Single-market blues Feb 5th 2009 From The Economist print edition Recession is bringing fresh threats to Europe’s single market Illustration by Peter Schrank IN FRANCE railway crossings are adorned with a small lesson for a life of gnomic brevity. “One train can conceal another,” is the message printed on warning signs. It is a motto that supporters of free trade should remember as they scan the horizon for threats to the European Union’s greatest achievement: the borderless single market. Those watching out for protectionism have plenty to alarm them, right before their eyes. But the biggest threats to the single market are those hidden from view. Start with the visibly alarming. France’s President Nicolas Sarkozy, an express train in human form, has hinted that billions of euros in aid for the French car industry should be made conditional on keeping production in France (and perhaps on buying French-made components, unnamed aides have briefed). There has been no less furious tooting and whistling from politicians in such places as Spain, Britain and Greece as they nag bailed-out bankers to lend first to domestic businesses and households. The Greeks publicly “advised” banks to be “more prudent” about transferring bail-out funds to Balkan subsidiaries. A nasty industrial dispute, sparked when Italian and Portuguese workers were posted to an English oil refinery, led one British minister to urge changes to EU law to stop foreigners undercutting Brits. Yet so far, say European Commission officials, most such announcements amount to “virtual” protectionism. Politicians thunder about shielding domestic jobs, but in the detail of their plans, they have avoided direct challenges to EU competition and state-aid rules. Linking public funds to a strict “buy French” policy for car parts, for example, would clearly be illegal. It would probably be equally illegal to link aid to a nationwide ban on moving production elsewhere in Europe (though regions can link funding to promises to keep specific factories open). European leaders have not forgotten the lessons of the 1930s, and accept that measures to harm neighbours would trigger a downward spiral of protectionism. Most EU governments are sincerely horrified by the “Buy American” provisions added to the Obama administration’s stimulus package by Congress. Many governments are frankly short of money, and are wary of subsidy races against each other. All the main political parties in Britain have condemned the current wildcat strikes against foreign labour, and defended the benefits of the free movement of people, goods, capital and services inside the EU. Yet dangers lurk, even so. This credit crunch will test all sorts of EU disciplines. Last month the commission revived EU export subsidies for dairy products for the first time since 2007, amid falling prices. After a similar plunge in olive-oil prices, Italy wants the stuff added to an EU list of foods that can be bought with public money and given to the poor. Greece is now trying to buy off its protesting farmers with a €500m ($650m) aid package for olives and other crops. The Greek plan could yet fall foul of EU rules: it is presented as an insurance scheme paying out for weather-damaged crops and rising input costs, but the amount is too big. There are other warning signs that governments are thinking selfishly. There is a reason why every stimulus plan contains infrastructure projects, says one senior official: it minimises the risk of public money leaking to other countries. In contrast, if governments try to boost consumption (say with tax cuts) lots of the extra cash might go on imported goodies. Public works are also pleasingly visible to voters. A list of 1,000 stimulus projects to start this year in France is nothing if not splendidly French. Some 45 cathedrals are to be restored and also several castles, alongside the usual high-speed rail lines and roads. The Spanish government is so proud of a public-works blitz of 32,000 projects that it wants to mark them with red-and-yellow metal signs four metres wide and three metres high. Yet a cornerstone of the single market is the idea that big public works should be put out to tender across the EU. The philosophy is clear enough. Contests keep local firms competitive and ensure value for money for taxpayers. Now that argument is under strain. Commission officials report political pressure to raise the threshold at which EU-wide tendering must occur, currently €5.15m for public-works projects. France wants the procurement rules tweaked to favour smaller firms. Compete or protect? Enforcing EU rules is going to become ever more painful. The Spanish prime minister, José Luis Rodríguez Zapatero, has promised that his public-works programme will create 300,000 new jobs, with hiring policies favouring the unemployed. That is allowed. But under EU rules, the jobs cannot be reserved for unemployed locals or Spaniards. The same goes for British politicians when they talk of stopping foreign posted workers “undercutting” British rivals. The truth is that the single market was always intended to bring out the competitive advantages of every corner of the EU. That includes allowing workers from, say, Poland, to offset lower productivity with lower wage costs, as long as minimum European standards were met. Ever since the EU began enlarging to take in poorer members, west European trade unions have been worried about keeping their high levels of social protection. Recent British protests are no surprise: commission officials had long expected action in Britain against foreign workers brought in under the posted workers’ directive, a trade union bugbear. The single market is firmly in the left’s sights. The European Trade Union Confederation, an umbrella body, has drafted a new “social protocol” it wants to add to the next EU treaty, saying the single market “is not an end in itself”, but must be balanced by “social progress”. That would split the EU between old and new members, and play into the hands of economic nationalists. A great deal is at stake as this crisis deepens. Without a lot of vigilance, the single market could be derailed.