Economy and Trade Spring/Summer 2006

New Protectionism Can Weaken Europe
By Carola Kaps

Spaniards against Germans, French against Italians, Poles against Italians, even Luxembourgers against Indians! Cross-border hostile takeover bids trigger nationalistic reflexes in a trend squarely at odds with the European Union’s principles of a single market and, more recently, the Lisbon Agenda for improved competitiveness.

Two years after the historic EU enlargement to 25 member nations, the state of the union seems more fragile than ever. A new wave of protectionism is rising with governments at the ready to defend their corporate “national champions” against takeovers by foreign rivals, even from fellow-EU countries. This trend, which emerged in the wake of the rejection of the proposed EU constitutional treaty by French and Dutch voters, seems to have paralyzed European politicians. There are calls to suspend or even stop further enlargement as well as proposals to drop the constitution and forget about further integration. Such second thoughts are voiced by members of the European Parliament, leading politicians and experts in member states.

In principle, all politicians and economic leaders within the EU 25 agree that the single market with its “four freedoms” (the free movement of goods, capital, labor and services) is a good thing and should be strengthened by all means. And the European Commission, under President Jose Manuel Barroso, continues to pursue the Lisbon Agenda with a stiff upper lip. But in practice, principles tend to vanish quickly in times of low growth, high unemployment and nagging fears of globalization.

At election time, when frustrated voters are demanding protection from international competitive pressures and threatening to kick out the governing party or coalition, principles are sacrificed. This process was on view early this year with the controversial “Services Directive” that was intended to establish the single market in services. Despite the fact that fast-growing services already are generating 70 percent of the EU’s gross domestic product, the proposed reform sparked an emotional debate. The result was a weak compromise that was especially unsatisfactory for the new EU members.

Hostility to the plan rested on the belief that the directive would result in cheap workers from the new, poorer countries of the EU undercutting wellpaid and well-protected jobs in the service sectors in richer older member states. The negative image of the “Polish plumber,” who became a symbol of cheap labor and a nuisance in the constitutional referendum debates, captured everything that went wrong within the badlyhandled debate on the services directive.

The perceived or imagined threat of cross-border migration was not new: in mid-2004 Germany and Austria had announced that they intended to keep their borders closed to workers from the ten new EU member states. But this year the trend amplified into a groundswell of nationalistic emotions in the existing member states, running totally against the promise of the single market with its four pillars of free movement. The force of this wave caught the Commission by surprise – and laid the groundwork for worse shocks to come.

These erupted after the explosion of oil and gas prices. Amid mounting concern about security of energy supplies, the theme of “economic patriotism” – coined in France by Prime Minister Dominique de Villepin and taken up, with or without copyright acknowledgement, by many European leaders – came to the fore and the belief gained ground that only the creation of huge domestic companies – national champions – could guarantee energy availability and serve as a country’s protective barrier against the harsh winds of foreign competition and antagonistic economic power.

“Economic patriotism” gave rise to the creation of national champions to ward off foreign competition

The idea that the European Union as a whole and its single market could provide the critical mass necessary to protect the supply of strategic goods and should be looked upon as the answer to the challenges of globalization apparently did not occur to the worried politicians. “Our defensive move to keep the German energy company E.ON from taking over the Spanish energy distributor Endesa has nothing to do with protectionism but everything to do with energy security,” said Jose Luis Rodriguez Zapatero, the prime minister of Spain. His energy minister was even more direct: “All states have the right to have big utilities, why not Spain?” True to its convictions, the Spanish government increased the powers of the national energy regulatory authority over mergers and acquisitions in order to keep E.ON out. At the same time it encouraged the Spanish company, Gas Natural, to bid for Endesa, thus preparing the ground for a national champion in the energy field.

In the same spirit, France prevented the Italian energy company Enel from taking over the French-Belgian utility, Suez, by engineering an instant merger of Suez with the state-owned utility, Gaz de France. After fending off a foreign (Swiss) bid for pharmaceutical giant Aventis, France announced plans to fence off ten strategic sectors (including some food products) from foreign takeovers. That idea has not been tested as a possible violation of EU law on the free movement of capital.

