Commentary: The Pernicious Rise Of "Core Europe"

Germany and France are building a bloc to preserve their influence

What does a French pharmaceutical merger have to do with the future of Europe? At first glance, not a lot. On Apr. 26, when Jean-François Dehecq, the chief of Sanofi-Synthélabo (SNY ), announced that his bid for rival French drugmaker Aventis (AVE ) had won the day, he talked glowingly of the new group's promise: It would be the world's No. 3 pharmaceuticals producer, and it would boast a $4.5 billion research budget. Oh, and the headquarters would be in Paris.

What Dehecq didn't mention was why the merger came about. The French government, eager to keep Aventis out of the hands of Switzerland's Novartis (NVS ), pushed for an all-French merger, and the deal was put together in meetings at the Finance Ministry. President Jacques Chirac wanted a national pharmaceutical champion -- and who better to make that happen than his longtime friend Dehecq? Little matter that the $64 billion tie-up is hard to justify on economic and industrial grounds. Or that it is disastrous for France's image as a magnet for investment. "In terms of the interference of the government, this is really, really bad," worries Bernard Gilly, a leading French biotechnology executive and venture capitalist. "I was among those French who thought [such] intervention had died out six or seven years ago."

But such intervention is part of what some German and French policymakers now describe as Core Europe. This is not the expanded Europe of 25 nations, which comes into being on May 1, when 10 new members join the European Union. No, this is a narrower region revolving around France and Germany, with Spain, the Benelux countries, and perhaps eventually Italy playing supporting roles. Core Europe stands distinct from the pro-American British, with their free-market notions, and the poor relations just arriving from Central Europe.

Core Europe's precepts? First, a kind of protectionism lite, which promotes national champions and, when necessary, uses market methods to advance its dirigiste goals. (Paris, after all, encouraged Sanofi to pay big bucks to Aventis investors.) The other traits: a determination to keep U.S. influence at bay and bend EU rules to promote the interests of the core, even at the expense of the periphery. Witness how France and Germany got away with breaching rules on budget deficits last November. Or how Chirac and German Chancellor Gerhard Schröder have coddled Russian President Vladimir V. Putin -- despite the European Commission's more critical stance on Russia.

Chirac and Schröder feel the wind in their sails, especially after the Madrid bombings, which led to a Socialist electoral victory two days later -- and to a 180-degree shift of policy in Madrid toward France and Germany and away from Britain and the U.S. Almost overnight, France and Germany won new clout in the fight for Europe's future. They are now likely to get an agreement on an EU constitutional treaty.

This shift in the political dynamic is rapidly isolating British Prime Minister Tony Blair, who has had to give in to calls from skeptical Britons for a referendum on a new European constitution. A no vote -- which polls predict -- would distance Britain further from the rest of the EU. With Britain sidelined and Spain backing France, says BP PLC (BP ) Chairman Peter D. Sutherland, "we're again back to the idea of Core Europe."

If official meddling is anything to go by, that's not an uplifting idea. After bailing out engineering giant Alstom (ALS ), Paris has pushed French banks to renegotiate its debt. Rome is rescuing Alitalia. German officials want new EU members to realign corporate tax rates to higher German and French levels.

True, governments are taking advantage of a leadership vacuum in the EC, which normally keeps an eye on uncompetitive behavior. EC President Romano Prodi, whose successor will be announced in June, is focused on Italian politics; several commissioners have left. Daniel Gros, head of the Center for European Policy Studies in Brussels, thinks a weakened EC is letting Paris and Berlin pursue "rear-guard" actions. But, he adds, "if Core Europe means thinking what is good for Paris and Berlin is good for everyone, it's not going to work." That won't keep Paris and Berlin from trying.

By John Rossant

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