Thursday, June 28, 2007

Sarkozy Really Doesn't Get It

The Financial Times today provides some depth and detail to President Sarkozy's attempt to steer Europe down the drain, economically. In the new European Reform Treaty for which he served as midwife, large European firms will no longer try to compete with each other. Now it turns out, he doesn't want them to have to compete with foreign companies, either:

Mr Sarkozy expanded on his economic world-view later that day, calling for a “genuine European industrial policy” and urging European governments to get tough on economic rivals such as China and the US. “Naivety is over,” he declared. “Reciprocity has started...”

But with Brussels bracing itself for fraught debates over further liberalisation of the energy and postal services markets, trade policy and an overhaul of the Union’s budgetary priorities, Mr Sarkozy’s words pose important questions. Is the French president articulating a wider unease about the free-market policies espoused by the EU – and is the Union about to roll back its commitment to liberalisation and enter a new era of protectionism?...

Yet it is hard to ignore the cracks that are emerging in what was an almost unanimous coalition behing pro-competition policies. An end to Europe’s economic revival could intensify protectionist rhetoric.

The latest breakdown in the Doha round of global trade talks has put more pressure on Peter Mandelson, the EU trade commissioner, and has made reforming the common agricultural policy harder. Meanwhile, the rise of China’s manufacturing exports has increased protectionist voices in countries from France to Romania.

Mr Mandelson’s anti-China rhetoric has recently been turned up a notch with a claim that the growing trade deficit is “artificial”, sustained by Beijing’s protectionism and an undervalued currency. All the same, Mr Sarkozy has already called for Mr Mandelson’s head for offering big cuts in farm tariffs as part of the Doha round.

In other areas, the Commission is finding it increasingly difficult to complete the great liberalisation projects that underpin the internal market. Brussels’ plan to encourage competition in the energy sector by breaking up large groups such as RWE, Eon and EdF is meeting fierce resistance in Berlin and Paris. A plan to abolish the last monopolies in postal services in 2009 looks likely to be postponed.

If Europe really is about to try protectionism for a while, they will fall far further behind economically than they are to date.

Protectionism sounds good, but it ultimately means prospering the company ahead of the consumers, by forcing them to pay artificially high prices for inferior products. Let's assume for a minute that the EU could shut off competition from the rest of the world -- how long would European consumers put up with this raw deal?

But more importantly, Europe can't shut out the world. No nation can. The EU currently imports about $1.5 trillion annually -- from the US, China, India and a host of other nations. Those countries won't allow Europe to shut its markets; nor will the WTO. And in the face of competition from the world's best companies -- honed by competition in open markets -- the 'European Champions' are doomed to fail.

You can't fight the invisible hand of Joseph Schumpeter.

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