Tearing Down Even More Fences In Europe

If you are worried about a Fortress Europe, relax: The European Community is moving the other way. That's one conclusion that can be drawn from the historic agreement signed on Oct. 22 between the EC and the seven-member European Free Trade Assn. Reached after two years of grueling negotiations, the pact commits EFTA members as diverse as Iceland and Austria to following the EC's 1992 single-market rules--in effect creating a 19-nation barrier-free zone of 380 million people.

The European Economic Area (EEA) agreement, which is still to be ratified by all the governments, will mean big changes in EFTA states such as Switzerland and Norway that have fenced off parts of their economies and societies. Governments will have to abolish most restrictions on investment and adopt EC product standards and policies on aid to industry. Yet the promise of free movement of goods, services, capital, and people within this enlarged Europe should make it easier for companies to operate across borders and should give a fillip to economic growth.

HANG LOOSE? Beyond the economic issues, the EEA pact raises difficult political questions, which will come to a head at the EC summit in the Netherlands in December. Most EC members favor a more unified Community, with a single currency and joint decisions on such sensitive matters as foreign policy and defense. But Britain has opposed a strong Brussels, arguing that the EC must remain more loosely linked to accommodate potential new members.

The EEA deal could boost Britain's case for a broader--not deeper--EC. Although the EC originally hoped the talks would forestall a rush of new applicants for full membership, many EFTA members are now eager to join the EC club--lest they be bound by EC rules without a vote in deciding them. Indeed, Sweden and Austria have already applied, and Finland may follow suit next year. Several of these countries have pursued a neutral political orientation different from the NATO core of the EC. And the more members the EC lets in, the greater the difficulty it will have reaching any consensus on thorny political and defense issues.

Now that the EC has embraced EFTA, it should be easier to welcome the central European countries that are on the doorstep. A more loosely strung Europe will be able to accommodate the political and economic differences of these emerging democracies. Imagine the problems if, following a North

American free-trade pact, the U. S. were to attempt a political union with Mexico.

Still, Europeans will feel the impact of the EC-EFTA accord well before these political issues are settled. Tougher EC competition will assail such cosseted industries in EFTA countries as retailing, construction, and banking. Europe's big banks and insurance companies, for example, will benefit, because they'll get to move into EFTA states with a single EC license. One industry certain to feel the winds of change is aviation. High-cost airlines such as Swissair and Scandinavian Airines System will have to follow the EC's gradual deregulation of the skies. In anticipation, SAS, for one, is slashing jobs. "There is no way, with the cost structure we had, that we could survive in a deregulated environment," says Vagn Sorensen, head of SAS's airline division.

Big EFTA multinationals, such as Sweden's Volvo and Switzerland's ABB Asea Brown Boveri Ltd., have been preparing for closer links with the EC for years through acquisitions and joint ventures in the Community. They will probably prosper, but smaller and midsize EFTA companies that haven't prepared are headed for a shakeout.

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