The European Market is a Common Market

By Serena Sileoni, Deputy Director, Instituto Bruno Leoni

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The EU originated and developed in order to secure for consumers and producers the benefits of a single space for transactions and exchange, to succumb boundaries – not only political and legal, but also technological – keeping markets fractured. Now, at a time when innovation allows us to be closer to each other than ever before, breaking down legal barriers becomes more important and congruent to the dismantling of technological barriers.

The digital revolution prompts the European Union to make a choice: it can choose to push the digital market in the direction of a single market by the deregulation and liberalization of digital services, or it can opt to place its regulatory hands in this sector, too, by enacting rules that, in order to build a common digital market, threaten to have the unintended effect of bureaucratization.

The European Commission’s Digital Single Market Strategy, released on May, attempts to follow both paths. A number of measures seem to have in common a general trust in competition, while others – in order to harmonize the European framework – seem to hint at a re-regulation approach, especially when obstacles to a single market arise not from obsolete national regulations, but from a different approach by member states that the EU attempts to harmonize.

But regulation is not the only way to intervene in the digital market. There are two other approaches that are worth considering: surveillance on competition and taxation.

While regulation is the direct method, the other two are more subtle but not less intrusive, especially when considering the past EU’s approach on both counts.

Just look at competition. Since the Microsoft case and on the basis of a growing evidence from the statements of the actual Commissioner for competition, in the European view antitrust rules seem to be an essential tool in order to avoid big companies to become bigger per se, not in order to protect consumers. Whatever the consumers’ preferences or degree of satisfaction, the size of a company – or the market power it is deemed to have – seems to be a problem per se, or, better said, a harm per se for the vitality of smaller companies.

Investigations into Amazon’s e-book distribution arrangements or into Google’s search engines appear paradigmatic of a distrustful approach toward all big companies, as their very size is considered to hamper the freedom of action of their competitors and counterparts.

This is the oldest antitrust approach, instead of the more innovative approach whereby consideration is given to the consumers’ satisfaction, and not to the fears of competitors.

Take the Google case. By issuing a statement of charges pertaining to the practice of favouring its own comparison shopping product in its search results first issue, and opening a formal investigation into the second one, EU Competition Commissioner Margrethe Vestager stated her aim of guaranteeing unfettered development of the digital economy, free of any unilaterally imposed obstacles to competition from any company. The ideological nature of this goal, however, clearly emerges from a counterfactual consideration: nobody – including the authorities charged with protecting and monitoring a free competitive environment – can tell what developments would ensue if companies were not subjected to antitrust sanctions. We cannot know whether the growth of any market is due to monitoring by antitrust authorities, or entirely unrelated causes. As is the case for Google’s current dominance in search engines, at the time when Microsoft was fined for abusing its dominant market position, in 2004, it held some 90% of the European market for operating systems. As today, the most vocal complaints did come not from consumers, but from Microsoft’s smaller (at the time) competitors. A few years hence, Microsoft was no longer the unchallenged behemoth in the electronics and digital services markets.

Was this the result of the EU Commission’s action, which aimed at curtailing its market share to enable the survival of a greater number of competitors? If this is the case, then it would seem that European regulations did in fact cut Goliath down to size, thus allowing the little Davids’ in the relevant market to grow but, at the same time, that these minnows have since grown to quite respectable proportions. In contrast, if we were to conclude that the European case was not the root cause of Microsoft’s loss of its dominance, we should draw the inference that the remedies imposed by the Commission in Microsoft’s case did not prevent the emergence of new ‘too big’ actors in the digital market.

Another explanation is more plausible. There is good evidence that innovation, not regulation, has led to the emergence of novel ways to deploy the same digital technologies. Undoubtedly, the antitrust authorities’ motives are unimpeachable, but it remains the case that the regulation of competition looks at the markets from a static perspective. Yet companies, like individual products, have a life-cycle: they grow, they reach a peak, they experience a decline, and then they either pass away or consolidate.

The static approach shown in this case can be generalized; for instance, the Digital Single Market proposals suggest intervention in online platforms from preventing certain business practices, as if innovation and dynamic competition were unable to change role and position and size of the companies. The proposals suggest, for example, to forbid exclusive advertising deals and preferential treatment of search results, to applying regulation used in other sectors to digital platform, under the assertion that platforms might allow its owner to restrict access to competitors.

The antitrust sword is also wielded in the fiscal sphere. There is a consistent amount of case-law on fiscal state aid, from the Luxembourg/Amazon case to the Ireland/Apple case, whereby a favourable fiscal treatment is alleged as illegal state aid. This is the case also for enterprises operating in different markets, not just digital companies. But the intrusive opinion of EU institutions regarding the freedom to choose the country of establishment for any given firm is even more debatable in the digital economy, as companies don’t need physical establishment compared to traditional commerce.

In other words, where is the line that separates rational grounds of concern from ideological judgments by the EU institutions in deciding whether a digital company did choose to base itself in a particular country with the exclusive aim to obtain an illegitimate fiscal advantage?

When contemporary economic circumstances allow companies to establish their base without much regard for physical constraints, this is a real dilemma. EU institutions are aware of such a dilemma, and are increasingly convinced that it can be bypassed just by harmonizing the fiscal treatments of the different EU countries. However, choosing the most convenient fiscal regime is the other side of the legitimate fiscal competition among States: in an economy where production is systematically de-materialized and transactions are globalized, the choice regarding where to establish a company is inevitably and legally related to the friendliness of the fiscal and legal context.

Fiscal competition is, at the very least, one side of the European common market that has been predicated – it is worth remembering – on the freedom of establishment and of movement not only for individuals, but also for companies and capitals. These pillars were erected on the belief that they could guarantee the most rational operations of the economic system better than legal and fiscal barriers.

In the end, if advantageous fiscal treatments can be possible, this is because there are worse fiscal treatments. Preventing economic actors to choose which is the best and which is the worst would be both a denial of the classic EU freedoms and a short-sighted political decision. One of the possible effects would be the flight of digital companies to the markets outside the EU, where a highly dynamic economy such as the digital one – estimated at some 7 percent of European GDP – could find a more comfortable setting than the European one.