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Each to their own

By Richard Milne
Published: February 4 2009 19:53 | Last updated: February 4 2009 19:53

Ice pickets: protesters at the UK’s Lindsey oil refinery, where the use of Italian and
Portuguese construction workers by Total, its French owner, has sparked wildcat
strikes

Strikes against the use of foreign workers in the UK; French carmakers told to buy domestic components and not close factories in France; a
minister in Spain urging consumers to buy Spanish: protectionism in Europe appears to be rising by the day.

Warnings over the attendant risks are also on the increase. “Protectionism would be a sure-fire way of turning recession into
depression,” says Lord Mandelson, the UK business secretary.

The historical parallel is all too clear. Eight decades ago the US, followed by governments in Europe and elsewhere, launched a wave of
protectionist measures that heightened tensions and aggravated the economic crisis. Could it be about to happen again?

Europe’s willingness to confront the US over the Buy American provisions in its economic stimulus package suggest the times have changed
somewhat. Barack Obama, US president, even received a lecture from France when its trade minister said the plan to use only US steel was “a
very bad signal” and “clearly protectionist”.

Governments across Europe do indeed face a juggling act as they try to protect their citizens from the full force of the economic downturn. Yet
so far, the signs are that trade protectionism is unlikely to make a comeback, due largely to World Trade Organisation and European Union
rules that limit the scope for tariffs to be raised.

Instead, other forms of economic nationalism are coming to the fore, from demands to reserve “British jobs for British workers” to invocations to
patriotic consumption. Most insidious of all, say some observers, is the threat of what has been dubbed financial protectionism. Banks are
withdrawing to their home markets as government rescues force them to think more along national lines. That, in turn, is adding to the political
pressure for bail-outs of other industries.

“There is a very strong law of unintended consequences taking place after all the bank bail-outs. We will see
more and more activist government policies that distinguish economic activities according to the nationality of Barrier basher:

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the actors. It should be a big concern to everybody,” says Nicolas Véron of the Bruegel think-tank in According to the rules of the
Brussels. European Union’s single
market, there should be no
The consequences of such protectionism are likely to test Europe economically, politically and legally. barriers to the movement of
capital and labour in the bloc
“Unravelling the integration of the banking market will cause a lot of damage. It will throw things back 10
of nearly 500m people.
years, but not 30. But the rest of the protectionist measures we see will be marginal, providing the economy Conditions for businesses
doesn’t get totally out of hand,” says Daniel Gros of the Centre for European Policy Studies. should in general be the same
in all 27 member states.
Protectionist pressures in Europe have emerged as a serious concern at the European Central Bank and The European Commission in
Jean-Claude Trichet, its president, could step up warnings about the potential impact on growth after its Brussels is the guardian of
interest rate-setting meeting on Thursday. Mr Trichet last month described “the emergence and intensification the single market and can
of protectionist pressures” as one of the main downside risks facing the eurozone economy. take legal action against
member states.
Some of the financial integration that EU policymakers laboured to promote during the good times has It also oversees rules
already been rolled back by measures such as the splitting up along national lines of Fortis, the Belgo-Dutch designed to restrict the ability
finance group. Bank bail-outs, meanwhile, have generated pressures in other jurisdictions, with France of governments to offer
offering to inject €21bn ($27bn, £19bn) into the country’s six largest banks to ensure they were not at a assistance to their local
businesses and to ensure that
competitive disadvantage to UK or US rivals.
there is a level playing field
when it comes to permitted
Arguably more worrying is the withdrawal of many banks from lending outside their home markets. Rüdiger state aid.
Günther, the finance director of Arcandor, a German retailer, says: “You see a famous UK bank that is
saying to its bankers: ‘Don’t invest in Germany any more.’ It is creating some very difficult situations for some
companies.”

