Trade policy in the EU

Protect trade, or protect Sarkozy?

Mar 22nd 2012, 0:07 by The Economist|Brussels

Funny thing, those hard-fought EU summit statements. Sometimes the most thunderous declarations

mean nothing. But sometimes there are those ambiguous little words turn into something big. Such is

the case with the preamble of the communique (PDF)of the summit in September 2010:

The European Council discussed how to give new momentum to the Union's external relations,

taking full advantage of the opportunities provided by the Lisbon Treaty. It agreed on the need for

Europe to promote its interests and values more assertively and in a spirit of reciprocity and mutual

benefit.

“Reciprocity” was left undefined. But now we know what it means. The European Commission

yesterday (March 21st) issued a much fought-over proposal to give itself the power to close its

public-procurement markets to companies from countries deemed not to reciprocate in allowing

European firms to compete for their public contracts.

The Commission insists this is not about protectionism, but about becoming an adult in the big bad

world. It is about arming oneself to force others to open the door to European companies in a market

that accounts for anything up to 20% of a country's GDP. It is, above all, about confronting China.

"The EU should no longer be naïve and should aim for fairness and reciprocity in world trade,” said

Michel Barnier, the (French) single-market commissioner who co-sponsored the initiative with Karel

De Gucht, the (Belgian) trade commissioner.

My forthcoming column this week deals with the threat of protectionism. For now, I want to delve

into some of the detail, and the internal process that led to this deeply flawed proposal.

With difficulty, perhaps, one might believe the Commission's claim to be seeking greater market

access if the proposal had included only Mr De Gucht's bit. After all, he is from Belgium's Liberal

party and has negotiated many a trade deal. Articles 8, 9 and 10 of the text (the official version is not

yet out, but a Commission release is here PDF and my copy of the text is here PDF) set out an

orderly procedure for the Commission to investigate market access in other countries, seek redress

through negotiation and, only at the end, impose temporary and targeted retaliatory measures. These

could include excluding tenders with more than 50% of goods and services from the sinning country,

or a price penalty on the offending part of the tender.

Mr Barnier's contribution to the effort, Article 6, is more worrying. It gives governments,

municipalities and other local bodies the power to exclude bidders from offending countries (with

permission from the Commission). This would apply to contracts above €5m (accounting for 60% of

public-procurement contracts subject to EU-wide bidding) and where bids contain 50% or more

goods and services from non-reciprocal countries.

This local freedom to exclude bids threatens to fragment the EU's single market that Mr Barnier is

supposed to be defending. Not surprisingly, the article was the most contested by heads of cabinet on

Monday, and by the commissioners themselves on Wednesday.

More alarming, the 50% rule in both procedures means that European firms that may make up the

other half of bids could be penalised.

The proposal has run into opposition from the Commission's legal services. And despite several

changes, the Commission's own Impact Assessment Board “could not give a positive opinion”. Of

those consulted by the Commission, a substantial minority said they disagreed with any new

legislation, including two-thirds of contracting entities and government bodies. The rest disagreed

over what action should be taken.

Perhaps the most damning opinion came from Germany. Its response to the move, circulated

privately, declares bluntly: “The proposal is unacceptable and should be rejected”. (see next post for

the detail)

So to summarise: the proposal raises fears that it may spark a protectionist trade war, it endangers the

single market, it raises questions about its legality, it worries those most charged with ensuring value-

for-money in public contracts, it is opposed by Europe's most successful exporter and, according to

the Commission's best experts, it probably will not achieve its declared objective.

So how did such a poorly conceived project get through the Commission's college, and why now?

During the internal debates, many argued for the proposal to be redrafted because it was patently a

mess. At least, the critics said, remove Article 6 entirely. But it stayed in, and the college was split

more or less down the middle, with opponents including Cathy Ashton (the British commissioner),

Cecilia Malmström (Swedish), Olli Rehn (Finnish), Stefan Füle (Czech) and, to a lesser degree,

Günther Öttinger (German).

The decisive push came from José Manuel Barroso, the president of the European Commission. This

a curious step for him. He is usually considered to be a liberal on economic matters, albeit not a very

forceful one.

His motives may well lie across the border in France, where the presidential election campaign has at

times seemed to be a contest over who could be most critical of the EU. President Nicolas Sarkozy

has been beating the drum for protectionism, and for renationalising border controls in the Schengen

free-travel area (his speech is here PDF). His Socialist challenger, François Hollande, wants to

renegotiate the newly-agreed fragile fiscal compact to enhance fiscal discipline.

Perhaps Mr Barroso was browbeaten by the French president, or perhaps he concluded Mr Sarkozy

was the lesser evil and decided to give his struggling campaign a helping hand.

It is no secret in Brussels that two men dislike each other. But at least they are from the same political

“family” of centre-right parties, the European People's Party. One diplomat suggests: “The EPP

connection is stronger than people imagine.”