20 Apr 2020 Articles

The Implications of COVID-19 for Competition Policy and Economic Growth

2 minute read


In response to the COVID-19 crisis, the European Commission (“EC”) has signaled that it would let Member States cushion the economic effects by large infusions of public aid. In the past month, the EC has cleared all State aid related to COVID-19 in less than 48 hours. This easing of panic deserves praise - at its core is a concern for the protection of people’s jobs.

Yet, Jorge Padilla* and Nicolas Petit** highlight that recessions often have a pro-competitive “cleansing” effect. They can facilitate the exit of inefficient “zombie” firms that crowd out growth opportunities for more efficient competitors, and delay the diffusion of technological innovation. A case might thus be made that the current recession is an opportunity for growth and regeneration of the EU economy, long trapped in a cycle of weak productivity, low economic dynamism, and a conspicuous absence of “superstar” firm creation.

What counts from a social welfare perspective is not the number of firms that remain in the market, but the number of efficient firms that compete effectively to meet demand. An optimal competition policy should reduce barriers to the exit of inefficient firms that prevent industry reorganization. This might justify a more proscriptive approach towards State aid and a more permissive policy towards mergers.

The EC’s move to clear State aid under the temporary framework and, in sharp contrast, to suspend merger filings is problematic. A horizontal State aid policy could lead to companies with pre-existing problems unrelated to the current crisis becoming entrenched, and the increasing skepticism about the procompetitive effects of mergers may deter sector restructuring.

Economics can help allay these concerns. First, adopting a buyer-specific merger policy for competitive assessment would mean inefficient buyers could be subject to stricter scrutiny on a case by case basis. Second, merger and State aid approval could be conditional on demonstrable reorganizational and managerial efficiencies. In this way, competition agencies could promote the allocation of resources towards firms’ policies that raise productivity, quality, and innovation.

READ THE BRIEFING (Published by Concurrences)

* Senior Managing Director, Compass Lexecon, Europe.
** Professor and Chair of Competition Law, European University Institute, Invited Professor, College of Europe.

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