Rising Barriers
French Prime Minister Dominique de Villepin is leading a new wave of protectionism—in Europe—but also, possibly, one of reform.

By Eric Pape and Christopher Dickey
Newsweek International

Villepin's approval ratings have slipped to 36 percent
Joe Klamar / AFP-Getty Images
Villepin's approval ratings have slipped to 36 percent

March 20, 2006 issue - Like his hero Charles de Gaulle, Dominique de Villepin sees himself as a man of action. When France's prime minister mulls tough decisions in Matignon, his official palace on the Left Bank, he casts an aristocratic eye on the general's famous fighting words, ceremoniously framed: FRANCE HAS LOST A BATTLE. BUT FRANCE HAS NOT LOST THE WAR! De Gaulle called on his countrymen to resist German occupation in 1940. Villepin today calls on France to protect French jobs. "The true evil," he said upon taking office in June, is unemployment. "All of the forces of my government will be engaged in this battle." He vowed to "mobilize every asset of our economic and industrial policy"—and staked his political future on the fight.

Beware what you ask for. France's unemployment remains stubbornly high despite Villepin's promises—highlighted just last week by protests that brought half a million demonstrators into the streets of France. His approval ratings have slipped to an anemic, Bush-like 36 percent. That may explain the somewhat desperate rhetoric that has crept into his exhortations lately. Now as he talks about jobs, Villepin also talks—a lot—about protecting French industries. His tone suggests he believes walls can hold back the flood of global, and even European, competition.

He's not alone. All across Europe people are afraid. For some, the worry is China and the seepage of jobs abroad. For others, it's a more generalized fear that, with globalization, they can only lose out. "There's a neo-nationalism in Europe," says Columbia University economics professor Xavier Sala-i-Martin. "They don't even believe in their own project. They say they want a big market for capital and goods, but when it doesn't go well, they resort to neo-protectionism." So as the French prime minister shouts "To the barricades!" the battle cry is being echoed across the Continent, with potentially disastrous consequences.

Even those who don't ordinarily read the business pages know Villepin's recent works, and see his hand. Listing "strategic" industries to be protected, France has tried to push back an Italian bid to take over the French water and energy company Suez, as well as a move by Indian magnate Lakshmi Mittal's Dutch-based company to acquire steel giant Arcelor. Even the food empire Danone, most famous for yogurt, has been deemed of vital interest. The obvious idea is to tilt the playing field in favor of French "national champions," the political goal to convince the French people that all this will somehow preserve their jobs.

In Brussels, Villepin is seen as a sort of latter-day Luddite trashing the already rickety European economic machine. He threatens Europe's prosperity, they say, by inciting a tit-for-tat cycle of protection and retribution. "It is another sign of a type of closing off, nationally, after, the rejection of the EU constitution," says Frederique Sachwald of the French Institute for International Relations. "The year 2005 was a dark one for Europe, and France contributed to that, and it continues to do so." Italian Economics Minister Giulio Tremonti talks about a "1914 effect," looking back to the eve of World War I, when the nations of Europe turned against each other with increasingly ugly protectionist competition instead of cooperation. Eric Chaney, an economist at Morgan Stanley, makes an analogy with the 1930s: "The Great Depression in the U.S. became a global depression, because in trying to protect itself, it killed globalization."

Given such dire predictions, what does Villepin think he's doing? Well, look at what else his office holds. There is an African sculpture with two heads facing in opposite directions. And there's a battered old copy of Antoine de Saint-Exupery's famous children's book, "The Little Prince." The wisdom it conveys, proffered by a fox, is far different from de Gaulle's: "What is essential is invisible to the eye." Even as Villepin extolls national champions, he's tried quietly to push for economic reforms. In fact, Villepin epitomizes a kind of political realism (or hypocrisy) that's spreading every bit as fast as protectionism in Europe. Like prestidigitators, politicians distract their audience with big talk about national industries and promises to protect jobs, even as they implement, as if by sleight of hand, policies intended to open their countries to more foreign investment and to liberalize their labor markets. Reforms, in other words, that however unpopular in the here and now, hold the prospect of greater economic health in the future.


Take but one of the most conspicuous examples of recent weeks—Villepin's maneuvering to prevent the Italian energy company Enel from taking over the major French energy company Suez. It is a masterpiece of calculated confusion. To stop the deal, French politicians (reportedly including President Jacques Chirac) have called up their Italian counterparts and warned them to back off. Meanwhile, they've worked hard to engineer a merger of two French giants, Suez and formerly state-owned utility Gaz de France, effectively blocking the Enel bid.

