. In its fear, it’s moving toward a policy of creating European champions that will only poison relations with the United States.
Over the past decade, Europe’s share of the world’s largest firms has declined precipitously. According to The Economist, in 2006, 17 of the world’s 50 largest firms were European. By 2016, that number had fallen to seven. Moreover, many of the largest American firms, like Google, Apple and Amazon, are exceptionally profitable, are based on technology, and enjoy high public visibility.
Large firms are not the be-all and end-all of economic growth, employment, or innovation. Large firms attract disproportionate attention precisely because they are large, not because they are necessarily efficient. History is replete with major firms, from Kodak to General Motors, that were dominant for a time, but which rapidly proved to be susceptible to competition, despite their size.
But European Union policymakers fear their firms are falling behind their competitors in the U.S. and China in scale and success. They fear that these non-EU firms will set the terms of the global marketplace in ways that will fundamentally and permanently damage Europe’s interests.
The fundamental reason why there are fewer large European firms is that, for the past two decades, Europe has grown slowly. If Europe wants more large firms, it must address its growth problem. It’s just not possible to create giants with economic policies fit for dwarfs.
Instead, the EU is looking at a shortcut: Industrial policy. Instead of changing its policies to grow large European firms organically, it wants to promote and create them through mergers. The EU argues that it needs bigger, and potentially monopolistic, firms to battle its international rivals.
As 19 EU nations put it in December, the point of this is to facilitate the emergence of European industrial giants able to face “fierce competition” from the U.S. and China. The European Commission, the EU’s civil service, has responded to this pressure by calling for the adoption of a “modern” industrial policy.
Industrial policy is based on the fallacy that government bureaucrats are wise enough to make good investments while avoiding bad ones. But just because EU policymakers think an industry is important doesn’t mean its largest firms should be allowed to merge. That might be good for the firms, but it will be bad for the free market and thus consumers.
The EU needs more, not less, competition. Too many European governments protect their own national champions at the cost of wider European competition. What the EU needs is governments that pursue pro-growth policies that allow firms to expand, and more competition among firms across Europe.
The deeper irony of the EU’s clamor for larger firms is that Europe has led the world in imposing discriminatory taxes on large U.S. technology firms. The EU stance is riddled with hypocrisy: When large firms are American, they deserved to be taxed; but if they were European, they would be welcomed.
The U.S. should make it clear to the EU that this argument could easily be used to justify the imposition of U.S. taxes on large European firms. These taxes would be as undesirable in the U.S. as they are in Europe, but as long as the EU views U.S. economic competition as a threat on par with China, the political pressure in the U.S. for retaliation will only grow.
Industrial policy is bad economics. As such, an EU industrial policy is a bad way to confront the genuine problems posed by the rise of China. Worse, any EU policy based on picking European winners must also create American losers. The U.S. should have no problem with European winners. But it will have one with being treated as the cause of Europe’s economic failings.
This piece originally appeared in The Washington Times