Instead, such banks are under growing pressure from government to increase lending at home. Richard
Lambert, director-general of the Confederation of British Industry, says international banks used to account BEHIND US FEARS:
for up to 40 per cent of lending in the UK. “They have now gone, and that’s why we have a funding problem Americans look for a
and a credit crunch,” he adds. cushion against
‘localised pain’
But some question whether what we are seeing is really financial protectionism or just banks sensibly cutting During the long boom in the
back their borrowing. “I think it is both. We are certainly seeing the financial crisis used by some as a cover US economy from the 1990s,
for financial protectionism,” says Razeen Sally, co-director of the European Centre for International Political it became common to argue
that the era of widespread
Economy.
American protectionism was
over, writes Alan Beattie. The
Ironically, some of the strongest warnings against financial protectionism have come from Gordon Brown, the political clout of trade-
UK prime minister, who oversaw the banking bail-out and has sought to persuade UK banks to lend more at sceptical lobbies including
home. “The greatest risk after the events of the last few months is a retreat into what I would call financial textiles and steel had shrunk;
isolationism,” he told the FT recently. industries such as carmaking
were keener on knocking
Nowhere is the threat of financial protectionism felt more than in eastern and southern Europe, where there down barriers to investment
abroad than raising trade
are growing fears that banks could repatriate capital, particularly from the ex-communist emerging markets.
tariffs at home.

George Provopoulos, the Greek central bank governor, says he has warned Greek banks against using funds Such triumphalism now looks
premature. As shown by the
from a €28bn government support package to support their Balkan subsidiaries. Groups should “lend on the
debate over Buy American
basis of availability of local funding, taking into careful consideration local economic conditions”, he adds.
provisions on federal
spending in the economic
Elsewhere in the continent’s east and south, financial supervisors are monitoring the local subsidiaries of stimulus bill before Congress,
international banks to ensure that they do not transfer funds abroad. the stars are coming into
alignment for a protectionist
Their concerns are not baseless. Serbia’s central bank injected €600m in extra liquidity into the local foreign resurgence. The economy is
currency market in December only to see foreign-owned banks siphon the money back into their head offices in recession and
unemployment is rising; the
in Austria, Italy, Greece and elsewhere.
US continues to run a large, if
diminishing, trade deficit; the
Mr Véron sees threats to integration: “For me, the big risk is of economic misery in central and eastern dollar remains strong; and the
Europe. If you see a big divergence between that region and western Europe then it will be a big blow to the Democrats, whose already
EU.” lukewarm affection for trade
has further diminished this
The political test is likely to be felt on both the national and the European level. Financial protectionism is decade, are in charge of both
leading to national support for other industries as European governments realise they have to be seen to houses of Congress and the
White House.
help not just the banks. Even the free-market Nordics are getting in on the act, with Sweden putting together
a rescue package for its car industry. Like many of the rescues across Europe, it is focused on national Douglas Irwin, professor at
Dartmouth College and a

