Economic crisis and protectionism threaten EU's single market


EUROPEAN DIARY:Nicolas Sarkozy faces tough questions from fellow EU leaders about his proposed €6 billion bailout of the French car industry

AS THE economic crisis gathers pace and dole queues lengthen, politicians everywhere are getting nervous and the temptation to resort to protectionism is proving hard to resist.

The spotlight in Europe is on French president Nicolas Sarkozy, who faces tough questions from fellow EU leaders about his proposed €6 billion bailout of the French car industry at an emergency summit in Brussels next week. The energetic French leader, who drew plaudits over his handling of the previous EU presidency, now stands accused of taking a wrecking ball to the EU single market.

Czech prime minister Mirek Topolanek has labelled the plan “protectionist” and attacked comments from Sarkozy suggesting French carmakers should not outsource production to other EU states, such as the Czech Republic.

The European Commission is closely scrutinising the French bailout to see if it contravenes EU state aid rules. Officials say they are particularly concerned about a stipulation that state funds should only go to companies that keep jobs in France.

It is not just the Czechs – who host a Peugeot factory near Prague – who are concerned about the bailout.

Swedish finance minister Anders Borg described it as “problematic”, and German chancellor Angela Merkel said the EU “must make sure that there is a level playing field where EU competition law applies” because it affects everyone.

“The risk is a tit-for-tat response – if one country supports its own industry, then other countries do the same – then we could see an unravelling of the single market,” says Fabian Zuleeg, analyst at the European Policy Centre. “This would then mean fewer jobs in Europe because firms would be less competitive, causing living standards to fall.”

The EU single market was established in 1992 by removing the barriers to free movement of capital, labour, goods and services. This enabled the creation of pan-companies such as Ryanair and the huge drop in the cost of making phone calls across borders. The commission estimates it has generated more than €800 billion in extra wealth in Europe and created seven million jobs, yet its benefits go largely unnoticed by the public.

“You can’t fall in love with the single market,” remarked former commission president Jacques Delors, who drafted the laws sweeping away the barriers to EU trade.

With almost 19 million people out of work across the EU and social unrest mounting in many member states, politicians are keen to support jobs at home rather than defend esoteric concepts such as the single market.

Italian prime minister Silvio Berlusconi recently suggested Italian firm Indesit drop its plans to relocate a dishwater plant from Turin to Poland to avail of €2 billion in a state-aid rebate scheme.

In Britain, health secretary Alan Johnston wants to rewrite EU law to prevent workers from other member states from undercutting British workers when bidding for construction contracts. Even in the Republic, which has flourished principally because of the EU single market, protectionist rhetoric is on the rise. In November, Minister for Finance Brian Lenihan appealed to shoppers to forget the single market and do their “patriotic duty” by spending their money in the Republic and not the North.

With protectionist pressure bubbling under the surface, officials in Brussels and Geneva – the home of the World Trade Organisation (WTO), which monitors and polices the international trading system – fear beggar-thy-neighbour policies and a 1930s depression.

“There is another spectre lurking in the mist which could make this already bad situation even worse – the threat of a return to the isolationist policies of the 1930s,” warns WTO director general Pascal Lamy, referring to the tariffs on global trade introduced by politicians to protect domestic industry that helped turn a recession into a depression.

The strict rules governing the EU single market mean it is more likely to survive the economic downturn, while global trade is more vulnerable to nationalist impulses. Last week, industry commissioner Günter Verheugen warned his fellow commissioners of a “severe risk” of protectionism, singling out eight countries for introducing protectionist measures.

He cited the US for its “buy American” provision initially contained in the stimulus Bill, and Russia’s decision to raise import duties on combine harvesters, cars and trucks. China’s VAT rebates on textiles, clothing, bamboo products, plastic and furniture also made the protectionist “blacklist”, which could provoke EU retaliation.

But the EU is no paragon of virtue itself. Trade commissioner Catherine Ashton was recently lambasted by her counterparts from New Zealand and Australia over an EU decision to reinstate export subsidies for dairy products to help EU farmers as prices fall.

“Around the world, of all the protectionist measures, the one most reviled of all is export subsidies,” said New Zealand trade minister Tim Groser. “So what has the EU done against a very serious background of world trade grinding slowly to a halt?

“They’ve reached into their policy toolkit and pulled out the most reviled of protectionist measures. I’m sorry, I just find this totally irresponsible.”

Whether EU leaders will discuss the export refund scheme at the summit on protectionism next week remains to be seen.