Stephen King: European champions need the competition

Imagine a world in which the team winning a football league succeeded not through a series of competitive games but, instead, through decisions made by politicians. Tony Blair would presumably choose Newcastle United. David Cameron might opt for Aston Villa. Gordon Brown, the incoming Prime Minister, could favour Raith Rovers.

Left to our politicians, Manchester United, Chelsea, Liverpool, Arsenal and Tottenham Hotspur wouldn't have a cat in hell's chance of becoming champions even though, at the end of the 2006/07 season, these teams made up the top five places in the English Premier League.

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Sometimes, though, politicians like to pick winners even if they don't obviously have the requisite skills. They have a distaste for capitalist competition, recognising that market forces can upset their best-laid plans. You won't often hear politicians referring to caring capitalism, but you will hear them talking about crony capitalism or casino capitalism. When it comes to alliteration, politicians like to preface capitalism only with bad Cs.

The latest opponent of capitalist competition is Nicolas Sarkozy, the newly elected President of France (and fan of Paris Saint-Germain). When he first turned up at the Elysée Palace, some commentators saw him as a French version of Margaret Thatcher, in favour of free markets, competition and "caring" capitalism. Not so. M. Sarkozy has revealed a deep suspicion of capitalism and, as such, is proving to be very much in the French Gaullist tradition.

As the new European Union Treaty was being put to bed on Saturday morning, M. Sarkozy said "the word 'protection' is no longer taboo ... Competition as an ideology, as a dogma, what has it done for Europe?" He added that the time had come for the creation of "European champions". I don't think he had AC Milan in mind.

M. Sarkozy has succeeded in removing the commitment to "free and undistorted" competition from the EU Treaty. It exists within various protocols attached to the treaty but that isn't quite the same thing. In effect, the commitment has been downgraded.

What, though, does M. Sarkozy mean by "European champions"? Arguably, the desire for such champions reflects the need for Europe to boost its competitive credentials. Faced with an increased competitive threat from China, India, Brazil and other emerging markets, many policy makers in Europe feel they have to offer a vigorous political response. The emotional attachment to "champions" needs to be seen in this context.

On closer examination, though, the championship concept says more about posturing than policy. Nowadays, defining a European champion is really quite difficult. Take a fictitious company called, say, Gargantuan plc. Imagine it's one of M. Sarkozy's champions. How might Gargantuan be rigged to represent Europe's "interests"?

It might be forced to invest only in Europe and not elsewhere in the world. It might be required to employ only Europeans. Its shareholders might be limited only to people living in Europe. It might have to source its raw materials only from other European producers. It might be given a monopoly access to European markets at the expense of non-European competition. It might be given subsidies by favourably-disposed European governments.

These possibilities demonstrate how preposterous the idea of a European champion is. Each of my suggestions implies a serious reduction in the level of competition, thereby reducing the incentive for Gargantuan to perform well. For shareholders, profits would be eroded. For consumers, the products on offer would be inferior. For taxpayers, propping up a company of this kind might imply a higher tax burden. This is nationalisation through the back door.

Does anyone in Europe, M. Sarkozy included, really want this? I doubt it. So why do we seem to be heading in this direction? Let me offer some suggestions.

First, the European Union has never offered a united view on the most desirable economic system. Some countries support Anglo-Saxon liberalism. Others, notably Germany, aspire to a social market model. French Gaullists believe in various forms of economic nationalism, suspicious of the "evils" of modern capitalism.

Second, democratically elected politicians quite rightly believe they've been elected for a purpose but all-too-frequently discover their policy wings have been clipped by the market. In the early-1980s, President Mitterrand tried to "buck the market" but totally failed. France had to go through embarrassing exchange rate devaluations and domestic fiscal policy reversals. M.Sarkozy's attitude is a reincarnation of earlier attempts to tame market realities.

Third, protectionism has become more attractive to voters in response to a perceived increase in foreign threats. People celebrated when the Berlin Wall came down but they now often feel vulnerable, fearing the competitive forces unleashed in Eastern Europe, Russia, China and India.

Fourth, European politicians are concerned that their "trophy assets" could fall into the wrong hands. One of the most extraordinary shifts in economic power in recent years has come courtesy of the huge increase in foreign exchange reserves in China, Russia and the Middle East. These countries now have the financial clout to buy up stocks, houses, complete companies - and, of course, football clubs. This creates something of a free market paradox: in a free market, our companies should be for sale, but those who choose to buy may not be committed to free markets.

Fifth, the rise of private equity has increased concerns over corporate governance and the interests of stakeholders. The joint-stock company may be part of a mistrusted capitalist system, but it offers plenty by way of accountability, transparency and legal protection.

So, it's not so much that we need European champions or protectionism. Nor is it obviously the case that competition has failed. Competition works best, though, if everyone plays by the rules. M. Sarkozy's strongest claim is that not everyone does so.

For emphasis, I'll close on the subject of football. Our political leaders shouldn't determine national or European football champions. But neither, arguably, should the Abramovichs, Glazers and Thaksins. Their investments, though, have placed their clubs at the top of the league (or so Manchester City supporters will be hoping). Their financial clout has effectively stifled competition.

For those teams languishing at the bottom of the Premiership or in lower divisions, the message is obvious: if you want to succeed, find yourself a sugar daddy. M. Sarkozy's attitude is not so different. The creation of European champions is anathema to free market competition. But M. Sarkozy thinks we live in a world increasingly like the English Premiership, devoid of free and undistorted competition, and for that reason he wants to be Europe's sugar daddy.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com