When Thyssenkrupp and Tata Steel formally agreed a merger in 2018, one key rationale was the defence of both businesses against a flood of cheap steel from China. But the European Commission, worried about the impact on consumers and industry, blocked the combination the following year.

Six years later, Tata is in the process of closing its last integrated UK steelworks. Thyssenkrupp, whose shares have fallen by two-thirds, has announced plans to axe 11,000 out of 27,000 jobs across its steel business.

Although the failed merger is far from the only reason for their current troubles — worldwide overcapacity, flagging demand and high energy costs are the main culprits — serious debate has begun in Brussels about how EU competition policy can better support industrial policy.

“European merger control must be reformed. We must allow European champions,” said Friedrich Merz, the centre-right’s candidate for German chancellor, in remarks to journalists over the weekend.

He cited past decisions to block combinations involving Siemens and Alstom and the German and British stock markets, adding that he considered these decisions “legally probably correct, but politically incorrect”.

Mario Draghi’s landmark report on EU competitiveness last year also called on the authorities to facilitate consolidation as a way of promoting Europe’s innovation drive. Although he stopped short of calling for a complete overhaul, the former ECB president argued that the continent was facing an “existential challenge” if it wanted to remain a global economic superpower: “We claim to favour innovation, but we continue to add regulatory burdens on to European companies.”

A change of personnel in Brussels is helping fuel the debate. Margrethe Vestager, a Danish liberal who served two terms as competition commissioner with a clear agenda to protect European consumers, is being replaced by Teresa Ribera, a Spanish socialist charged with examining whether to dismantle some of this legacy and make changes “fit for the new realities” of global competition.

Against a backdrop of persistently weak economic growth, some are urging a complete rethink in the way the bloc enables its corporate champions to grow larger in order for them to thrive.

“The geopolitics are quite different this time,” says Damien Geradin, a Brussels-based lawyer who specialises in competition law. “We see the US becoming aggressive, the Chinese also. The situation in Europe is not optimal. Growth has stalled.”

Over the 10 years to 2023, China’s GDP grew by an average of 5.96 per cent a year, according to World Bank Data. The US grew 2.46 per cent but the EU could only manage 1.73 per cent — and many are pointing the finger at its regulatory burden.

A similar debate is under way in the UK, an EU member when the Tata/Thyssen proposal was blocked and now grappling with similar challenges — weak growth, declining competitiveness and subscale companies — outside the bloc.

Regulators in Brussels are for the first time in a decade contemplating allowing large EU-based companies to gain scale through mergers, so they can cut costs and better compete with international rivals — even if such combinations could reduce competition or increase costs for consumers.

Cecilia Bonefeld-Dahl, director-general of DigitalEurope, which represents the continent’s technology sector, says that while Europe has world-class companies in connectivity, banking, manufacturing and healthcare technology, it has been “too focused on regulating instead of promoting them”.

“We won’t create the next Apple or Nvidia through the Data Act or the AI Act,” she adds.

Investors, national governments, regulators in other jurisdictions and executives across industries ranging from AI to steel, will be watching for any signs of changes in policy that could signal the approval of mergers that might have been blocked by the previous regime.

But some in Brussels are resisting calls to relax rules to allow more big mergers and pushing back against the notion that mergers are needed to promote investments and innovation.

They point to the fact that the number of mergers the EC has cleared far exceeds those it has blocked, and the many significant cross-border deals that have been waved through.

“Will the political willingness to go big outweigh the institutional need to protect consumers?” asks one seasoned EU observer. “Do we have companies in Europe that can gain the scale needed to help the bloc gain economic supremacy?”

Brussels began regulating larger mergers in 1990, at the dawn of the EU’s single market.

Broadly speaking, the EU considers upwards of 300 transactions each year, based on the size of the parties’ revenues and the value of those sales generated in the bloc. Combinations below the thresholds are left to national competition regulators.

The first combination that it blocked was the 1991 purchase of De Havilland, a Boeing-owned manufacturer of short-haul aircraft, by France’s Aérospatiale and Alenia of Italy, on the grounds that it would create a duopoly in such planes.

