Page last updated at 08:15 GMT, Thursday, 19 February 2009

Protectionist forces bedevil EU

By Ben Shore
Europe business reporter, BBC News, Brussels

Production line at Toyota-Peugeot-Citroen Automobile in Kolin, Czech Republic
Peugeot-Citroen has a joint venture with Toyota in the Czech Republic

"Protectionism" is like "terrorism". Now, before people get upset I should make myself clear. What I mean is the use of the two words is similar - one person's terrorism is another's freedom-fighting.

In the same way, what one government calls "protectionism" another may see simply as a way of safeguarding jobs.

On 1 March EU leaders will gather in Brussels for what is being billed as a "protectionism summit".

The idea is to head off what many see as a shift towards measures that incentivise large firms to favour investing in one member state over another, not for sound business reasons but because of the subsidies on offer. This is an abhorrent sin in the eyes of the eurocrats who run the EU. They believe the European single market is the main source of Europe's prosperity and that subsidies distort it.

The current distortionist-in-chief is supposed to be French President Nicolas Sarkozy. He has suggested that in order to secure French government aid, French companies like Renault and Peugeot-Citroen should move production out of their East European factories and back to France: "when a manufacturer, I won't say any names, sets up a factory in the Czech Republic to sell cars to French people, that's unjustified".

Such comments have caused consternation. The Czechs are in a particularly difficult position. Not only do they suddenly feel their factories are under threat, but as the current holders of the rotating EU presidency it falls to them to try and calm the troubled waters. It is they who have been the driving force behind the meeting on 1 March.

National priorities

In such situations in Europe, one would normally point to the difference between rhetoric and reality. President Sarkozy is known for speaking his mind, while the rest of the French government quietly gets on with making policy. But on this occasion there is a distinct overlap between what he says and the content of his proposals.

French President Nicolas Sarkozy
President Sarkozy has put the EU's national rivalries centre stage

The basic idea is to lend 3bn euros (2.6bn; $3.8bn) each to PSA Peugeot-Citroen and Renault, but on the condition that they avoid closing French production plants, or laying off French workers.

The trouble is, with demand for cars in Europe collapsing (new registrations were down 27% in January) something has to give - and that something might well be Czech workers.

The EU competition authority has formally requested details of the French scheme and is now studying the detail. But despite going through the correct procedures there is a clear concern at the drift of French policy.

EU Competition Commissioner Neelie Kroes, who must ultimately decide on the legality of the French programme, is making her position quite clear.

"We have to protect people by creating for them real jobs with real futures, not jobs that only exist as long as the taxpayers' money exists. That takes leadership. Leadership is not bribing multinationals and stealing jobs from one's neighbours," she said.

But while Ms Kroes has the luxury of not being answerable to voters the French government is ultimately responsible to French taxpayers.

Favoured banks

In the absence of a way of channelling money through central European institutions how is it going to look if the people running the country end up paying billions of euros into the coffers of their carmakers only for thousands of French jobs to disappear? Some might describe it as political suicide.

The sudden debate about protectionism tells us a lot about the nature of European politics, but it also tells us something about the financial crisis.

In the desperate autumn of 2008, as banks teetered on the edge of a catastrophic collapse, governments across Europe were forced to inject huge sums of cash into the banking system. Very often that cash came with strings: "you will lend money in your home market," banks were told.

These conditions were noted but not eliminated by the Commission, desperate to prove it was up to the task of managing the crisis.

But if a bank accepts, say, a 10bn-euro injection in exchange for focusing its lending on its home market - at the expense of lending elsewhere - is that not a market distortion similar to that which the French are accused of instigating in the car sector? National governments were in effect paying for preferential lending for their own citizens from their own banks.

But the panic of those days has passed and the industries under threat are not the internal organs of the European economy (the banks).

The car industry is a completely different beast, suffused with national pride but also synonymous with the ebb and flow of industrial relations.

Disputes about subsidies for carmakers are not new, but it is the fear of what is to come that has electrified the protectionist debate. Fear that the downturn could lead to a devastating de-industrialisation is clashing with a core principle of the European Union - that we're all competing in this market together.

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