A wave of new protectionism could aggravate economic woes in Europe

In the case of Poland, the new populist government vehemently opposed UniCredit, an Italian bank, when it wanted to merge its two Polish subsidiaries, BPH and Pekao – in effect, a takeover of BPH through the bank’s earlier acquisition of Pekao. For the Polish government this meant too much foreign influence over the national financial markets. As one Polish politician was quoted saying, “If you do not want our Polish plumber, we do not want your Italian banker.”

Most astonishing and revealing, however, was the sudden change of heart of Luxembourg’s Prime Minister, Jean Claude Juncker, long one of the most ardent advocates of free trade and market liberalization. He quickly cast off these old credentials when faced with a takeover threat on Arcelor, the French- Spanish-Luxembourger steel company, by India’s Mittal Steel, owned by the industrial mogul, Lakshmi Mittal. The fear of losing a flagship company and thousands of jobs in the small Duchy of Luxembourg was too much for even such a convinced free-trader as Juncker. Despite his record as a reliable and very successful global investor, who has turned supposedly hopeless steel producers in Eastern Europe and elsewhere into successful companies, Mittal was given an entirely unwelcome reception and every effort was made to torpedo his plan for merger with Arcelor.

Interestingly, the same politicians, who at home are frantically erecting barriers around self-declared strategic sectors, become adamant supporters of European competitiveness and the single market when they are in Brussels. At the March EU Summit, all 25 heads of state unanimously agreed to work for a more competitive Europe in the framework of the new enhanced Lisbon Agenda and to extend the single market into such strategic sectors as energy. None of the leaders assembled there had the courage to speak out against the protectionist tendencies in some member states that are undermining the four pillars of the single market they ostensibly champion.

When the EU finance ministers later met in Vienna, they similarly overlooked these worrying developments. They talked rather generally about “a wave of new protectionism” that could aggravate economic woes in Europe. But there was no public mention of specific wrongdoing. A bit more forthright, Jean-Claude Trichet, head of the European Central Bank, warned that protectionism always carried a risk for growth; and Axel Weber, president of Germany’s Bundesbank, added that welfare deficits invariably worsened in countries trying to protect their companies from competitive forces.

Joaquin Almunia, the Commissioner for Economic and Monetary Affairs, however did not mince words. Refreshingly direct, he complained that the Europe of Jean Monnet is looking increasingly like the Europe of Colbert. The latter served as France’s finance minister under King Louis XIV and is considered to be the father of mercantilism. “Going back to the principles of the 17th century is hardly progress,” said Almunia. He reminded errant European leaders – whom he described as “self-proclaimed defenders of national interests” – that life behind protective walls is deceivingly cozy and ultimately doomed. “Behind the Maginot Line the French troops felt save and secure until the Germans overran their defensive wall,” he warned.

Despite these discouraging signs in EU countries, there are reasons to remain confident that this protectionism is a phase, not a specific and necessarily enduring European phenomenon. In fact, we have been here before, we can see a similar phase in the United States and, beyond the controversial cases that make headlines, there is real overall progress against protectionism. Probably the most convincing proof that the notion of “Fortress Europe” does not reflect reality is the fast growth of imports in most of the 25 member states. China is the main source of these imports, even though Brussels has occasionally resorted to protectionist measures to stem the rising tide of Chinese goods. After years of double digit export growth China is about to overtake the United States as Europe’s largest supplier of merchandise in 2006.

On the first point, veteran EU observers have seen all these developments before. It is by no means the first time that governments have tried to create national champions and to intervene to keep foreigners out. The French may be the biggest offenders in this regard, but even the economically liberal Germans are sometimes guilty of trying to protect their companies from hostile foreign takeovers. A case in point is the carmaker, Volkswagen. Its ownership includes a golden share held by the German state of Lower Saxony, where VW is by far the largest local employer. This holding is a formidable protective wall for the company.