LSEG/Deutsche Börse (2017)

In 2016 the operators of the London and Frankfurt stock exchanges made their third attempt to combine. LSEG and Deutsche Börse termed it an “industry-defining merger” that would “make Capital Markets Union in Europe a reality”. The commission saw it differently, blocking the deal as it “would have created a de facto monopoly in the markets for clearing fixed income instruments”. Since then, LSEG’s shares have more than tripled and Deutsche Börse has more than doubled — but both stock exchanges have seen current and new listings drift towards the US, prompting widespread fears about the health of European capital markets.

Ironically, both Aérospatiale and Bombardier, the Canadian company that eventually acquired De Havilland, were later subsumed into Airbus — a genuine European industrial champion and one half of a global civil aviation duopoly.

The EU has issued outright bans on relatively few mergers since then and some of those were overturned on appeal. Some companies have withdrawn merger proposals voluntarily, after failing to agree remedies with the commission.

Merger rules have rarely changed since they were drafted in 1989 and senior officials have recently warned that changes could risk entrenching the position of powerful companies even further — to the detriment of smaller companies and consumers. Many EU states share the commission’s concerns.

But key countries are applying pressure on the EU to be more lenient. Last May, France and Germany called for regulators to enable the creation of larger companies, particularly in the telecoms and airline industries.

“We need to review the current European competition rules and practices to check whether they are still appropriate to contribute to achieving this goal and allow for establishing consortiums and consolidation in key sectors in order to strengthen European resilience,” their joint paper said.

It is not the first time that Paris and Berlin have called for reform. They did so in 2019, after the commission vetoed a proposal to combine the train-making divisions of Siemens and Alstom in 2019, issuing a manifesto for a 21st-century industrial policy.

“The choice is simple when it comes to industrial policy: unite our forces or allow our industrial base and capacity to gradually disappear,” the manifesto stated, pointing out that only five of the top 40 companies in the world at the time were European.

The EU’s first hurdle for any meaningful reforms of the merger rules is the commission itself. Its president, Ursula von der Leyen, has asked incoming competition commissioner Ribera to “modernise competition policy” by giving more importance to aspects that may have been neglected in previous analysis — including considerations of future innovation and defence.

Some have interpreted this as a green light for European companies to grow via mergers. “It will be a matter of degree,” predicts another long-serving EU official. “You will see the EU being a bit more generous in how we assess mergers. A Siemens/Alstom deal would have better chances of being waved through today.”

But Agustín Reyna, director-general of the European consumer organisation BEUC, says the notion of European champions is “schizophrenic” and describes the notion that allowing more consolidation will make Europe more competitive as “a fallacy”.

“What’s happening instead is that incumbent operators are trying to consolidate their market power to be able to extract more rent from consumers,” Reyna adds.

Tensions within the commission are also likely. “There will be internal resistance,” says Alec Burnside, senior counsel at law firm Dechert. “The question is whether the political appetite for any meaningful reform is strong enough.”

Guillaume Loriot, deputy director-general of mergers in the commission’s competition unit, said in a recent speech that “some voices seem to hope for merger control rules to be more lenient, in the name of the ‘scaling up’ imperative”.

“It is good to remind everyone that merger control is not about scale as such,” he continued. “The point of merger control is addressing excessive market power, the increase of market power. Competition enforcement, for me, is not part of the issue or the problem, but rather is an integral part of the solution.”

Some offer a more nuanced interpretation of Ribera’s mandate. “Ultimately regulators are thinking about competition rules to advance the EU’s standing in the world,” says Martijn Snoep, the head of the Dutch competition watchdog. “That doesn’t mean that everything has to change.”

There could also be shifts in other areas of competition policy aimed at allowing small players in Europe to grow, rather than being snapped up by US rivals or listing on US exchanges.

Following von der Leyen instructions to Ribera, EU officials plan to expand their powers to block “killer acquisitions” that pose a threat in particular to European start-ups. People briefed on the plans say officials are considering new thresholds on the value of deals so as to catch mergers that currently fall outside their jurisdiction.

