Close The Door

At long last, Tony Blair actually played the role of European Union president. Hoping to prevent last week's gathering of EU leaders from turning into another verbal fistfight, he downgraded the meeting from an official summit to an "informal" confab. Two days of talks were cut back to one. All the while he kept his eye on the real prize: a historic deal to conclude the current Doha trade round, swapping cuts in European farm tariffs and subsidies for similar concessions by the United States.

Alas, Jacques Chirac would have none of it. French farmers bear the sacrifice for Blair's gamble with his American friends? Sans doute, France reserves the right to veto that one, the French president promised. Just like that, he threatened to scuttle a new global trade order that might save Europe's taxpayers billions of dollars and create millions of jobs around the world.

The clash at Hampton Court is a symptom of the crisis gripping Europe. The economic integration of the Continent's 450 million consumers into a prosperous single market--the EU's raison d'etre since its creation after World War II--has come to a virtual standstill. At the same time, growing numbers of Europeans have awakened to the threat of globalization, with little agreement on how to cope. On one side are the core economies of the continent: Germany, Italy and France, all stagnating yet determined to preserve their vision of a "social Europe" that protects citizens from too much change. On the other side: Britain and the Scandinavians, who want to meet the challenges of globalization by staying competitive, flexible and attuned to the fast-changing demands of the market.

Casting about for solutions, the former seem to be raising an old specter: protectionism. Never mind that, economically, the case against trade barriers is cut and dried. There is not a single case in history where nations that cut themselves off from global trade grew--or stayed--rich, says Paul Hofheinz, president of the Lisbon Council, a pro-market lobby in Brussels: "The issue is completely unambiguous." Yet in an increasingly insecure world, where politicians have to appeal to voters worried about their jobs, protectionism's political expediency is clear.

The signs are everywhere. Even as Chirac sunk last week's summit, his prime minister, Dominique de Villepin, was working on legislation to protect 10 "strategic" industries from foreign buyers--not just Americans or Asians, but even European neighbors. This new "economic patriotism," he says, is designed to defend "France and that which is French" by declaring entire sectors of French industry off-limits to foreigners, including pharmaceuticals, biotech and--strangely--casinos. Already, Chirac has denounced the European Commission for allowing Hewlett-Packard to slash its French work force; last summer, de Villepin attacked Pepsi's reported interest in Danone, the French diary conglomerate, as an assault on one of the nation's "industrial jewels." In Italy, meanwhile, the government has been accused of ignoring a five-year-old EU court order not to block other Europeans from acquiring Italian companies, as it did again last summer when Italian banking regulator Antonio Fazio tried to stop Holland's ABN Amro from taking over Italy's Banca Antonveneta. And in Germany, leading politicians inveigh against foreign "locusts" buying up local companies.

It's not only the EU's three biggest founding members putting the continent's integration on hold as they question the benefits of free-market competition. Even "liberal" states are hearing protectionist voices. Sweden, that paragon of a superdynamic "knowledge economy," is having second thoughts about its open borders. There, labor unions in December 2004 successfully campaigned to stop the construction firm Laval Partneri from using cheap Latvian workers to build a Stockholm-area school. Laval, since forced into bankruptcy by a union-led boycott, has sued the unions before the European Court. A similar case involving cheap imported labor has raised public anger in Denmark, another showcase modern economy starting to face a backlash against open markets. In EU newcomer Poland, talks to form a new ruling coalition stalled last week, raising the chances that Prime Minister Kazimierz Marcinkiewicz will form a minority government dependent on the votes of two rabidly anti-EU parties.

Those hoping that regime change in Berlin might give the EU a new pro-market drive are likely to be disappointed as well. For all the talk during incoming chancellor Angela Merkel's campaign of relaunching Europe's traditional economic locomotive on a path to growth and competitiveness, the details leaking out of coalition negotiations last week were not particularly encouraging. With little talk of the broad changes in labor laws and other regulations economists say are necessary to create jobs for Germany's 5 million unemployed, the main disagreement so far seems to be whether to raise taxes by 40 billion euros, as Social Democrat leaders plan, or a few billion less, favored by the Christian Democrats. Unless the negotiations yield major surprises, it will be only a matter of time until the next economic downturn leads to fresh calls for special protections. Already, Merkel has put protectionists in charge of the Agriculture and Economics ministries, where key trade decisions get made.

If this means a re-emergence of economic nationalism, Europe's economy can only suffer. Right now, only five of the 12 Eurozone countries even bother to adhere to the "stability pact" limiting national debt, instead running up debt that will burden future budgets. When France and Italy led a drive to impose EU-wide quotas on Chinese textile imports earlier this year, they may have temporarily saved a few jobs in a handful of factories. But they hurt many other companies, especially retailers, not to mention consumers who depend on cheap Chinese imports. This spring, Germany and France cut down the EU's landmark effort to create a Europewide market in services, which make up 70 percent of the continent's economy. That means they'll forgo an estimated 600,000 extra jobs, according to the European Commission. At best, further integration is now stalled. At worst, the EU could see protective walls between its members re-emerge, putting much more at risk than strategic French casinos.

It would be bad enough if the problem were confined to Europe. What's worse is that Europeans' second thoughts about market freedoms and trade threaten to spill over into the world arena. Chirac's veto threat carries a very real risk of scuttling the current round of WTO trade negotiations, just as French objections held up agreement at the Uruguay round of trade talks in 1993. At the next meeting in Hong Kong in December, cuts in agricultural tariffs and subsidies are part of a complex package of trade easements that could add an entire percentage point to annual growth worldwide, says Bob McKee, an analyst at Independent Strategy, a London investment adviser. "If we don't get a deal, protectionist forces in Europe and the U.S. will be on the rise."

To be fair, a U.S. Congress beholden to farm lobbies and China fears will be as much of a wild card for WTO negotiations as an unbound Jacques Chirac. And the bark of a populist like himself is often worse than his bite. But with protectionist voices gathering strength on both sides of the Atlantic, there may no longer be a consensus to expand--or even preserve--the international free-trade order. "We're playing with fire," says Jean-Pierre Lehmann, business professor at IMD International in Lausanne. Europe's recidivists could be driving the EU toward serious misfortune.

With Tracy McNicoll in Paris

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