Where do you come from, or where are you coming from?

The recent controversy about the appointment of the chief economist in the part of the EU commission that deals with competition is instructive. And not in a good way. DG Competition wanted to appoint a US citizen to the post, Dr. Fiona Scott Morton, who is a distinguished professor at Yale and has been advisor to many US IT companies such as Apple and Microsoft.

There was uproar, and Ms Morton pulled out of the appointment. But people have missed the point. The outrage of France in particular was confused by President Macron’s diversionary question, asking didn’t we have any suitable Europeans, and wasn’t it a problem if we didn’t. He also suggested he would be happy with the appointment if a European would get a similar job in China or the US, as if nationality were the key issue and could be resolved by some kind of international trading of posts.

 Many people pointed to the expectation that, once in the job, the new chief economist would have to recuse themselves from most decisions, because of having worked with so many of the companies that are likely to be involved. This is also true, but again is missing the big point.  The controversy was further confused by the many eminent economists who rallied to Ms Morton’s support, emphasising what a great economist she was. Obviously true, but once again missing the big point.

So what is the big point? Well, it’s this: the perspective on industrial policy that the EU has or should have.  Most western economists, and all US politicians take the view that the state should not intervene unless there is clear market failure. Let the market decide. If there are big mergers, let’s see how they would affect market competition. And that’s it. But the EU, through the detail, scope and frequency of its legislation, is on a different tack. More like “the state should intervene unless it can be shown that the market is functioning properly”. That’s a big difference. The conventional view says that unless you can show that the market is not operating fairly, we should leave it alone. The radical view, which is driven by technological and geopolitical change, says that today’s market is not tomorrow’s and we need to get ready for the latter. That’s the priority. This implies not spending too much time on elegant analysis of what will soon be yesterday.

Competition: it’s not me, it’s not you, it’s us

Last year, Toyota increased its shareholding in Subaru, and Subaru bought shares in Toyota for the first time.  There is no intention it is said of Toyota actually acquiring Subaru but they need to work more closely together in the light of global changes and autonomous cars. Similarly Ford and Volkswagen have joint shareholdings in each other and in another company for similar reasons. This kind of cooperation looks modest in comparison with the recent Fiat Chrysler merger with Peugeot. But it is nevertheless strategic and in fact it is a considered alternative to a merger.

Cross-shareholdings are the method by which companies try to increase their competitiveness by what looks like an anti-competitive maneuver. We can see similar patterns of small cross shareholdings in many internationalised industries, including airlines. (Here the purpose is not so much to improve technological advances as to reap the benefits of scale by enabling coordination of passenger transfer, including rationalization of routes.) Usually, competition law is only concerned with shareholdings that give effective control, and this allows structures of smaller cross-holdings to provide both companies with information and communication channels, formal and informal, for strategy and technology development.

Is all this anti-competitive? Perhaps, in that the companies are deterred, to a degree determined by the shareholdings, from competing with each other, but more importantly through the impetus given to alternative directions for each of them, which derives from the enhanced perceptions of the other’s strategy. Each may identify something better to do than going head-to-head. All the paraphernalia of international competition law, including that of the EU, is irrelevant in the face of this cleverness. Big companies are learning that there are better things to do than to seek dominant positions.