Is the EU really a free market?


Dismantling government protectionism may not be practical. Germany’s VW law is one example, but Europe also has to think about even greater dangers from outside.

Ten years ago, the European Commission ordered its member states to dismantle their government interests in private corporations - like VW - and report back to Brussels. The idea has always been to create a free-trade zone within the Union; but the largest members of the European Union haven’t exactly complied. Tuesday’s ruling by the European Court of Justice to end Germany’s VW law will help the Commission tilt at windmills like „golden shares” or „multiple voting rights” and other newish tricks that help governments protect privatized national enterprises from foreign takeover.

But regulators in Brussels, by the end of 2005, still had an internal list of 141 firms that were protected by European governments through special rights. In fact Charlie McCreevy, the Irishman responsible for enforcing European market laws at the EU Commission, has noticed a steadily decreasing tendency among member states to root out protectionism. Spain, France and Great Britain, as well as Germany, have all turned back toward shielding their corporations from large investors and hedge funds - referred to famously by a German politician as „locusts.”

The head of E.ON, the German energy firm, could sing a song about it: His company had barely mentioned its ambition to buy a Spanish electricity provider called Endesa when the Madrid government started to change its laws and give its bureaucrats more jurisdiction. After months of bitter struggle, E.ON still has little to show. French President Nicolas Sarkozy blocked Italian attempts to buy out Gaz de France, a state-owned gas company, by letting it merge with the French utility giant Suez.

Sarkozy also made sure that Siemens’ planned investment in the energy infrastructure firm Alstom would fail. Two years ago he drew up a list of 11 key industries where the Paris government would have to approve any involvement by foreign investors. „Key industries” was the pivotal point in VW’s case: Europe’s Advocate General, Dámaso Ruiz-Jarabo Colomer, in his recommendation several months ago to the Court of Justice, granted Germany its right to „melancholy memories” of the postwar era, with its economic miracle - which Volkswagen all but symbolizes - but he made clear that the VW law was not in line with EU law.

Conservative politicians in Brussels, like the Christian Democrat Klaus-Heiner Lehne, tend to agree: In defense, energy, and food industries a government can make the argument for protectionism, says Lehne, but cars clearly don’t belong in the category of „national interest.” The Court of Justice saw it the same way on Tuesday, and so, incidentally, did all the 27 leaders of the EU member states at a summit last Friday, when they signed the so-called Lisbon Treaty, which included a line about protecting companies only out of „compelling reasons of national interest.” But when most of the same leaders go home, they seem to forget about free markets. The German government has already started on a new set of laws to protect certain companies from takeover by hedge funds or massive, foreign state-controlled investors.

Last-minute appeals to protect VW
Even on Tuesday, just after the Court of Justice verdict, there were cries of protest from leaders who had a vested interest in Volkswagen’s status quo. Jürgen Peters is head of IG-Metall, Germany’s main metalworkers’ union, and he told journalists - with an eye toward Berlin - that „it now lies in the federal government’s hands to do its share to help retain jobs at Volkswagen.” The threat from the workers’ point of view is that Porsche will now step in to buy Volkswagen and streamline its production capacity.

„(Volkswagen) brands like Audi or Skoda will be able to act much more independently than before,” says automotive expert Ferdinand Dudenhöffer at Gelsenkirchen Technical College. „A structure of subsidiaries (under Porsche), all with equal footing, would make sense if the holding company wants to forge a sense of teamwork.” One unresolved problem is Volkswagen’s do-it-yourself mentality: The company manufactures its own axles, transmissions, steering mechanisms and exhaust systems.

It’s also the only German automotive manufacturer to run its own foundry for engine components. A sale or closure of these units is unlikely - but they may have to compete for business with external suppliers. The figures within EU member states who want to protect certain companies are blowing against the wind, legally, as another verdict on Wednesday showed: A last-minute attempt by the VW workers’ council to keep Porsche from listing its new holding company, „Porsche Automobile Holding SE” - which would buy a majority of Volkswagen shares - failed in a regional German court.

The threat from the East
But there’s another problem with tearing down government protectionism in Europe, and it comes not from grassroots voters - the workers are bound to be frustrated with changes in the job market - but from beyond the EU. Bureaucrats in Brussels know that at least one non-European investor is watching their energy market with close interest - the Russian gas monopoly, Gazprom. A clause in one EU paper on European energy includes conditions for foreign investors, namely that European law should also apply to them.

Meaning: Any firm that wants to compete in Europe’s de-nationalized, chopped-up energy market will have to accept European rules, even if that means exposing itself to buyouts - and the potential chopping-up, say, of its gas network. Europe is working hard to dissolve protectionism within its borders, but at the same time it has to think more and more about how to replace the same laws, in practice, at a European level - because no one here wants to sell their „key industries” to concerns in the United States, China or Russia. (businessweek)

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