Sunday, March 25, 2012


Yet another word has entered the dictionary of Euro-jargon. Following "rebate", "subsidiarity" and "absorption capacity", we now have "reciprocity". Charlemagne hates it, the Germans hate it, the Financial Times hates it, and, most damning of all, I hate it.

The basic reasoning runs as follows:
Insisting on reciprocity in international trade, including public procurement, the topic at issue here, always has two consequences. On the benefits side, there is the possibility that this pressure might work, in which case European companies make more money abroad. In Euro terms, this benefit is equal to the probability of success multiplied by the additional profit made in case of success. On the costs side, there is the certainty that European consumers - in this case the public bodies doing the purchasing - will have to pay more. It follows that the benefits of a tough stance exceed the costs as long as at least one of the following two things is true:
  1. Other countries are extremely intimidated when the European Union gets mad.
  2. There are huge profits to be made here.
As it happens, neither of these things is true. The Chinese, who appear to be the main target of this proposal, are likely to be supremely indifferent. In fact, in all likelihood they would resent being manhandled in this way, and as a result would be even more resisting to change. As for the profits to be made by European companies, the same old adage applies here as everywhere: the greater the degree of competition, the lower the profits of the sellers. Putting some numbers in, I'd estimate that the chance that such an External Public Procurement Regulation would have a noticeable effect on any major market at no more than 10%. I leave it as an exercise for the reader to decide how probable it is that the additional profits to EU companies in that case will exceed the certain losses for EU public authorities by a factor of 10. 

For the European Commission's more scientific (and less objective) numbers, cf. p. 6-7 here. I could be crazy, but they seem to be talking about an EU domestic market worth € 420 billion per year as compared with potential additional revenue (!) for EU companies of € 12 billion per year. Even ignoring the uncertainty involved in trying to force other countries to open up their markets in this way, how will this bill not result in losses for EU public authorities exceeding € 12 billion per year??? All it takes to get there is an average price increase due to reduced competition of 2,9%. Are we really supposed to waste all that government money just so that Alstom can sell a couple more trains to China, maybe?

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