The European Commission in Brussels has angrily demanded an explanation—but the key consideration cannot be acknowledged, at least not officially. The Suez merger with Gaz de France will shrink the French state's share in Gaz de France from 80 percent to about 35 percent. It's a stealth privatization, in other words, that would long have been unthinkable in political terms, even though many analysts thought it necessary before the energy sector is deregulated across Europe next year. "This is a classic French move: rhetoric to the left, movement to the right; talk a big line, then do what's sensible," says Paul Hofheinz of the pro-reform Lisbon Council in Brussels.

Of course, says Hofheinz, this came at the cost of Villepin's "spreading poisonous rumors among his own people, using the butt-covering of economic nationalism." And in that especially he is not alone. As the campaigns heat up for Italy's elections next month, Prime Minister Silvio Berlusconi and challenger Romano Prodi have been treating the French maneuver against Enel as a national insult, hinting at retaliation against French companies that want to acquire Italian ones. Spain has extended the power of its regulators to impede takeovers of Spanish utilities. Politicians in Germany have famously denounced foreign "locusts" buying up German companies, even as they clash with Brussels over the so-called Volkswagen Law protecting the automaker from foreign takeovers.

But the French case is especially striking because even as Villepin publicizes his desire to protect whole categories of "strategic" industries, France has accumulated an impressive record opening itself to foreign investors. Over New Year's, Villepin won a measure giving the French state a veto over foreign acquisitions in industries deemed critical to national security. Yet the International Monetary Fund recently calculated that foreign direct investment represents only about 13 percent of GDP in Italy, 25 percent in Germany, a respectable 36 percent in Britain and a whopping 42 percent in France. Chaney of Morgan Stanley suggests that precisely because France is so open to outside investors, "the political reaction is the most sensitive." Similarly, last week's big protests are an indication of how dramatic Villepin's labor reforms actually are. During his first eight months in office, he managed to push the unemployment rate down from 10.1 percent to 9.6 percent. But, recognizing that the jobs picture couldn't keep improving without more draconian action—and that he couldn't reach a presidential run-off without more support from the French right—Villepin in January pushed through a special employment contract for people under 26 that encouraged hiring by allowing employers to fire, if need be, with little or no penalty during the first two years on the job. This may sound harmless enough in the fluid labor markets of Britain or the United States, where there are many jobs, and many of those are essentially temporary. But the French are used to the idea that jobs are permanent, or ought to be. "You work for Peugeot; you become Peugeotist. Until now, you've had a career inside a company," says Jean-Louis Borloo, whose ponderous title is minister of Employment, Labor and Social Cohesion. "It is difficult for French society to deal with that changing."

But global competition works against this kind of comfortable tenure. Companies that can't adapt quickly because they can't change or reduce their personnel often just drop dead. Then everybody loses. "People are starting to realize that we need an administration that allows greater mobility, but it isn't easy," says Borloo. It's particulary difficult in a climate so charged with nationalism.

Some advocates of global commerce take comfort in the fact that Villepin's ability to follow through on protectionist rhetoric, even if he wants to, is extremely limited. The struggle against Mittal Steel's bid for Arcelor is perfect proof. "There is a bit of grandstanding," says Guillaume Durance, an analyst with the European Policy Center in Brussels. "The first reaction to the Mittal bid was heavily negative and to some extent xenophobic, but there was absolutely nothing the French government could do. There is no breach [by Mittal] of existing rules." European Commissioner Frits Bolkestein, who penned a controversial directive to open up European service industries, told a recent gathering of business leaders in Paris that, overall, European protectionism "is declining." Opportunistic politicians campaigning against Brussels or their neighbors may slow the tide of global markets, he said, but they won't stop it.

Yet the risk endures that protectionist rhetoric, even as a smoke screen for cautious reform, will become a reality that's harder and harder to overcome. "Protectionism is almost never unilateral, it almost always entails countermeasures and responses," says Daniel Vasella, CEO of the Swiss-based health-care giant Novartis. "It is always a negative spiral." Protectionist posturing destroys business confidence. "For a free flow of capital and investments, predictability is important. You can't say to investors and companies: "You can enter but you may possibly not exit'," says Vasella.

The larger problem with the bait-and-switch approach to reform is that it will never become easier. "The saddest part of all this, and the most dangerous thing Villepin is doing," says Hofheinz, "is that no one is explaining the basic fact to people that open borders are good for France." Ultimately politicians who intend to lead have to learn that what is essential, in fact, must be visible to the eye.

With Karen Lowry Miller in Brussels and William Underhill in London

© 2006 Newsweek, Inc.

© 2006 MSNBC.com

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