Charlemagne. Union blues

European leaders gathering at next week's summit should stop and ask how bad things are

IT'S like 1914, asserts Giulio Tremonti, Italy's finance minister. The four freedoms (of goods, capital, labour and services) are being undermined by self-declared "economic patriots" manipulating takeover laws and creating national champions. "The European Union is dead and we should act accordingly." Nonsense, retorts Jose Manuel Barroso, president of the European Commission. These are just growing pains. The single market is being strengthened by cross-border mergers. The reaction from national capitals, deplorable as it may be, is just a backlash against inevitable change.

Who is right? Mr Barroso is correct that a merger wave is under way that transcends national boundaries and may change the face of European business. Merger mania is also evidence of renewed corporate self-confidence across the continent. In the past, says Mario Monti, a former EU competition chief, bosses contemplating cross-border mergers would have trembled at the frown of national governments. Now they stand up to them.

Mr Barroso could also have pointed out that the backlash against cross-border takeovers is by no means confined to Europe. The United States Congress has just blocked Dubai's purchase of American ports; before that, it stopped a Chinese bid for Unocal. One country's spasm of economic nationalism does not justify another's. But it suggests that there is nothing uniquely European about the process. Indeed, America's protectionism may have egged on France's. Dominique de Villepin, the French prime minister, has repeatedly referred to American corporate flag-waving as justifying "economic patriotism".

In any case, it is not clear that things are worse in the EU than they were. Two years ago, the French government frightened off a bid by a Swiss drug company for a French one, by threatening to deploy regulatory levers. Conversely, Britain is not seeking to block foreign bids for such assets as its airports, mobile-phone companies or big banks. Perhaps the recent rush of political interventions in business may be unusually numerous. But that is a difference of degree, not kind.

Yet the case for worrying does not deny this. Instead, it posits that, despite the good things going on in the marketplace, politicians could still mess everything up. When Mr Tremonti talked of 1914, he did not mean that Europe was about to explode in a welter of blood, starting with a death in the Balkans. What he meant was that short-sighted politicians whipping up nationalist fervour just might blunder into a conflict whose seriousness they had not grasped in advance. This is not the opposite of Mr Barroso's optimism. It is consistent with it.

In a democracy, political leadership sometimes means telling voters they are wrong. In Europe, in recent years, too many politicians have flunked this test. Worse, they have encouraged many voters' fears by peddling the misleading line that globalisation is in some way a threat to European livelihoods. That process was boosted after much of elite opinion chose to interpret the French and Dutch referendums last summer as votes not against the EU but against globalisation.

Politicians committed to "the European project" seem unable to accept that voters might have turned against their beloved creation. Hence the appeal of talking up the perils of globalisation as an alternative explanation. This has the merit both of being plausible (anti-globalisation campaigners did have something to do with it) and of appealing to Euro-enthusiasts because, for them, being European is partly bound up with being anti-American and with opposing globalisation.

It is this account of the referendums that has helped to prepare the way for renewed economic nationalism. Politicians who chose to interpret the no votes as being cast against globalisation have fallen back on nationalism partly because, in their view, those votes have weakened the entire European project.

The nationalist revival

In this sense, Mr Tremonti is right: there has been a political failure that is connected with the EU's obsession with institutional reform. But the question is not whether it will fatally undermine the single market. Short of some Mitterrandesque attempt to renationalise chunks of the economy, that seems highly unlikely (and note that the Suez-Gaz de France merger would actually reduce the French state's ownership). Rather, the question is how much damage a resurgence of economic nationalism could do.

The answer is, potentially, a lot. Despite all the mergers, the single market remains weak. Over the past decade intra-EU trade has grown more slowly than the block's external trade. That has not changed since the launch of the euro, which was supposed to boost trade among those that use it.

The authorities also look weak. The commission has few heavyweights. Commission-bashing has become a favourite refuge of patriotic scoundrels. The stability pact meant to support the euro has been ripped up and replaced by a feebler remake. The trade commissioner has been reduced to threatening poor countries with endless anti-dumping sanctions. The big test of institutional strength now may come if EU competition authorities rule against one of the putative national energy champions. If they try, and governments seek to get round the ruling, even the commission's ability to police the single market, the core of its authority, would be compromised.

The EU has not reached that point yet. It may never do (another energy firm may snatch Suez from Gaz de France). But the danger is clear and present. At next week's summit, European heads of government will no doubt be tempted to ignore these troubles and talk about the Lisbon Agenda instead. But those who believe in open markets and the case for globalisation should confront them. If damage to the single market cannot be contained now, when Europe's economies are reviving, what will happen in the next recession?

Commentary feature. Is the EU's single market threatened by the rise of 'economic nationalism'? - or is the threat exaggerated?