Alyn Smith: EU competitiveness report has lessons for Scotland

Last week former Italian PM and president of the European Central Bank Mario Draghi unleashed, finally, his 400-page report on European competitiveness. He had been tasked with writing it by the outgoing European Commission, yet the coolest reaction to it, in Brussels at least, has been from parts of the Commission itself.

I remember my own studies in European competition law back in the early 1990s, and to be fair, the principles have little evolved since, though longevity doesn’t necessarily mean obsolescence.

The EU was established as a social economy, not a free-for-all economy. From the get-go, it involved a fairly high degree of regulation of businesses in order to protect the consumer, workers and increasingly the environment.

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Even if it was at arm’s length and behind the scenes, there was always an overtly social purpose to regulation, much as many within the EU itself would not put it in those terms. Maybe indeed we should have sold Social Europe better.

But even with the advent of the single market, from a competition law perspective, it retained a presumption that no company or cartel of companies should get so big across borders within the EU as to be able to distort competition. This is because the EU rules are and remain still ultimately designed to protect the consumer above all else.

Draghi’s report turns this on its head, asking why the EU does not have companies on the scale of Apple in the US or umpteen Chinese equivalents. The single market is 500 million of the richest consumers in the world but does not operate as a single bloc for corporates.

I would say quite deliberately, and it is a model that has worked pretty well for 30-odd years. But I would also accept the fundamental challenge Draghi is making and agree with him that a proper rethink is urgent.

His challenge was echoed by Aurore Lalucq MEP, newly elected president of the European Parliament’s Economic and Monetary Affairs Committee, warning that the state-led industrial strategies pursued by Washington and Beijing risk the EU becoming “a continent of consumers” rather than manufacturers.

Mario Draghi asked why the EU doesn't have companies on the scale of Apple

But their challenges are just the latest iteration of the fundamental dichotomy of the European Union, and it is a question few have ever properly answered. Is it a club of states working together, however big or small, towards a limited number of agreed common endeavours, or is it a thing in and of itself, 500 million people acting as one?

Yes indeed the EU has no Apple, but neither does Germany, France, Slovakia or Malta and they are all individual states of equal dignity that don’t agree on everything.

To compare the EU to the US or China is to fundamentally miss the point – we’re not them and we don’t aspire to be. Or do we? In this era of “unhappy globalisation”, do we have a choice if we’re to maintain living standards?

His report also goes a lot further than just upending competition policy; he calls explicitly for vast EU investment, funded by debt, in industrial policy. Again this is an easy call to make but upends how the EU actually works.

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The EU does not control its own budget, it operates by donations from member states. Because nothing is ever simple, this is negotiated on a multi-annual basis (the next one from 2028-2034 is already gearing up) with the EU budget being broadly composed of a proportion of each EU country’s gross national income; customs duties on imports from outside the EU; a small part of the VAT collected by each EU country, and (get this) a contribution based on the amount of non-recycled plastic packaging waste in each country.

The EU cannot borrow, much like the Scottish Government cannot borrow in any significant way, and has to have a balanced budget.

The EU can only spend what it is given and each member state will argue hotly over the share paid in and indeed the share paid back out to it.

So little wonder the EU has put so much resource into legal things like competition policy that cost little but have a huge impact on the market – they’ve not had the budget to do otherwise.

Draghi has, I think fairly, suggested that this should change, but his proposal that the EU should be able to issue debt on behalf of all the member states is I think not only a non-starter but dangerously naïve given the climate in a number of member states.

The Germans, the Dutch and several other states while very much pro-EU are also very much pro-national sovereignty of money. They have always been at the vanguard (way more than the UK, which for 30 years did little more than defend the deeply limiting Fontainebleau rebate) of keeping the EU on a short financial leash.

It is not surprising that the strongest criticism of Draghi’s proposals came from these countries.

But the report remains stark reading. It is not quite Reform Or Die but it is implicit in the text.

The EU has some of the best scientists and best ideas, but the commercialisation of those ideas is way behind other places.

A bit like Scotland – we have world-leading science but where is our Ericsson, Nokia, Apple or Alstom?

We’re not in the EU but the questions Draghi poses, if not his answers, are every bit as salient to us. The Scottish Government last week launched its Green Industrial Strategy, and there’s a lot of good stuff in there, but absent serious new ways to find cash then it can only go so far, much like Draghi’s strategy.

Either way, the two reports demonstrate that the issues we face remain the same, and the more barriers we create artificially, the harder resolving them will be.