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priorities, with loans and guarantees providing the money is spent in Sweden.
trade history expert, notes
similarities with the 1980s,
Similarly in France, the government is making carmakers promise not to transfer jobs or
when a recession brought
production outside France in return for €6bn of support. Nicolas Sarkozy, France’s president, believes forth many calls for particular
judicious intervention by the state during a severe recession will help foster support for globalisation and industries to be protected.
forestall a downward protectionist spiral. That explains actions such as launching its own sovereign wealth “But the difference then was
fund, taking a stake in a shipyard and providing guarantees to customers of Airbus, the aircraft maker. that there was a Republican
president, so the Democrats
Italy’s approach of “managed globalisation” takes a similar tack and explains how it kept Alitalia, the in the House could act tough
on trade in the knowledge
lossmaking airline, in Italian hands but let Libya acquire 10 per cent of Eni, the state-controlled oil company.
that the White House would
Germany, as the world’s largest exporter, has tried to avoid being seen as protectionist even if some of its block it,” he says. “These
moves to prop up banks and proposals for supporting industry have flirted with the idea. days they need to be a lot
more careful.”
Spain has taken a more unusual approach, with Miguel Sebastian, minister of industry, trade and tourism, Barney Frank, chairman of
urging Spaniards to buy more local products. “Right now there is something that our citizens can do the House financial services
for their country: bet on Spain, bet on our products, our industry and our services – bet, in short, on committee, says he
ourselves,” he said last month, in a call echoed in the UK by Sir Alan Sugar, the businessman. understands concerns about
the Buy American provisions
At a European level, there is concern over what all this means for countries’ commitment to the single but adds that public suspicion
of international trade is
market. “It is threatening in terms of the coherence of the single market. It is creeping protectionism and it is
intense. His solution is to
dangerous as fiscal stimulus programmes are likely to make things worse. But I don’t see it as system-
create a better system of
wrecking,” says Mr Sally. All this comes at a time when the European Commission, coming to the end of its cushioning people from the
term, is having difficulties standing up to the demands of national governments. “The Commission will fight a shocks of recession and
losing battle,” says Mr Gros. trade: “There’s localised pain
and diffuse benefits. Until you
Eastern European countries are nervously watching relieve the localised pain
western bail-outs, particularly for the car industry, better, the average American
will block things like trade and
which is important for Poland, the Czech Republic,
outsourcing,” he told ABC
Slovakia and Hungary. Gordon Bajnai, the Hungarian television.
economics minister, warned at a recent business
Opinion polls have suggested
conference of a “very serious” risk of countries
that people blamed growing
abandoning market-oriented policies. He forecast inequality in wages largely on
that the next year would see different countries the effects of competition from
adopting different paths, with some falling prey to cheap-labour economies,
“populist wishful thinking” and others sticking to notably China. Now the
market-oriented policies. recession has hit, observers
say, the US public is looking
primarily to its own
Such a backlash is also likely over immigrant labour.
government rather than world
Experts see the UK protests as only the start and the co-operation to solve things.
EU is reviewing the rules that oversee the free John Bruton, European Union
movement of workers. “All these countries that had a ambassador to Washington,
big influx of foreign workers on the back of a building says that since the crisis
Consider local conditions’: Greece’s George boom – so Spain, Ireland, the UK – will see, now that began on Wall Street, “there
Provopoulos the bubble has burst, that those foreign workers are is a feeling that America can
fix America’s problems on its
no longer welcome,” says Mr Gros.
own”.

Another potential problem is over currencies outside the euro, especially the pound. Peter Sutherland, the
former head of the World Trade Organisation and current chairman of BP, suggests that the steep devaluation of sterling can be seen as a
protectionist act: “It is a big challenge for the internal market when you get a precipitous drop in a currency in a single trading area.”

The third test is legal and reflects how all the rescue packages for banks and companies have to be vetted under the EU’s competition rules
for state aid. Mr Sutherland, who is also a former European competition commissioner, says: “I would be worried that governments pushed by
vested interests seek to bend the rules in terms of state aid. We must not jettison the law due to populist sentiment.”

Concessions have been made to the EU’s state aid regime over the past six months – making it easier for governments to channel funds to
banks and businesses – but the rule-book has not been abandoned. Officials have also insisted that these rule relaxations should not persist
once economies pick up. Countries are at least paying lip-service to that, with France vowing to act within EU rules even if it attacks Brussels
for being too inflexible.

Ultimately, however, the question of how serious the rising protectionism in Europe will become may well depend on actions elsewhere in the
world, particularly in the US. Mr Véron describes the “US leadership effect as huge”. If it follows protectionist policies such as the Buy American

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provisions then “it can be seen in Europe as a licence to do the same,” he adds.

Additional reporting by Ben Hall, Stefan Wagstyl, Nikki Tait, Ralph Atkins, Victor Mallet, Bertrand Benoit, Guy Dinmore, Robert Anderson, Kerin
Hope and Jan Cienski

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