EU firms face attacks on several fronts

Date: 29/10/1998

By Chris Johnstone

EUROPEAN industry must sometimes feel a bit like Napoleon's army on the retreat from Russia - the environment is hostile, numbers are dwindling and help does not appear to be on the horizon.

The Asian and Russian crises have taken the shine off the prospects for Europe's exporters. A further fall in the dollar and the possible spread of financial upheaval to Latin America could deepen their gloom.

Europe's steelmakers are now predicting a catastrophic year for trade as imports flood into the EU. Car sales to the Far East have all but dried up, shipbuilders fear that the recovery of South Korea's giants will be largely at their expense, and chemicals companies which poured investments into the region are now facing excess capacity and falling prices.

The European Commission has been generous with advice to the crisis-struck countries but parsimonious about offering much concrete help to European industries which fear the worst is now coming their way. The Commission is, in fact, ill-equipped to act, with such measures as anti-dumping duties inappropriate to protect European industry against cheap exports from countries whose currencies have devalued.

The current crises will make it much more difficult for new negotiations to push forward the frontiers of free trade.

In a still relatively buoyant European market, industry faces energy taxes, the slow plugging of single market gaps and the mixed prospects - depending on whether individual firms stand to gain or lose - of a clamp-down on government subsidies and national tax breaks.

On the eve of the euro's introduction in 11 countries, there is little of the euphoria which characterised the launch of the single market. Profit warnings and downward revisions of economic growth forecasts have filled the space where industrial optimism once reigned.

It is not, however, all doom and gloom. The new currency should bring immediate benefits, except for firms in the banking industry, by saving companies from having to hedge against fluctuations or second-guess the markets.

However, some of the reforms which should logically accompany the euro in the areas of tax and state aid are taking time to feed through. Taxation Commissioner Mario Monti has set a mid-1999 target for governments to agree a code of conduct on company taxation, aimed at stop countries poaching businesses and jobs from each other by offering preferential packages.

His efforts are, however, still encountering national opposition. European employers' lobby UNICE complains that the EU is not a barrier-free zone for tax treatment, with multinationals still encountering double taxation or, on the opposite side of the coin, difficulties in writing off losses.

On more direct forms of state subsidies, Competition Commissioner Karel van Miert is attempting a similar charm offensive towards governments to win their support for a rewrite of the current rules to allow illegal aid to be tackled faster. He also wants to clamp down on the current trend for companies to launch court challenges to Commission demands for aid repayments simply to delay reimbursement.

Companies with something to fear from Van Miert can only take consolation from the fact that the number and diversity of the dossiers being dealt with by his staff never ceases to increase.

Former no-go areas such as broadcasting, banking and sports have now become the bread and butter diet of the Directorate-General for competition (DGIV). Van Miert would be reluctant to admit it, but more does mean less, with his officials having difficulty delivering verdicts on the multiplying and expanding airline industry alliances and tackling complex financial dossiers such as Philips' 'technolease' sales of industrial know-how for cash.

Subsidy watchdogs at the Directorate-General for energy (DGXVII) are, however, showing signs of disciplining aid to the coal sector and putting together a set of rules on what incentives can be given to renewable energy.

Attempts to boost competition in the few areas of European industry which have not yet been exposed to the twin forces of liberalisation and privatisation are going ahead, in spite of the centre-left hue of most EU governments.

Energy liberalisation is seen as a key issue for EU industry, which complains that its costs are 30-40&percent; higher than in the US. The first stages of market opening in both the gas and electricity sectors look set to bring a far higher degree of competition than demanded by law.

At least 60&percent; of the electricity market should be opened in February. However, as the saying goes, you can take a horse to water but you cannot make it drink. An open market needs new entrants to spark competition.

Some key questions, such as the price charged to energy company newcomers to transport electricity and gas, still have to be answered. Gaps in the transport network also have to be filled in.

The rail and postal sectors, bastions of national monopolies, look ripe for some radical initiatives as they face the erosion of their respective markets by road transport and the Internet.

The railways have already been confronted with a proposal to phase in competition on one-quarter of their freight market over ten years. The postal industry is waiting for an end-of-year proposal from the Commission on what fresh steps to boost competition should be taken after 2003.

Things are changing. Deutsche Post, yesterday's brake on postal liberalisation, is now at the forefront of demands for certain sectors to be fully liberalised by 2003 and for complete market opening in 2005.

The Commission is already holding up telecommunications liberalisation as a success story less than a year after it took effect, with more than 500 companies now operating on local networks and over 100 mobile phone companies competing for business.

When it comes to industry's nightmares, the EU's long-threatened proposals to impose an energy tax figure prominently for large power-using industries such as steel, chemicals and glass-making.

Industry has fought off EU proposals for almost a decade, but the stakes have been raised by the Kyoto Protocol on climate change. The Commission argues that only through energy taxes will the EU be able to meet the target of an 8&percent; reduction in greenhouse gas emissions compared with 1990 levels.

The latest proposal calls for harmonisation and widening of excise duties to all forms of energy. It follows on from an idea for a straight tax on energy based on its contribution to pollution and oil equivalence.

Industry argues that cuts should be delivered through voluntary agreements with different sectors. Although the Commission has been willing to negotiate a voluntary accord with the car industry for a reduction in carbon dioxide emissions, it has also spelt out that such agreements are not appropriate for all sectors and circumstances.

Voluntary deals might work for the car sector, where there are only a few manufacturers and they have a relatively strong industry organisation, but are difficult to apply and police in the case of less-consolidated sectors.

How far the EU will reconcile its commitment to greening its policies and taking on board the concept of sustainability with its emphasis on industrial competitiveness has still to be seen.