There are reasons to remain confident that this protectionism is a phase, not a specific and necessarily enduring European phenomenon

When it comes to foreign capital, Europeans have always tended to speak with two tongues. Foreign direct investment, which creates productive capacity and well-paid jobs, is welcome everywhere; but foreign takeovers of a nation’s big high-profile companies, usually accompanied by cost-cutting and job losses, are frowned upon. At the same time, French, German and other European companies are themselves happily gobbling up companies abroad and are being actively supported by their governments in that strategy, using their government- defended domestic base to expand into more open markets.

Of course, the backlash against crossborder takeovers is hardly confined to Europe. The U.S. Congress recently blocked Dubai Ports World from purchasing a British-owned company operating six American sea ports. Fear of terrorism might explain this newest bout of economic patriotism. But when Congress stopped a bid for the oil company, Unocal, by a state-owned Chinese oil company, U.S. objections had more to do with economic rivalry and fears about China’s expanding role and influence in global commerce than fear of terrorism.

Subsequently, the United States has permitted Dubai International Capital to buy Doncasters Group, which makes parts for American weapons. Congress is debating the creation of a new office to attract foreign investment to the U.S. to be called the Untied States Direct Investment Administration after lobbying by business.


There is a substantial tradition of opposition to foreign takeovers in the hearts and minds of American lawmakers. In the late 1980s, Japanese investors faced political and public hostility over their U.S. acquisitions. Moreover, tough legal restrictions regarding foreign equity participations in the energy, media, communications and airline businesses date back a long time and make foreign takeovers just about impossible in these sectors.

The Department of Homeland Security has designated 12 sectors of the U.S. economy as “critical infrastructure,” a category where foreign ownership is liable to face increasing restrictions. This new list now includes additional sectors such as food manufacturing, chemicals, computers and electronics, and water and road transport. In contrast, prospects seem good for a pending deal that seems to have been well managed – the takeover of the telecom giant, Lucent, including its defense business, by France’s Alcatel. As a new test case, it could provide a more encouraging precedent for the openness of the U.S. economy.

In this context one needs to mention as well the “Buy America Act” which dates back to the time of the Depression and has resisted repeal ever since. Passed in 1933 the act mandates preferences for the purchase of domestically-produced goods over foreign goods in U.S. government procurement. Critics have always labeled this piece of legislation and its subsequent modifications as one of the most visible and egregious remnants of U.S. protectionism. Moreover, it has been frequently cited as justification for other countries to institute their own domestic-content requirements in order to protect their companies and workers against foreign competitors.

The new generation of European managers will not be browbeaten by politicians, but will insist on following their own strategic plans

Thirdly, the current bout of “economic patriotism” comes on top of an unprecedented merger wave, including cross-border takeovers that have strengthened the EU single market. In this bigger picture, the protectionist moves by some politicians are being overwhelmed by the self-confidence of corporate Europe. Its coffers are full and its ambitions run high in seeking to put together blue-chip European companies big and strong enough to withstand the ever-increasing global competition. The new generation of European managers will not be browbeaten by politicians: they will stand up to them and insist on following their own strategic plans.

Even with these glimmers of hope, the protectionist developments are worrying symptoms of a process that could get worse. Once rules about open markets are broken, more trespassing might follow, slowly but surely eroding the benefits of the single market. In fact, the single market remains weak and incomplete: this spring the Commission issued more than 37 letters to 17 governments complaining about failures to implement single-market rules. Last year the number of such violations within the 15 old member states rose to 1068 from 1009 in the previous year.

The Commission’s powers – notices, public scolding and ultimately lawsuits – are blunt weapons that take a long time to be effective, with no guarantee of success. In the end, the best weapon in the fight against protectionism is political pressure, which has to come from the willingness of member states to back up the Commission on this issue. At this point, one must cross one’s fingers in hope that a majority of member states will stand behind the Commission. It is the best chance of foiling protectionist moves by a few member states. It is an obligation of members individually to the European Union as a whole.

Carola Kaps worked for 25 years as an economic correspondent for the Frankfurter Allgemeine Zeitung, covering the United States, Africa, Eastern Europe and Brussels. She continues to write in the FAZ and other publications, mainly about central Europe and the Balkans.

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