Conflict surfaces as states protect sectors

Economic nationalism threatens to shake the EU, writes Jamie Smyth, European Correspondent

When executives from the Italian energy giant Enel met secretly last November to plot a takeover of French utility Suez, they probably didn't realise their actions could spark a diplomatic crisis that would call into question the viability of the EU single market.

But that is exactly what happened this week following a decision by the French government to block a foreign takeover bid by engineering a merger between Suez and the state controlled company Gaz de France to create a national utility champion - provoking a formal complaint to the European Commission from the Italian government.

The intervention by France, and a recent upsurge in protectionism in several member states, led former European competition commissioner Mario Monti to warn that the single market is in danger.

It also forced European commission president Jose Manuel Barroso to call this week for an end to the "nationalist rhetoric" employed by some EU leaders.

French prime minister Dominque De Villepin masterminded the tie-up of Suez and Gaz de France in the interests of "economic patriotism" and also pledged to protect French firms in strategic sectors, such as energy, from hostile foreign takeovers.

"This strategic area must remain under the full control of the state," said Mr De Villepin, who also outlined a swathe of measures designed to protect French industry from foreign takeovers this week.

These include boosting employee share ownership and using Caisse des Depots et Consignations (CDC), the biggest institutional investor in the French stock market, as a buffer against foreign takeovers.

Unsurprisingly, De Villepin's last-minute intervention to block Enel's bid for Suez provoked an angry response from the Italian government, which dispatched its economy minister Giulio Tremonti to Brussels on Wednesday to protest to the guardian of the EU internal market, European commissioner Charlie McCreevy.

"If the Commission does not act, my advice would be for it to close down because of a failure to meet its mandate," said Mr Tremonti, who left Mr McCreevy a lengthy file on Enel's preparatory work on the Suez merger to help him prepare a legal action.

But the Enel-Suez case is just one of several examples of a tide of economic nationalism currently sweeping through Europe.

Ironically, in light of its current indignation, last year Italy was itself gripped by allegations that the head of its central bank had favoured a domestic bank in a takeover battle with Dutch financial services firm ABN Amro.

Antonio Fazio was finally forced to resign in December, damaging the reputation of Italy's central bank and highlighting that "economic nationalism" or "protectionism" is not purely a French concept.

In another high profile case Mr McCreevy has warned the Polish government that it faces legal action for interfering with Italian bank UniCredito's takeover of German bank HVB.

The deal was approved by the commission, However, the Polish authorities are seeking to block the deal because it would mean the merger of both banks' Polish subsidiaries, a fact Warsaw believes could undermine competition.

Across a range of strategic industrial sectors, from banking to energy to steel making, economic nationalism is emerging as a key policy goal in certain member states.

"There is a clear trend towards protectionism," says Ann Mettler, director of the Brussels-based think tank Lisbon Council. "Partly this is due to the fact that it's always harder for governments to allow companies to restructure or relocate during times of economic distress. Partly it is due to the fact that national politicians believe that there are short-term political gains to be made by protecting 'national champions' from takeovers."

Low economic growth and high unemployment have made France particularly sensitive to mergers or political initiatives that could threaten jobs. It is strongly critical of the current bid by the world's largest steel maker, Mittal Steel, for the Franco-Luxembourg steelmaker Arcelor, fearing thousands of job losses.

French pressure also played a key role in watering down the services directive - a key piece of legislation that would enable service providers to operate easily across all 25 member states.

Mr De Villepin, a presidential hopeful, has not been afraid to play the nationalist card when it comes to protecting French firms. Last year he pledged to shield food group Danone against takeover when rumours of a possible bid by US firm PepsiCo began circulating.

He is also the author of a controversial decree that lists 11 strategic industry sectors that should be protected from foreign bidders. The Commission is threatening to bring France to court over the law.

"The basic idea of the internal market is enabling fair and free competition and that's what we need for more jobs and growth," says Mr McCreevy, who insists that he will use the European Court of Justice to take on member states that do not comply with EU treaty rules.

"The French decree as adopted earlier this year is about singling out 11 sectors in which foreign companies are treated on a discriminatory basis when they want to operate in France and take over French companies," says Mr McCreevy.

The concern felt within the Commission about the upsurge in protectionism forced Mr Barroso to take the unusual step of issuing a warning that the tide of nationalistic rhetoric could damage Europe's competitiveness.

"Europe cannot make progress if there are barriers between the member states," said Mr Barroso, aware of the danger of tit-for-tat protectionist measures breaking out across the EU.

"I would like to appeal to a European sense of political responsibility on the part of our statesmen to avoid national or nationalist rhetoric . . .We are not going to be able to meet the challenges facing us if we take a nationalist approach."

Singling out the energy sector for special attention, Mr Barroso said that Europe could not withstand global competition if it had "25 mini energy markets" and even the biggest member states were too small to compete alone in this strategic sector.

The pointed criticism came as the Spanish government was working on legislation to help ward off a €29 billion bid for its largest energy firm Endesa from the German utility Eon. The bid threatens plans by Spain to create a national energy champion by merging Endesa with a local rival Gas Natural.

The Commission is investigating the legislation. Further liberalising the EU energy market is a key goal of the commission, which wants to create a truly European energy market to help it negotiate deals with suppliers of gas and oil such as Russia. It argues that blocks on the free movement of capital undermine the competitiveness of EU firms, making them less able to counter the challenges posed by US firms and emerging Chinese and Russian competition.

But the extension of the internal market to include sensitive sectors such as energy is controversial in many EU states.

For example, Minister for Natural Resources Noel Dempsey, aware of the Eircom saga where the State lost control over roll-out of new technologies such as broadband, has pledged not to sell off ESB Networks in his review of energy policy.

Similarly, the main gas, post and rail firms remain in public ownership protecting them from private and foreign bidders and suggesting that the concept of "economic nationalism" is alive in well in the Republic.

Member states will now have to make a choice of whether to follow the Commission in its drive to boost the EU internal market or jealously guard their strategic industries from foreign predators.

This week's battle may just be the first shot in a long war.