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Economic Patriotism - A Threat to the European Market?

The term "economic patriotism" has been circulating in the rhetoric of European economic policy since it was first coined in 2005. A number of European governments are taking action to prevent transnational takeovers and mergers. Is this protectionist behaviour having a detrimental impact on Europe's single market - and by extension on national economies?

It was former French Prime Minister Dominique de Villepin who first coined the term "economic patriotism" in 2005 with reference to attempts to prevent French dairy giant Danone from a takeover by PepsiCo of the United States.

Swedish Scania rejected a 9,6 billion Euro take-over bid of the German company MAN.
Photo: AP

A year later the French government successfully blocked the takeover of the Belgian-French electric utility Suez by its Italian rival Enel, by engineering a merger between Suez and another French giant, Gaz de France. In the meantime, 11 sectors of French industry have been declared strategic areas in which the government can intervene in the "interest of state security" to prevent a foreign takeover.

"In France, the state's economic centralism is not perceived as an anachronism in a global economy but as the application of Adam Smith's Law of Comparative Advantage," political scientist Dominique Moisi pointed out in March 2006, explaining the French predilection for economic patriotism: "Bringing the patriotism criterion into the equation only confuses the debate. Can major French companies be good for Europe, but major European companies bad for France? They'll have a hard time trying to sell this maxim," he concluded.

Violations of competition rules

"I don't find it obscene for governments to question the industrial concept behind a takeover bid or a merger," Luxembourg's Prime Minister Jean-Claude Juncker asserted in an interview published by French newspaper Libération on 24 March 2006, defending Luxembourg's economic patriotism in the case of the takeover of Arcelor by India's Mittal group. "The same goes for the impact a takeover can have on a region or country," Juncker added, stressing: "You can't reduce Europe to a single market."

Nonetheless, the declared goal of the EU is to strengthen competition within Europe. The single European market has existed since 1993 and, according to Article 14 of the European Community treaty, guarantees the free movement of goods, persons, services and capital. However, opening up Europe's markets has been a difficult process and for a long time there were no uniform regulations governing takeovers. It was only in 2005 that the European Commission finally passed a directive on takeover bids aimed at making the process of cross-border mergers more transparent - for example in such matters as the deciding rights of shareholders and the duty of the acquiring company to provide detailed information.

But the "canker of economic patriotism" is not equally active all over Europe. Over the past few years there have been a number of successful cross-border mergers: British telecommunications company Vodafone acquired Mannesmann-Mobilfunk, German industrial gases company Linde swallowed up its British rival BOC and Italy's Unicredito was able to add Germany's Hypovereinsbank (HVB) to its portfolio.

National icons

However, the latter spawned protests from the Polish state because both Unicredito and HVB held shares in Polish banks. The fusion made Unicredito the most powerful banking group in Poland. This prompted the Polish government to demand that Unicredito sell its Polish shares.

Anna Slojewska, Brussels correspondent for Polish daily Rzeczpospolita, criticised her government's conduct in this matter: "We are prepared to fight for the opening of labour markets and the relaxation of the services directive in the 'old' EU because we see this as providing better opportunities for our companies. However, we're not prepared to renounce our right to intervene when it comes to foreign banks establishing themselves in the Polish market."

The Polish example demonstrates that there is also a renationalising tendency in the economies of former communist states. Hungary recently tried to defend its oil company MOL against a takeover by Austrian competitor OMV by buying up shares in MOL and parking them with allied companies.

On 12 July 2007 László Varró justified the protectionist measures of the Hungarian government in the Hungarian daily Népszabadság saying: "The takeover of MOL by OMV would be anti-liberal because a state-owned company would be taking over a private company. A market structure based on free competition would thus be monopolised."

The liberal countries: big without big companies

Great Britain, on the other hand, is among the liberal countries of the EU that are open to foreign investors. Over the past few years many British companies have been bought up by foreign companies, as Austrian daily Die Presse reported in a survey published on 25 July 2007. The newspaper concluded that this had not harmed Britain's economy: "London is the only financial centre in Europe that can hold its own with New York."

Therefore, when the British gas firm BOC was taken over by German rival Linde, the British daily The Guardian calmly commented: "The fascinating thing is that there is hardly any national disquiet. What a contrast with other parts of Europe, where there is an outburst of economic nationalism to protect 'national champions', mainly in countries that are proactive in buying up British utilities. In this respect Britain is more 'European' in accepting a free market than other EU members who are battening down the hatches."

Strengthening medium-sized companies

Nor does Sweden's liberal stance appear to have put it at a disadvantage so far. In a radio report by Julia Elvers-Guyot broadcast on 28 February 2006, economics expert Claudia Kemfert attributed this to the fact that England and Scandinavia had started the privatisation of their energy markets earlier than other countries: "Even before the passing of the EU directives both countries had functioning markets comprising many small companies."

This is why, on 18 October 2006, the Swedish newspaper Sydvenska Dagbladet gave the all-clear signal when Germany's MAN raised its bid in the battle to takeover Swedish truck maker Scania: "Sweden should be trying to combat the spread of protectionism in Europe instead of emulating it. Economic nationalism often goes hand in hand with stagnation. The problem is Sweden's poor track record when it comes to attracting foreign businesses. The solution to the problem is not holding on to the large companies at any cost but helping small and medium-sized companies to set up."

Golden shares as the solution?

The European Commission may be trying to combat the protectionist tendencies of certain European states, but as far as takeovers by non-European companies are concerned it appears to adopt a different stance. On 19 September 2007 the European Commission plans to present a new concept aimed at protecting Europe's energy sector against investors and investment funds from non-European countries while promoting liberalisation and restructuring at an internal EU level at the same time. The Financial Times Deutschland explained this step as follows on 30 August 2007: "It is motivated by the fear that Russia or one of the Arab oil states could use state-controlled companies like Gazprom or consolidated funds to gain control of the European Union's energy supplies and thus put them at risk."

"According to this concept, nation states and the European Commission will be granted special rights in companies. Politicians will be able to block the takeover of companies in 'sensitive sectors' with a single share," Franz Schellhorn of Austria's Die Presse explained on 24 July 2007. He pointed out that "under the pretext of 'protecting against foreign capital' Europe's governments are well on their way to dragging Europe back to the times of nationalisation and protectionism we thought we had left behind long ago. Giving states a 'golden share' is nothing other than the de facto expropriation of private investors."

The Europeanisation of companies

Fanned by fears of superior rivals like China, of a globalised market within which Europe's role may become ever smaller and the loss of prestige and jobs, the discussion about how to deal with non-European investment funds has just begun. According to economics expert Nicolas Véron of the independent Brussels-based think tank Bruegel, these fears are understandable, but the political solutions are not tailored to the realities of economic policy.

The Europeanisation of companies in Europe took place long ago, Véron points out in his assessment of a study conducted by his institute. The study shows that just three-eighths of Europe's companies make the bulk of their revenue in the countries where they have their headquarters. France, for example, accounts for only 22 percent of "French" Danone's global sales and less than 14 percent of its global workforce works there.

"The general trend is unambiguous," Véron writes, and warns of the dangers of ignoring it: "The biggest risk is that the growing disconnect between the perception of 'national' companies and the reality of Europeanization may lead to spectacularly ill-judged policies."

Sabine Seifert

Sabine Seifert was an editor for euro|topics. She studied German studies and History before going on to work as a cultural editor at the tageszeitung ...
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