Politically--not legally--logical decision: EU competition commissioner Margrethe Vestager to appeal humiliating defeat in Apple-Ireland "state aid" case

Of the three key decisions that were scheduled for today, the least important one (a Nokia v. Daimler patent infringement ruling in Munich) has been pushed back on very short notice by more than a month, and the second one will be announced any moment now (and probably will have been announced by the time you read this, unless you're an early bird catching a premature worm):

According to the Financial Times, which is the European Commission's favorite media outlet when it comes to leaking competition-related (and many other types of) decisions, EU competition commissioner Margrethe Vestager has persuaded enough of the other commissioners that the Directorate-General for Competition (DG COMP) can appeal Apple and Ireland's victory in the EU General Court, which held that the Commission's "state aid" decision alleging favorable tax treatment of Apple by Ireland was baseless. The final decision will be made by the Court of Justice of the EU (CJEU), which is based in Luxembourg like the EU General Court (which was previously called Court of First Instance) and focuses exclusively on questions of law, not fact--which is a huge problem for the Commission given that the factual findings didn't support its decision in the first place.

This blog has been--and obviously has no reason not to continue to be--critical of the Commission's 13-billion euro decision (by now there's even another billion and a half in play, it appears), which was deficient, self-contradictory, and hard to reconcile with the Commission's acceptance of special tax rules in other parts of Europe that do look like state aid at first sight.

25 years ago, I actually recommended to Blizzard Entertainment (now part of Activision-Blizzard) to set up an Irish subsidiary to benefit from the low corporate tax rate there that was available to foreign investors meeting certain requirements. I had previously met officials of the Irish Development Agency at Software Publishers Association (SPA) Europe conferences, and I wanted the best for my client. But it's not the best for Europe. While I'm in favor of fair tax competition, what Ireland has been doing for a long time is just to take advantage of the EU's fundamental flaws.

The EU is a failing experiment of a "supranational" (neither an international organization like the UN, where you need unanimity for all decisions and member countries retain full sovereignty, nor a single nation state) body and the idea of "ever closer (and irreversible) integration." A few U.S. tech giants now have a market capitalization in excess of all publicly-traded companies from all industries in all European countries. Tesla, which just turned 17, is more than twice as valuable as the entire German automotive industry. The Digital Age belongs to America and parts of Asia, and Europe is the continent of losers that is more concerned with its history and diversity, and with taking care of poor neighbors, than its own future. But while the EU fails most of its citizens, some small countries like Ireland and Luxembourg have managed to take advantage of the EU's systemic deficiencies, at the expense of all others. Ireland can offer its low corporate tax rate only because it markets its access to the EU's Single Market, which is about 100 times as large as Ireland's domestic market.

The problem that the founders of the EU and its predecessors faced was that the benefits of integration (stronger together) were as clear as the impossibility--in the past and even today--of getting the governments of its member states to give up all sovereignty, and to convince the populations of particularly southern countries that the continent as a whole would have to accept one set of laws--and a common language, for which English would have been the obvious choice--while still retaining some local traditions, but practically demoting national languages to regional dialects. If the EU had done that, and if the focus had been on building an economy that can compete with places in the world where people simply work a lot harder than in most of Europe, then European digital startups could address a market with half a billion inhabitants, a single language, a single set of laws (even EU directives are not a substitute for a single jurisdiction), and make it big. Instead, the EU is going down the tubes, economically speaking.

It's telling that some of Europe's most affluent countries like Switzerland and Norway aren't EU member states, and with the UK the European country with arguably the best education system has already left.

Instead of realizing and addressing those structural shortcomings, the EU Commission changed direction in a different way over the course of the 2010s: having given up on fair competition, and being unable to cure its own diseases (by the way, the EU has also failed completely to make anything positive happen with respect to the COVID-19 pandemic; actually, open borders made everything worse), the EC opted for protectionism.

That protectionism is reflected by the EU Commission's unwillingness to require Nokia to live up to its FRAND licensing obligations vis-à-vis automotive suppliers, and its new plans for a Digital Services Act designed to give the EU Commission maximum leverage over global tech giants.

Mrs. Vestager has clearly turned a blind eye to antitrust violations by European companies, with only a few token investigations meant to create the perception of a balanced approach to enforcement, while going after each and every U.S. company, no matter how absurd the theory might be.

On the subject of absurdity, the Apple-Ireland "state aid" case was a transparent attempt to scapegoat a successful company that was on the verge of bankruptcy in the 1990s and went on to become the most valuable corporation in the history of the world, without needing any oil reserves to get there. It was a smear campaign, styled as an antitrust decision.

Not only in terms of the amount at stake, but also the extreme contortion of the law and the total absence of facts that would have underpinned those theories, Mrs. Vestager's Apple-Ireland decision has been the most ridiculous Commission ruling to date. The judges of the EU General Court realized this, and tossed it in its entirety. The Commission decision even contained two fallbacks: a Plan B, where the relevant amounts of money would have been approximately 10% of Plan A, and a totally unspecified Plan C. None of the three plans worked out and the appeals court overturned the whole thing.