Siemens/Alstom (2019)

Merging the train-making divisions of the German and French engineering conglomerates was meant to create a European champion to rival China’s CRRC. But the commission ruled the merger would harm competition in signalling equipment and very high-speed trains and blocked it. France’s finance minister at the time, Bruno Le Maire, described the decision as “a mistake” and urged the commission to “look at reality”. However, revenues in Siemens’ mobility division last year were 28 per cent higher than in 2019, while at Alstom they have more than doubled, helped by its acquisition of Bombardier Transportation in the UK.

“This goes hand in hand with the notion that Brussels will now be backing EU champions,” says one person familiar with the EU’s thinking, adding that Brussels wants to reduce the risks of large foreign companies “scooping” smaller rivals in Europe to eliminate future competitors.

There are limits on even the most powerful regulators, however. The commission’s decisions can be appealed in the courts in Luxembourg, which have on occasion overturned its rulings.

“There is a margin of political manoeuvre because the law contains flexible criteria and policies can change,” says Sir Jonathan Faull, a former senior official at the EU’s competition division and now chair of European public affairs at Brunswick Group.

“But there are limits set by the rules and 70 years of case law.”

The telecoms sector offers a case study in the challenges involving competition regulation.

Mobile and broadband infrastructure is a key asset upon which the technology sector in particular relies, yet the capital costs of providing it are substantial and take years to recoup.

Reformers such as Draghi argue that Europe needs bigger groups with more financial firepower if it is to compete in future, but the commission blocked the 2016 acquisition of O2 by CK Hutchison while TeliaSonera’s attempt to merge its Danish unit with that of Telenor was abandoned in 2015 after objections from Brussels.

In order to get around competition concerns, he has proposed defining telecoms markets at the EU rather than national level, and increasing the weight of innovation and investment commitments required for clearing mergers.

Treating telecoms as a single European market would make mergers more acceptable to regulators by increasing cross-border competition and reducing monopoly risks, Draghi argues.

But Loriot, of the competition unit, told another conference last year that enforcers cannot “pretend that the [telecoms] market is European when it is not, just because we should wish it to be. We are not in Wonderland.”

Last month, the UK’s Competition and Markets Authority cleared the £16.5bn merger of Vodafone’s domestic business with that of CK Hutchison’s Three UK, to create the UK’s largest mobile operator.

Like the EU and peers elsewhere in Europe, the CMA had in the past rejected transactions in the sector that reduce four players to three, and had warned that this combination could lead to higher bills for customers. But it eventually assented after the companies agreed to provide guarantees for customers and invest billions of pounds rolling out a 5G network across the UK.

Sector analysts say that the clearance signalled the willingness of watchdogs to approve deals contingent on investment pledges, though it is still not clear whether the new EU competition regime will be ready to clear mergers on investment plans if they still risk increasing costs for consumers.

But sceptics say transactions such as the combination of carmakers Fiat Chrysler and PSA to form Stellantis, the takeover of steelmaker Arcelor by India’s Mittal Steel, and various airline mergers show the commission has supported the emergence of bigger, stronger companies.

They also note that for all the controversy, Siemens and Alstom are still global players in train-building six years after their proposed merger was blocked.

“Competition policy can be useful at the margins,” says Geradin, the competition lawyer. “But it won’t change whether big companies can compete at a global level. That’s a matter of fundamentals.” Even Draghi acknowledges that it is not the only, or even the main reason for the widening gap between Europe and the US.

Other factors include lower spending on research and development — EU companies spent €270bn less than their American rivals on R&D in 2021, he said in his report — and under-developed capital markets.

“The problem is not that Europe lacks ideas or ambition,” he wrote. “We are failing to translate innovation into commercialisation, and innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.

“As a result, many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market.”

Bonefeld-Dahl of DigitalEurope insists that competition rules play a major part. “We need to ensure companies here can merge more easily to be able to grow and compete on the world’s stage,” she says.

“Tech is global, all sectors are becoming digital — but we are still thinking Europe is a market.”