By imposing tough conditions on network mergers, the European Union (EU) is in danger of heating up price competition rather than reducing it through sector consolidation.

Moody’s makes the warning in a report seen by the Financial Times.

The ratings agency pointed to stringent ‘competition remedies’ required in Ireland before the EU was willing to wave through the merger of O2 and Three, the respective subsidiaries of Telefonica and Hutchison Whampoa.

Vodafone, which has operations in Ireland, was up in arms about the merger conditions, as was regulator ComReg. They both fear increased competition.

Under the remedies laid down by Brussels, up to 30 per cent of the merged O2/3’s network capacity must be sold to two MVNOs. There’s also an option that one of them becomes a fully-fledged network operator at a later stage.

The domestic regulator said measures agreed for the merger green light “appear inadequate and ineffective to address the serious competition concerns and consumer harm identified by the [European Commission]”.

Moody’s said cable operator UPC, owned by Liberty Global, is likely to be the main beneficiary with an option to pursue a quad-play strategy.

What happened in Ireland may well be a sign of things to come in Germany, where Telefonica is seeking regulatory approval for its €8.6 billion takeover of KPN’s E-Plus.

The competition remedies have yet to be decided in Germany, but Ivan Palacios, telecoms analyst at Moody’s, is sceptical that operators will see much of a consolidation dividend.

“What is clear from Ireland is that the competition authority wants to maintain a competitive environment,” he said, quoted by the Financial Times. “There has not been the market repair that we thought might come with market consolidation.”