I did not get to this earlier. Michael Arrington of TechCrunch fame argues based on the recent fines for Microsoft and the German and French government support for two search engines show that

“the EU is not willing to let free markets determine winners and losers. The winners must be home grown, at any cost. And U.S. companies that have too much success in Europe seem to face a bleak choice – massive fines or government-backed competitors.” (Link)

Mike is making an interesting point here, but I think he got that wrong. I actually think he got that as wrong as you can get it. But before putting my response let me just quickly note, that I do not question Mike’s right to have this opinion. Some of the commenters on the post believe that he should not comment on politics and some others argue that this is a typical American view point, etc. But I think Mike as everyone of course is entitled to comment on politics and being American it is only natural that he will take an American view point. Nevertheless let me argue why I think he got this specific issue (or better issues) wrong.

The first subject is a quite hefty fine for Microsoft for not playing according European market rules. Now Michael is making two judgements about this case. His first judgement is that Europe is not a free Market. The second is that this is a specific reaction to an American company and that it would have been different in the case of a European company. Underlying there might be the thirdly the fear that the EU is taking away money from the Americans. Let me get to this fear first, because I guess it should be out of the way, before continuing with my argument. Microsoft is a global company, which is earning a lot of money on the European market. Microsoft is an example of globalisation at its best, an American company offering products and services locally in local languages and partially adapted to local necessities. However working globally also means that you need to abide to the local rules. This is a normal result of a global company. If a European company is selling products in the States it is bound to American consumer protection laws, which in their extreme consequences are often considered as weird in Europe. However I strongly believe that an American consumer should have the same rights when buying a car, no matter if that car is German or Japanese – or American for that matter. The same however applies to Microsoft on the European market. Because Europe has stricter antitrust regulations Microsoft must act differently in Europe than it does in the US. If Microsoft does not play by the rules the responsible bodies can fine Microsoft. This however does not mean that the Europeans take away money from the US. If it would not be profitable for Microsoft to do business under European legislation, Microsoft would simply not be present in the European market. A fine of the European Union is simply reducing Microsoft’s profit on the European market. It seems quite probable that Microsoft will simply add this to the cost of its products in Europe. In the end it is European customers who pay money to the European Union. However by changing the price of the product possibly the Union succeeds in levelling the market and therefore solve the antitrust problem caused by the monopoly situation.

The second argument is that this fine would have looked differently if Microsoft would be a European company. I can completely understand where this comes from. Obviously Mike is not very interested in European antitrust activities when they solely affect European companies which are active only on the European market. And I completely understand that. There is no reason for him to be interested in this. I guess most Europeans would not know. However it is important to understand that the European Commissioner for Competition is mostly active within Europe – often against strong lobbies and the plans of the member states. One recent case is the electricity market in Germany. During privatisation of the electricity market the regulatory institutions put in place were much weaker than the ones for telecommunication. In result the German electricity network is today split between three companies which artificially prevent small electricity companies to use these networks . The Commission is doing its best to split the companies owning the networks and the power plants into two. The Commission is actually doing this against the wish of the German chancellor, because it believes it is in the interest of German consumers and companies who would like to enter the German electricity market. Other examples are the Commissions activities regarding the unification of the rights on music on a European level. Contrary to what you usually hear in the blogosphere, it is more the labels than Apple which is pressured here. A third example is the legislation on roaming costs for mobile phones in Europe. I will not get into the details of the last two issues, but it is in both cases mostly European companies which are affected. In the case of the German electricity market it is two German and one Scandinavian company. I believe this shows clearly that European antitrust legislation is simply stricter than the American counterpart and Microsoft is not a victim because it is an American company, but because it -as many other international and European companies- did not play by the European rules.

The third point of the Microsoft argument is that this shows that Europe is not a free market. Well, I am not an economist and I am therefore not as qualified to argue this, as other people might be. However I guess here the argument is slightly extreme. Obviously monopolies damage the general economy. I do not think there is a debate about that. However there is obviously a debate what a monopoly is in the specific case. Or to say it differently, it is debatable how strictly antitrust regulations should be enforced. The States have a rather lax enforcement of antitrust laws. Most European states had as well. The European Union however has a rather strict application. On the other hand however the European Union usually talks to the companies in question and looks for an agreement both sides can support. Microsoft was not willing to compromise with the Union and therefore the company was fined. As a lawyer Mike should know that law is not an absolute thing. To find the optimal application and interpretation is always a compromise between different opinions prevalent in a society. And I doubt that he really wants to say, that the American interpretation of what a monopoly is, is the only right way to do it.

The second area Mike is bringing up is financial support for key industries. The European Union is allowing France and Germany to support two search start-ups or as Mike calls them “sure to fail Google-Killers”. Here again the issue is that he believes that this investment would be different if Google would be a European company and that it is proof that Europe is not a free market. In this case I at least partially agree. If Google would be a European company, it is unlikely that France and Germany would invest money in search technologies in the way they do. However it is very likely that this money would nevertheless be invested in tech development. I want to look at the the points together. Mike is actually arguing here that state subsidies are wrong in general. Funnily Mike is also giving the impression that there is no state subsidies in the States. He does not say that – but when reading his text, that would be the only case in which it would make sense. And that is simply wrong. Of course the States also know state subsidies. Besides indirect state subsidies via universities, the military and the space agencies, Europe and the States know direct subsidies either in certain sectors or into certain companies. The most important area for subsidies in Europe is farming. Compared to that, subsidies for research and future technology are meagre. While one can easily argue that subsidies for farming are inefficient and maybe even outright evil, because they damage the economies in developing countries, investing in future technologies is a totally different issue. Subsidies have been questioned by the Washington consensus, but the Asian tiger states have proven that an intelligent policy with subsidies can result in positive economic growth. The Korean car industry for example would not exist today, if there would not have been a policy of customs and subsidies in the beginning. Today Korea getd much more back from its car industry than it originally invested in it. A no customs, no subsidies policy is interesting for those countries which have established themselves in a market as first movers. Being the first mover is commendable, but asking other countries to stay out of these industries is slightly unrealistic. Is the European investment in Quaero and Theseus a good investment? Well, Mike is able to judge that better than I could. And I would agree that investment in specific companies is often less successful than investment in certain sectors. But his judgement that this would prove any further conclusions is wrong. If he could show me a single successful country, which has no state subsidies, we could have that discussion again. But if Europe is not a free economy because of state subsidies, the States are neither.

Mike concludes his article:

“It’s absurd. And it’s no wonder that many of the best European entrepreneurs keep coming to the U.S. to start companies.”

And that is the last part of the article I disagree with. Yes, Mike is right, many of the best European entrepreneurs keep going to the U.S. But why do they do so? When looking which entrepreneurs go to the States, we can see that most of them are Software and Internet entrepreneurs. Entrepreneurs which develop alternative energies, machines, bio technology, services, etc. are quite happy to stay in Europe. Therefore the reason that so many web entrepreneurs go to the States can not be caused by general market structures. The reason must be connected to the specifics of the online sector. What might these specifics be? American funding bodies have understood the web sector much better than their European counterparts. The Silicon Valley offers a climate in which web entrepreneurs can thrive. It offers the networks to promote a new company. And I am sure there is another dozen of reasons. But the reasons why web entrepreneurs go to the States is probably the same as the reasons why many American web entrepreneurs go to the Silicon Valley.

But all of that is of course only my European point of view on the issue. Feel free to tell me if and why you disagree.