Putting Up Walls Inside the EU

Suddenly, EU members are choosing protectionism over unity

Remember when this year was billed as that magical time when Europe would really start to click? As the single currency, the single market, and the expansion of the European Union ushered in vast economies of scale, waves of consolidation would roll across European industry, finance, and services, turbocharging the economy of the entire Continent.

That was the dream, anyway. It hasn't quite worked out that way. Labor rigidities, high taxes, and a European Central Bank that has kept interest rates too high for too long have all played their baleful part in keeping Europe mired in semi-recession. But there's another villain stalking Euroland these days. Call it neo-protectionism, neo-nationalism, or resurgent interventionism, it amounts to the same thing: Keep out the competition at all costs. "That tradition, I'm afraid to say, is still alive in Europe," says Mario Monti, the European Union's competition commissioner and antitrust czar.

It's not only alive--it's growing. Just about everywhere you look in Europe, resurgent nationalism is exacting a real economic cost. For starters, efforts to meld Europe's patchwork of financial services into an efficient and unified whole keep running into protectionist roadblocks thrown up by Germany, France, Spain, and other countries. Important new measures, such as a European takeover code, are now way behind schedule. And fear is growing that proposals for 42 new EU financial laws designed to harmonize the maze of national rules and regulations could also be delayed.

Stalling would cost Europe dearly. The European Commission reckons that enacting the measures to create a true single market in financial services would add 1.1% to European gross domestic product over the next decade and reduce the cost of capital for European companies by as much as 0.5%. "If this is the beginning of a reversal of opening the EU, it will lead to slower productivity and slower growth," says Eric Chaney, co-head of European economics at Morgan Stanley.

But the fear of losing control of national icons is superceding the desire of companies and governments for growth. Just look at the shenanigans over Germany's once-mighty KirchMedia. After the group's disastrous multibillion-dollar bankruptcy in April, some of the world's biggest media investors--Rupert Murdoch's News Corp. (NWS ), Italy's Mediaset, France's TF1, and others--started sniffing around Kirch's choice assets, such as its vast TV and film library and 52% stake in ProSieben, Germany's largest TV broadcaster. Yet when bids were opened on Oct. 29, KirchMedia's creditors' committee, dominated by German banks, granted exclusive rights to Hamburg-based Heinrich Bauer Verlag after just an hour's deliberation.

It didn't matter that Bauer had scant experience in television broadcasting. Nor did it matter that other bidders were given no chance to explain why their offers may have been better. The important thing was that KirchMedia and ProSieben remain in German hands.

In France, the center-right government is turning out to be just as protectionist as its leftist predecessors despite hopes that it would crack the market open further. In early December, Paris moved to throw a $9 billion lifeline to debt-burdened France Télécom--an action that has the state-controlled giant's competitors screaming about unfair competition.

Further evidence that Fortress France is thriving can be found in the way the French government is making sure that key assets of floundering Vivendi Universal (V ) stay French. In October, the group's $3.7 billion publishing arm was quickly--and not very transparently--bartered off to France's Groupe Lagardère (LGDDY ) despite the fact that the new entity would enjoy near monopolies in textbooks and reference books in France. Shortly after, a government-sponsored group took control of Vivendi's huge utility and water unit.

That's not all. In early December, Vivendi turned down a $6.8 billion offer from Britain's Vodafone PLC (VOD ) for its 44% stake in Cegetel, owner of France's second-largest mobile operator. French banks ponied up enough loans to allow Vivendi to pay $4 billion so that it could control Cegetel. That makes France the only major European country in which the first-, second-, and third-largest mobile operators are in the hands of national groups.

Unfortunately for Europe, this neo-protectionism stands to gather even more strength. The spreading recession makes it difficult for any government to argue in favor of efficiency since the last thing voters want is more job losses. Says Morgan Stanley's Chaney: "When Europe is in recession, you have more defensive reactions from the political and corporate side."

Those who favor a more open and competitive Europe can't expect much help from Washington, either. Traditionally, the U.S. acted as a useful counterweight to the protectionist tendencies of European states. But the Bush Administration has been restrained on this issue compared with its Democratic predecessor. One big reason: Bush's decisions to protect U.S. steel groups and to support American farmers with a $180 billion aid package effectively remove Washington as a catalyst for market opening in Europe. "There's no way they can now criticize the Europeans with a straight face," says Peter Alexiadis, a competition lawyer in Brussels with Squire, Sanders & Dempsey LLP.

Moreover, just when Europe most needs a RoboCop to enforce competition, Monti and his Merger Task Force have been slapped down. The European Court of Justice in Luxembourg has overturned three key anti-merger decisions thanks largely to the task force's sloppy work. "There is an undercurrent of nationalism afoot in Europe at the same time that EC authorities are screwing up," says Pontus Lindfelt, an antitrust expert at law firm White & Case in Brussels. The message that more competition can mean more growth is falling on deaf ears in Europe.

By John Rossant in Paris, with David Fairlamb in Frankfurt

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