Global Economics

Europe's Protectionism Trap


France's Nicolas Sarkozy isn't the only European politician resorting to old protectionist rhetoric amid the downturn: It's endemic to Europe

Few people can rile Central and Eastern Europeans quite as much as a French president. Jacques Chirac, referring to the pro-American Iraq policies of Bulgaria and other Eastern European countries, once growled: "The Eastern Europeans missed a great opportunity to keep their mouths shut."

Last week Nicolas Sarkozy upped the ante, saying: "We want to stop moving factories abroad, and perhaps we will bring them back. If we are to give financial assistance to the auto industry, we don't want to see another factory being moved to the Czech Republic."

Czech Prime Minister Mirek Topolanek, who was beside himself with rage, promptly announced a European special summit.

Sarkozy's remarks proved, once and for all, that protectionism is alive and well in the EU. Moreover, there is no doubt that protectionism reduces Europe's economic output. As we know, there are no winners in a protectionist race.

However, we should not fall into the trap of viewing Sarkozy's anti-liberal position as the root cause of growing protectionism. Germany has reduced non-wage labor costs several times without consulting with the other members of the European currency area. This has led to an immediate cost advantage for German companies.

The manner in which the German and French governments bailed out their banks was also not in the spirit of a common European competition policy. Anyone in Germany who wants to complain about French protectionism should try explaining the so-called "VW Law" to a Frenchman.

Protectionist Undercurrents

We have always had an undercurrent of protectionism in Europe, and the European Commission deserves a great deal of credit for the important successes it has notched up in the fight against it. The German Landesbanken, or state banks, and the French energy policy are two prime examples. But it will be more difficult to cap protectionism in the financial crisis, now that the member states have the upper hand and are using it to their advantage.

Sarkozy, with his protectionist remarks, finally demonstrated that he is no great European, and Slovakian Prime Minister Robert Fico did not take long to respond. If Sarkozy were to make good on his threat, Fico said, he would send Gaz de France home.

Open protectionism quickly leads to escalation. This would not be a favorable development, especially for Germany, the world's leading exporter.

But even though every politician and economist evokes free trade in soapbox speeches and on talk shows, Germany bears a significant share of the responsibility. As long as we react to the global economic and financial crisis in keeping with the motto "everyone makes his own bed,"—as Sarkozy allegedly quoted the German chancellor as saying in October, as cited in the French periodical Le Canard Enchaîné—one should not be too surprised about protectionism.

As long as there is no effective, European plan to combat the crises, countries will devise their own plans.

Under these adverse circumstances, Sarkozy truly cannot be blamed for saying: If we pay up €6 billion ($7.8 billion) for the auto industry, we can at least expect the money to remain in the country.

If the European Single Market is so important to us as Germans, why did we so vehemently reject a European plan to deal with the crisis?

If there were such a plan, we would not have French subsidies for the auto industry nor a German scrapping premium. Instead, perhaps we would boast a European car trade-in premium and symmetrical subsidies. And, in such a case, no one would have threatened to shut down Czech factories or send Gaz de France home.

Protectionism Made in Germany

The German economic stimulus program is designed to primarily benefit the German auto industry. It just happens to be structured somewhat more cleverly than the French plan. If we had sent the €50 billion ($65 billion) to the people in the form of tax rebate checks, French and Italian exporters would have benefited from our program.

But if everyone is intent on making as few concessions to neighbors as possible, it should come as no surprise that these packages are what they are. And no one, including Sarkozy, has sabotaged a common European approach as much as the German chancellor and Finance Minister Peer Steinbrück, a skeptic when it comes to Europe.

A similar debate unfolded in the United States recently, when Paul Krugman, the freshly minted winner of the Nobel Prize in Economics, announced, to his colleagues' dismay, that protectionism is justified to some extent. His argument is as follows: If stimulus packages are not coordinated, we have a problem, namely that national measures, such as tax cuts, primarily benefit foreign producers.

This was almost always the case with American tax cuts in the past. As a result, governments would face the choice of either dispensing with stimulus packages altogether, which would be disastrous in light of the crisis, or to structure them so that domestic producers would derive the most benefit from them. In this case, the protectionist version would be better than nothing. Krugman also sees the relationship between a lack of coordination and protectionism.

In this case, one can only hope for legal countermeasures. Perhaps the European Commission will manage to prevent a few excesses.

Nevertheless, the fundamental problem of massive French subsidies for the automobile sector remains in place. This will adversely affect other European carmakers. By sharply discounting their prices, Renault, Peugeot and Citroën will be able to gain market share—and not just in France. This comes at the direct expense of other companies.

Economic Games

From an overall European standpoint, such actions are economic zero-sum games. The French win, while the Germans lose. It is precisely the other way around with the German cuts in non-wage labor costs. Measures are adopted that cost a lot of money but are ineffective across Europe. It would be better to load the money onto a plane and drop it over Europe. But France, or any other member state, cannot be expected to do this. Only the EU can.

When Merkel and Steinbrück refused to agree to an overall European plan for the economy and financial sector, former EU Commissioner Mario Monti wrote in the Italian newspaper Corriere della Sera, the chancellor jeopardized what Germany had fought for over decades: the European Single Market. I am convinced that Monti reacts to Sarkozy's remarks with similar disbelief, as do all those people who support the European Single Market.

But even if Sarkozy offers a virtually ideal target for attack, it is still wrong to reduce the problem to this eccentric and ultimately somewhat ineffective politician. The root cause of the protectionism emerging in Europe is not Sarkozy. Rather, it is the work of people who, in a monetary union, make policies without consideration for their neighbors.

Translated from the German by Christopher Sultan


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