The European Union
Policies in Conflict

Policies on trade, competition and industry are used to achieve a wide range of objectives within the European Union (EU). But are all of these policies and policy goals compatible? Or are the various instruments and ambitions, at both EU and member state levels, pulling in too many different directions? At a Brussels lunchtime meeting at ECARE, Université Libre de Bruxelles on 12 December, Jordi Gual attempted to answer these questions by assessing the overall coherence of EU industrial policy, competition policy and trade policy. Gual is Professor of Economics at Instituto de Estudios Superiores Empresa (IESE), Barcelona and a Research Fellow in CEPR's Industrial Organization programme; he is currently based at the European Commission. His talk was based on his CEPR Discussion Paper No. 1105, `The Coherence of EU Policies on Trade, Competition and Industry'.
The treaties of the Union restrict the use of EU policies in the achievement of pre-established sets of objectives. They also limit the Union's ability to act in some areas. Trade and competition policies, for example, have well-defined priority objectives: the preservation and encouragement respectively of external and internal competition. But they also have to help fulfil other competing goals, notably those of social cohesion and industrial competitiveness. Gual's research on these issues was undertaken from the perspective of the optimal deployment of economic policies as prescribed by economic analysis, but taking into consideration the legal mandate and the institutional constraints imposed by EU treaties and regulations. He suggested some changes in policy assignment and implementation, which could increase efficiency by alleviating the most harmful policy conflicts.
It could be argued that the multiplicity of policy objectives results from the limited policy tools available to the Union. In other words, the direct instruments available (structural and cohesion funds in the case of cohesion) are insufficient and, as a consequence, policies aimed at securing a competitive and integrated market are tempered by the contradictory goal of maintaining social cohesion. In any case, the nature of the conflict between trade and competition policies and cohesion policy is clear: imposing the restriction of choosing policies that assist cohesion may lead to the choice of non-optimal policies in trade and competition, the protection or subsidization of a particular industry on the grounds of cohesion.
The second main source of policy inconsistency arises between EU trade and competition policies and the industrial policies of member states. Although EU policy is based on the principle that the best industrial policy is the promotion of a competitive environment with a large internal market and external competitive pressures, actual policy at EU and member state level has departed from this rule. In some cases, economic theory itself has cast doubt on the principle; in others, policy practice has not followed the statutory objectives. Recent theoretical results in economics have certainly influenced the relaxation of EU competition policy with regard to R&D subsidies and R&D cooperation. (Even in mergers, policy practice has led to consideration of the efficiency defence.) Arguably, such softening of competition policy need not be the best reaction to the externalities involved in R&D. A better alternative may be to adopt a policy mix that combines stricter competition control with some centralization of technology policies along the lines of Gual's proposals for industrial policy (see below).
Policy practice has departed from the statutory objectives in the case of trade as a result of the political economy of EU trade and industrial policies. Gual argued that an effort should be made to restrict trade instruments to their proper use under treaty objectives, and not to use them as instruments of industrial policy. But this raises the question of how these industrial policy objectives can be achieved. In fact, industrial policy is an area of considerable conflict itself, quite apart from its interaction with other policies. Aside from potential disagreements on the appropriate extent of intervention in a centralized nation-state, there is the question of the conflict not only between policies at the EU level, but also between the policies of different administrations. In several industries, member states intervene, through public procurement, state aid, and procrastinating in transposing legislation to favour their national champions. In mature industries, there is an exit game with a non-cooperative outcome that is significantly inefficient. In sunrise industries, subsidization of entry often leads to a similar result. Of course, Gual contended, given the EU's institutional nature and the fact that member states retain most of their sovereignty and governments are responsible to national electorates, it is unreasonable to expect a free market outcome with no intervention.
Two basic alternatives are available. The first is to strengthen significantly the decisions in the area of the internal market on state subsidiaries, procurement and national quantitative restrictions. This would be consistent with competition and industrial policy. But it would be strongly opposed by powerful interest groups within certain member states who could easily find cohesion or competitiveness arguments to support their case. At present, the institutional structures through which decisions are taken at the EU level prevent the successful adoption of this course of action. The second alternative is based on the argument that more centralization in industrial policy (with an adequate assignment of competences and a proper design of the voting system) may be justified in terms of efficiency. This could be the appropriate way to break the current deadlock, where member states' interference is leading to inefficient outcomes in many industrial markets. In addition, it could prompt the positive adjustment that, in principle, EU industrial policy attempts to achieve.
Of course, favouring and focusing on the achievement of an efficient economic outcome may have its costs in terms of redistribution. To that extent, such an industrial policy needs to be complemented by cohesion policy measures which automatically compensate the losers, depending on the geographical impact of any rationalization that takes place. Gual noted that centralization of this policy may be superior to coordination, given the lack of credibility of cooperation and the imprecise nature of industrial policy, which makes it more difficult for the parties to stick to negotiated agreements. Moreover, undertaking a more active industrial policy would be consistent with the new emphasis given to industrial policy by the EU treaties.