In order to side with the Commission, the top EU court would have to engage in the most massive miscarriage of justice in its history, and it's not like all of its decisions had been uncontroversial. The Commission's only chance is for that to happen. It's not the kind of appeal that is reasonably likely to succeed. It's a long shot, and the only way for the Commission to prevail would be for the CJEU to place politics above the law just like the Commission did when it decided to bring this appeal.

For Mrs. Vestager personally, but also for the Commission as a whole, this is worth trying even if the chances are extremely slim. It's going to take a couple of years, and by then Mrs. Vestager's going to be nearing the end of her second term as competition commissioner. The embarrassment is going to be even greater then in all likelihood, but later is better than sooner in this case--for the commissioner, for the Commission, not for Europe, which would have a greater benefit from the Commission focusing on real issues, of which there are many, some of which I just mentioned, such as Nokia's abuse of standard-essential patents to the detriment of Europe's automotive industry and IoT startups.

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Transatlantic trade war must be blamed on dysfunctional, self-serving, protectionist EU -- not on President Trump

[Update] You can't make this up: the EU's digital tax plans are just being presented and explained at the EU Commission's daily press briefing by commissioner Pierre Moscovici, "[p]reviously a member of the Trotskyist group the Revolutionary Communist League" according to Wikipedia... [/Update]

This is a broader follow-up to an October 2017 post, "The EU's definitive defeat: digital tax plans and a declaration of surrender to Silicon Valley."

Today the European Commission will propose, or by the time you read this, has proposed, a new digital tax of 3% on large digital companies' revenues in the Single Market. Google and Facebook are going to be affected, but they have higher margins than companies like Amazon, which could be hit really hard depending on what exactly the EU will decide in the end, if and when its member states reach a unanimous agreement. Some smaller countries such as Ireland and Luxembourg have a strong interest in the status quo. Theoretically, they could veto any decision. However, they would not be able to prevent larger countries from imposing a digital tax on their own, which is why some horse-trading might ultimately happen.

In order to understand transatlantic dynamics, it's key not to define the term "trade war" too narrowly. The narrowest meaning of the word would relate to import duties. A slightly less narrow term furthermore includes regulations, of which the EU notoriously has many, and many of which were created by the EU at the behest of European industry bodies seeking to erect practical barriers to entry for foreign--in many cases American--businesses. Typically, intellectual property rules are considered important regulatory tools with trade implications: weak protection can favor local pirates, strong protection can shield local patentees from competing on the merits of their products, or at least give them unfair leverage. And there's the intentional devaluation of a currency. Subsidies, too (thinking of Airbus, for instance). But even all of that is still not the whole picture. Let's not forget about antitrust enforcement and--not only today--taxes.

We're not merely on the verge of a transatlantic trade war. It's already in full swing, and the EU is pushing the escalation button. The Trump Administration has concluded that enough is enough, but it didn't fire the first shot. Before any new U.S. import tariffs may take effect, the EU has drawn first blood, and today's digital tax plans are part of that.

Most EU citizens, to the extent they're even interested in trade policy, are completely misguided, which is mostly the fault of a mendacious EU, dishonest politicians in EU member states, and largely incompetent and unbalanced reporting by mainstream media in the largest EU member states on the continent (to exclude the UK for sure).

Tariffs

As a result of fake news, the average European, even the average European with an interest in these issues, simply doesn't know some simple facts, and even some reporting in the U.S. appears unbalanced because it's driven by a desire for bashing President Trump. Just three eye-opening facts that Germany's most renowned economist, Professor Hans-Werner Sinn, mentioned in a TV talk show this week, where he also criticized German media for not mentioning such key facts:

• Tariffs are the EU's primary revenue source. Even the European Commission's website lists "mainly customs duties on imports from outside the EU" as its "traditional own resources" before anything else. That's why the Brussels bEUrocracy stands to gain from a trade war.

• While U.S. customs duties on foreign cars (except for some niche categories) amount to only 2.5%, the EU charges 10% on any vehicle imported from outside the bloc.

• EU import duties on meat are so high that European consumers have to pay prices that are roughly 20% higher than, for an example, in the United States.

The euro

The euro currency is simply the biggest financial crime committed in history against the citizens of any territory. Economists had warned early on that it would be completely irresponsible to create a common currency for disparate countries that have different economic and fiscal policies, including among other things widely varying attitudes toward public debt and the extent to which government should run the economy. The European Central Bank, which I usually just call the "European Criminal Bank", is the only lending system in the world where the debtors can set their preferred interest rate and determine the amounts made available to them. That's because each country, regardless of the size of its population or economy or of its contributions to that fundamentally flawed system, has one vote. In my observation, the one-vote-per-member-state system is a typical characteristic of many corrupt organizations, including major international sports bodies or the European Patent Office. It turns majority building into a race for the bottom, with sports bodies and the EPO finding it easier to buy votes from small, poor countries, and in the ECB's case, the problem is that Europe's uncompetitive south (which is not going to become competitive again anytime soon) simply runs the ECB (which wouldn't change even if the ECB had a president from a northern country since the president can't decide anything against the council).

