Protectionism Will Kill Europe

French President Jacques Chirac dismissed as “absolutely absurd” the idea that his country has recently become more protectionist. In fact, France is as protectionist as it has always been. Just a few months ago President Chirac, together with Prime Minister Dominique De Villepin, listed ten “strategic industries” that deserve protection against foreign takeovers. The ten industries are private security, arms manufacture, biotechnology, pharmaceutical labs that produce antidotes, nuclear power, cryptology, computer security, defence contracting, the interception of communications, and casinos.

Following a rumor that PepsiCo Inc. might consider a bid for the Paris-based Danone group, the world’s largest yogurt maker, Mr. Chirac clarified that yogurt companies should be considered a strategic industry as well. By the same token, the Swiss company Novartis AG was warmly invited not to bid for the French Sanofi-Synthelabo SA.

So, there is really nothing new in the story of the announced merger between the state-owned Gaz de France (which controls over three quarters of the market) and the multi-utility Suez. The merger is aimed at preventing a hostile bid from the Italian company Enel. While this operation may be perfectly justified on industrial grounds, the project was revealed in a press conference by the heads of the two companies together with Mr. De Villepin and finance minister Thierry Breton. Ironically, the merger will require a change in the French law that mandates the government own at least 70 % of Gaz de France. It may well be the first case of “neo-nationalization thru privatization,” which says a little about the degree to which the French private sector is indeed more French than private.

Yet the problem is not just that the French will protect their national champions at the expense of consumers—or rather taxpayers, since part of their electricity and gas bill is paid by general fiscal revenue. The real problem is that because France is a strong player in the European arena, it’s setting a precedent that is already being followed by many others. For example, Spain’s resistance to the German company E.On’s bid for Endesa, Luxembourg’s efforts to stop Mittal Steel Co. from buying Arcelor SA, and Poland’s veto over the merger of two subsidiaries of the Italian bank Unicredit.

Protectionism is gaining ground even in member states such as Italy as a reaction against France– top politicians from the left and the right have been calling for a retaliation against French companies. As a result, the voice of the European Commission (the executive branch of the EU) is getting weaker, especially if you consider that Energy Commissioner Andris Piebalgs comes from Latvia, a country whose influence is much smaller than France’s, and that Competition Commissioner Neelie Kroes can’t possibly challenge every single protectionist move. Clearly, the European dream of a single market isn’t likely to be fulfilled in the short run.

The theory underlying this new wave of protectionist moves is that a country needs to protect its national “champions” (as they call their leading industries) to preserve independence. Yet independence is a questionable concept as far as the economy is concerned: the only way to be really independent is a dramatic decrease of imports. The question arises: why does a country import certain goods? The answer is that it’s not countries but individuals who make the choice to buy foreign goods instead of domestic ones. They do so because foreign good are cheaper, or of a better quality, than domestic ones. Thus, by buying foreign goods consumers feel they are better off. Similarly, political decisions to limit imports or to prevent foreign takeovers (a limit of sorts to the importation of foreign capital) translates into more costs, or less opportunities, for domestic consumers. In other words, protectionism is a tax with a different name.

Protectionism provides an open space for rent seeking. Such an uncompetitive environment is not good for consumers, employees, and shareholders, who are prevented, respectively, from buying the best products, working for the more efficient and reliable companies, and getting the highest value for their investments.

In the energy sector, protectionism is even more harmful because, given the capital-intensive nature of investments, companies need to be big and healthy, not addicted to public money or state protection. Energy is an essential commodity for a modern society. The creation of a truly liberalized single market is therefore the necessary precondition for the Old Continent to begin to grow again. The choice that European leaders are called to make is not a mere technicality. It has to do with our common future as a wealthy region.