It violates every tenet of European integration. It contradicts all wisdom on how to reform economies, create growth and maximize competitiveness. And it's becoming a political hot potato. Just last week German Chancellor Gerhard Schroeder angrily denounced it as "infuriating" and "extremely nationalistic."

The object of his ire? France's new infatuation with so-called national champions--companies nurtured by state aid and special protections to gain an advantage over foreign competition. Declaring that key companies "must not fall into the hands of foreigners," French Finance Minister Nicolas Sarkozy is effectively renationalizing giant Alstom, the country's flagship maker of high-speed trains, and shutting out German rival Siemens, which had been eying the financially troubled conglomerate for acquisition. By late June, Paris-based drugmaker Sanofi-Synthelabo is expected to complete its 55 billion euro takeover of Franco-German rival Aventis, whose plan to merge with Swiss pharmaceuticals giant Novartis was recently blocked by President Jacques Chirac on "national security" grounds. The deals have infuriated France's trading partners, most of all the Germans, who will make much of the issue when Chirac and Schroeder meet this week in Aachen. Paris may talk about building "European" world beaters to compete with American multinationals. But as the Siemens and Novartis cases make clear, the intention has been to strengthen French companies instead.

For years economic orthodoxy has promoted efficient markets, free competition and the privatization of state industry as the best guarantee of growth and prosperity. All three are enshrined in EU economic policies that strictly limit state aid to companies and national protectionism. But Sarkozy and other proponents of the champion theory point to Airbus, a company created with billions in state subsidies and the politically engineered merger of several rivals. Now the French-based aircraft maker is eating rival Boeing's lunch, with a 52 percent share of the market for commercial jets. With Sanofi-Aventis, France is suddenly home to the world's third largest drugmaker, capable of competing on a global scale. (At one stroke, the 90 billion euro behemoth owns America's second biggest sales force and is no longer forced to let rival Bristol-Myers market its drugs, among them the stroke prevention treatment Plavix and the allergy pill Allegra.) Long-term success will be up to the markets. But to a Frenchman today--and a worker at Sanofi--the strategy looks impressive.

It does, however, pit Paris against the EU's liberalizers. Frits Bolkestein, the Brussels commissioner responsible for enforcing single-market rules, calls the policy a "pathetic" return to the dustbin of failed economic policies. Europe's postwar history is full of expensively subsidized failures, from defunct PC makers to fast-breeder reactors and magnetic-levitation trains. Even successes like Airbus come at huge and continuing cost, warns University of Kiel economist Hugo Dicke. Instead of protecting national companies, he says, EU members are supposed to be fostering entrepreneurship and deregulating markets under the Lisbon Agenda, an ambitious program to raise GDP by 40 percent and make Europe "the world's most competitive economy" by 2010. Liberalizers now worry the French are retreating from these commitments--endangering growth in all of Europe.

France is not alone in bucking the EU program. Germany, too, talks of building national champions, though it is less baldly ambitious about promoting purely German ventures than France. Why this sudden rage for economic nationalism? Even in a unifying Europe, all politics is local. In both countries, the ruling governments are deeply unpopular, facing elections amid near-record unemployment and barely visible growth. Sarkozy, a rival and potential successor to Chirac, knows voters love tough talk of defending French companies and French workers. "I do not believe that the market is the final answer to all industrial politics," Sarkozy said in May. The economy, he said, must be subjected to "a strong political will." Chirac treads the same line, partly to woo conservative nationalists in the next election. As for Schroeder, Sanofi threatened to cut Aventis's German-based jobs. After getting assurances from Paris, the chancellor dropped his objections. "Public opinion is worried by unemployment," says Elie Cohen, an economist at the National Scientific Research Center in Paris. "Politicians are there to offer comfort."

The trouble begins when populism becomes policy. In recent years France and Germany have defied EU orders to open up state-protected energy and cable networks. That might make job holders happy but--as telecom deregulation has shown--often stymies growth and new competition. The talk of economic nationalism may also dampen foreign investment. The growing perception is that "you can't do normal business in France without government interference," says Alistair Murray of London's Centre for European Reform. Meanwhile Paris and Berlin are pressing to exempt various kinds of state aid from the restrictions of the EU stability pact limiting federal-budget deficits to 3 percent of members' GDP. If they succeed, warns Murray, "that would be dangerous."

Luckily, the rules governing the EU and international bodies like the WTO constrain such maneuvers. In the Alstom case, Sarkozy traveled to Brussels three times to negotiate with competition commissioner Mario Monti. As a condition for the bailout, Paris must sell at least part of the company's assets--though not the parts that Siemens covets. And though France and Germany may seek to modify the stability-pact limits, the rest of the EU isn't likely to accede. "The decision to open markets has been made," says Daniel Gros, director of the Center for European Policy Studies in Brussels. "This talk about creating champions is just that, talk."

Yet talk has a way of fulfilling itself. France has lately been pressuring Germany to let ship and missile maker Thales swallow German ship makers Howaldwerke and Thyssen-Krupp, creating a new French-led defense giant. Earlier this year Schroeder leaned on Deutsche Bank to acquire German rival Postbank to preempt a feared takeover by America's Citigroup--until the bank forcefully declined. Such instances of economic nationalism may be sporadic and motivated chiefly by domestic politics. But if "national champions" becomes just another term for protectionism and a rollback of EU reforms, then not just a few companies but Europe's entire economy could suffer.

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