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Europe wary of following US in using antitrust to fight inflation

The Biden administration’s embrace of competition policy as a tool to combat soaring inflation has sparked debate in the U.S. and beyond about whether antitrust is an appropriate weapon to help counter the recent surge in consumer prices.

So far, regulators in Europe haven’t followed the U.S.’s lead. But the debate is only heating up as administrations on both sides of the Atlantic seek to ease the pain on households from the sharpest price increases in decades.

Monetary policy is the primary tool for controlling inflation, but with prices in the U.S. surging at the fastest clip in nearly 40 years, President Joe Biden has pulled out all the stops to show his administration is moving on multiple fronts to protect families’ budgets. The inflation rate in the U.S. hit 7 percent in December, the highest since the 1980s.

Soaring energy prices, global supply chain problems and surging demand with the reopening of pandemic-battered economies are uncontested drivers of heightened inflation. The question is whether the increasing power of a handful of companies in different sectors of the economy has also contributed to the spike in overall prices — and if trustbusters should therefore be part of the solution.

Biden signed an executive order last summer to promote competition, and his White House Competition Council is actively pursuing a range of corporate practices that aim to rein in spiraling prices for consumers — from energy to airfares to meat-processing.

“Lack of competition costs the median American family household … $5,000 a year,” Biden said on January 24, citing a New York University study. “My executive order is changing that.”

The executive order is part of a renewed U.S. focus on competition, which includes the appointment of Big Tech critics Lina Khan and Jonathan Kanter as head of the Federal Trade Commission and the Department of Justice’s antitrust division, respectively, and Tim Wu as the president’s adviser on technology and competition policy.

FTC chair Khan told CNBC last month that “an inflationary environment can give cover to companies with market power or monopoly power to exploit that power.” Certain types of mergers and acquisitions can thin out supply chains and lead to price increases, she added. She pointed to M&A activity over past decades as a reason for “brittle” supply chains and cautioned that “the system as a whole might be less resilient” to disruptions such as the coronavirus pandemic, which can lead to higher prices.

The situation is similar in Europe, if arguably less acute. Eurozone inflation topped a record-high 5 percent last month, and its core inflation rate, which strips out volatile factors like energy, is also lower than in the U.S.

While both the U.S. Federal Reserve and the European Central Bank have acknowledged that the inflation surge isn’t as transient as many had predicted, the discourse on competition policy is different in Europe.

The message of the European Commission, which is in charge of antitrust across the EU, is mixed. “While competition enforcement is not as such an anti-inflation tool, the Commission will not hesitate to investigate cases in which price rises might be caused by anticompetitive practices,” the EU executive said in a late January emailed statement.

National regulators in Paris and London, meanwhile, take a stronger line against the idea that competition is a factor.

“The recent rise in inflation is not linked to changes in competitive situations but to the strength of final demand, bottlenecks in global supply chains and pressures on energy prices, which call for other types of action,” the French competition authority, whose new boss is former ECB official Benoît Coeuré, said on February 3. That sentiment is echoed by the U.K. Competition and Markets Authority: “Competition policy makes companies compete with one another to keep prices low for consumers but, in itself, is not a tool or remedy for intervening to address soaring inflation,” the CMA said on February 3.

Economic evidence

A big issue is the idea of using a traditionally microeconomic tool — antitrust enforcement — to combat the macroeconomic problem of inflation. Inflation is typically the study of macroeconomists focused on monetary policy at the U.S. Fed or the ECB, while antitrust belongs to the realm of the Federal Trade Commission and the Justice Department in the U.S. and the European Commission’s competition department in Brussels.

One economist who has sought to bridge the gap between macro and micro in the past years is Jan De Loecker, who has looked into soaring profit margins for companies in increasingly concentrated sectors. The Leuven University scholar said his research, published with Jan Eeckhout and Gabriel Unger, showed that “a strong increase in profits and concentration has put competition policy back in focus when it comes to macroeconomic indicators such as wages and productivity.”

But escalating market power doesn’t always immediately translate into inflation, he explains. “A profit margin or a ‘mark-up’ is a ratio between a price and a cost. So when your market power and profit increase, that may perfectly happen without a price increase,” De Loecker explained. Companies like Amazon or Google, for instance, have been able to reduce their costs due to improved technology or because increases in scale allowed efficiency gains or negotiating better conditions from suppliers.

But the pandemic brought a perfect storm. 

Uncertainty about the restart of the economy from the coronavirus shock, short-term capacity constraints and the energy crisis impacted an economy with large concentrations of market power in different sectors, he said. “All of these elements combined will lead to inflation,” De Loecker said. “We don’t know the weight of each of these factors, but we do know it is plausible that they are all connected and mutually reinforcing.”

As he sees it, antitrust traditionally has not been in the mix of responses to inflation, which is usually considered to be a short-term phenomenon. By contrast, an intervention in something like an ownership structure is seen as a longer-term fix. However, recent evidence shows that concentrations of market power play a role in generating inflation, he said. Some examples he cited were energy prices in Belgium and, more specifically, diapers.

A lot of skepticism remains, however.

“The emerging claim that antitrust can combat inflation reflects ‘science denial’,” former U.S. Treasury Secretary Larry Summers said on Twitter. The Washington Post’s editorial board similarly called the message from the White House “bizarre.”

“Lack of competition explains high prices but not a sudden surge in inflation,” said Paul De Grauwe, a professor in political economy at the London School of Economics.

The European Commission follows this mainstream analysis, but also said in its late January statement that “competition policy can contribute to fighting price increases, to the extent that they are due to anticompetitive conduct.” A recent example was the surge in natural-gas prices that began last year, which compelled Brussels in October to start gathering evidence to see whether gas suppliers, including Russia’s Gazprom, were manipulating the market during the ongoing energy price emergency.

For her part, Competition Commissioner Margrethe Vestager often stresses that her interventions will keep prices down for the customers of the specific firms investigated. That narrative certainly didn’t fade as price increases accelerated over the past months. When blocking a deal between South Korean shipbuilders this month, Vestager warned that the merger “would have created a dominant position in the market for the construction of large LNG carriers.”

“This would have led to less choice, higher prices and ultimately less innovation for European customers,” she added.

But the EU executive remains reluctant to follow the U.S. example of proactively pursuing those cases that could most contribute to tackling inflation. 

Container shipping, which has seen prices soar by over 700 percent in the past two years, is a prime example. The U.S. Federal Maritime Commission in August followed the White House’s advice to investigate excessive fees charged by a handful of ocean shipping carriers. Despite repeated calls from companies in the maritime logistics supply chain — and a U.N. report that the rate increases could drive up consumer prices by 1.5 percent over the next year — the European Commission has yet to open an investigation.

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