Not only is the euro system unique because no other lending system would turn over all key decisions to debtors but this system has also managed to be bad for the citizens of all of its member states except for a few small "leeches" such as Luxembourg. The ECB is a redistributive system, and normally those systems are zero-sum games: what some give, others take. Not so with the euro: everyone (except for those few small leeches) loses, just in different ways and for different reasons. Germany, a country that is too much focused on the darkest 12 years of its history to defend the interests of its citizens and has less balanced and less competent mainstream media than even some far smaller neighbor countries with the same language, has practically assumed liabilities to the tune of two trillion euros (roughly as much as Germany's entire public debt as it is currently in the books) for those uncompetitive Mediterranean countries. A German citizen who would put 50,000 euros in the bank under today's conditions, with the ECB (because of lenders calling the shots) artifically keeping interest rates down, but inflation being significant (not high, but still), would lose the purchasing-power equivalent of a small Volkswagen car over the course of 20 years. Normally, some other countries' citizens would have to be the beneficiaries. But apart from the "leeches," no one is benefitting. In Italy, that completely overindebted country in which organized crime has greater revenues than any legitimate company, industrial production is still 20% lower than it was 10 years ago. In Greece, wages are about 3 to 4 times as high as in two non-eurozone neighbor countries (Bulgaria, Turkey) that are actually in comparable situations (relating to worker productivity etc.) apart from the euro. As a result, Greece has become a huge importer of olive oil because it has become too expensive to make that product in Greece itself.

The trade war implication of the euro is simply that German exporters don't have to compete fairly: their currency would be far more valuable if Germany didn't have a common currency with some large uncompetitive economies. Currency exchange rates play a role. I remember, from decades ago, that advertisement in the U.S. which said that for the price of one Mercedes you could afford two Cadillacs plus a driver. That was long before the euro. So, simply by being a member of the eurozone, Germany is nowadays engaging in currency devaluation. It still doesn't benefit German citizens since those large corporations don't pay a lot of taxes, their shareholders alerady are or can at any point leave for foreign countries, and their executives can and will leave the country whenever it's beneficial.

President Trump often points to Germany's huge trade surplus as a problem. He does have a point. The way I view it, a significant part of those exports is just due to the euro system: first, the currency devaluation effect I just mentioned, and second (but that's not of concern to the U.S.), Germany inflates its exports by lending money (through the ECB) to countries that couldn't afford that many luxury cars and similar goods if they had to produce the necessary income first or if they at least had to borrow money in an undistorted market.

Intellectual property enforcement

With respect to IP, the U.S. is more concerned about China than the EU. But one should keep an eye on IP in the context of transatlantic trade:

• The European Commission's guidelines on standard-essential patents (SEPs) are, fundamentally, a good thing. But there was a lot of lobbying pressure from old European companies increasingly reliant on patent license fees.

• Whenever the Unitary Patent Court (UPC) will be ready, Europe will become a paradise for patent trolls and the likes of Nokia and Ericsson.

• There are constant attempts to favor open-source software over other licensing models. That can benefit U.S. companies such as Red Hat, but it does have negative effects on European opportunities for such companies as Microsoft.

• The copyright picture is mixed. In some ways, European copyright enforcement rules overshoot, but the scope of copyrightability appears broader in the U.S. than in Europe.

Competition enforcement

Apart from cases (such as Qualcomm) in which the EU takes positions consistent with those found in other jurisdictions, its competition enforcement activity has increasingly, especially under competition commissioner Margrethe Vestager, become excessive. Mrs. Vestager is basically on a crusade against Silicon Valley. The longer the EU's Google cases take, the less I believe in them, and the tax case (styled as a state aid case) against Apple is an unbelievable absurdity.

Considering the combination of issues the tech industry faces in the EU, it doesn't make sense to me that major Silicon Valley companies engage in Trump-bashing all the time, as I already said in my New Year's post.

Just to avoid any misunderstanding, I do understand and appreciate the benefits of fair trade, such as specialization. So I'm not arguing isolationism. It's just about who's to blame. Consumer benefits are not what the EU has in mind. It never did in any context apart from mobile phone roaming charges.

The EU is an economic failure. There's no way that it's ever going to become a major player in the digital economy. It's simply getting squeezed between the U.S. and East Asia. The real hawks in this trade war are not in Washington, D.C., but in Brussels and in the governments of such countries as France and Germany. The Paris-Berlin axis is a recipe for failure, with Macron simply wanting redistribution and Merkel and her minions being happy to oblige. They'll be the driving forces, along with the EU institutions, behind those terrible "digital tax" plans and the "trade war."

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