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  Troubles in Brussels: EU Lacks Ideas and Direction in Economic Crisis

Troubles in Brussels EU Lacks Ideas and Direction in Economic Crisis

By SPIEGEL Staff

Part 2: The Rising Tide of Economic Nationalism

Politicians are already beginning to lose their nerve. The Swedish government has promised Swedish automakers Saab and Volvo government subsidies if they agree to shift production away from Germany and Belgium and home to Sweden. Italian Prime Minister Silvio Berlusconi has hinted to Fiat that he plans to rescue the company if need be. And in Germany the latest conservative rising star is already wading into protectionist territory. Shortly before his appointment as Berlin's new economics minister, Karl-Theodor zu Guttenberg, a Bavarian, blue-blooded member of the conservative Christian Social Union (CSU), made it clear that he plans to stimulate "jobs in Germany, not in the Far East."

It was precisely these sorts of protectionist policies that fired up the worldwide economic crisis in the 1930s. Czech Prime Minister Mirek Topolánek, the current holder of the European Union's rotating presidency, warned that the "scenario of 1930" could repeat itself. German Finance Minister Steinbrück warned of a "race of the lemmings."

French President Nicolas Sarkozy, who sought to portray himself as a model European only last year, is suddenly an ardent nationalist. He wants to lend French automakers PSA Peugeot Citroën and Renault a total of €6 billion ($7.8 billion) at low interest rates to "keep jobs in France." He recently said that it "isn't justified" for French automakers to build factories in the Czech Republic to produce cars to be sold in France. The French foray into protectionism only reinforces the image that the Czech prime minister has already formed of the EU's major players. According to Topolánek, the Germans and the French, in particular, are claiming special rights, subsidizing industries to the detriment of neighboring countries and overstepping the Maastricht criteria governing the euro, thereby ultimately jeopardizing the common currency's value.

'Severe Consequences'

Sarkozy's most recent move has ruffled feathers, both in Prague and Berlin. But the French president is not the only target of European ire. German Chancellor Angela Merkel is deeply dissatisfied with European Commission President Barroso. Merkel's advisors criticize Barroso for having been all too willing to give in to French demands, hoping that this would improve his chances of re-election.

Berlin is convinced that the French plans violate EU competition rules. Volkswagen CEO Martin Winterkorn is irate, noting "no one will benefit, neither employees nor companies nor customers, if the protectionism of French agricultural policy is transferred to the automobile industry," and that the unfettered exchange of goods and services has been good for Europe. "Everything else is a big step backward, with severe consequences," says Winterkorn.

But the Germans, too, quickly turn into combative nationalists when their own interests are at stake. In recent months, Finance Minister Steinbrück has repeatedly been vexed by "excessive requirements" coming from Brussels.

From the sale of the financially strapped IKB Bank to the financial injections for the bankruptcy-threatened Munich commercial property lender Hypo Real Estate and the government's investment in Commerzbank, whenever he was called upon to save German banks from collapse, Steinbrück found himself butting heads with EU Competition Commissioner Kroes, who wanted to have her say in setting interest rates for government financial bailouts and conditions for national merger plans.

Only when Steinbrück and his European counterparts joined forces to complain about the "legions of bureaucrats" and the "tight corset" of their conditions did the commissioner give in. Kroes is now processing the national bank bailout plans much more quickly and generously than before. But the number of plans is also increasing.

Nevertheless, Steinbrück's and Merkel's success in battling Brussels is a distraction from the main problem: economic stimulus programs designed around national interest are no longer working. Premiums offered to Germans to scrap their old cars and buy a new one also help French carmakers. The Germans benefit from French government subsidies for the domestic automobile industry, since German production makes up about 20 percent of every Peugeot.

Seven Days or a Week

When the government programs are not coordinated, much is left to chance. In some cases effects are duplicated, while in others good intentions are counteracted elsewhere. "Because of the tight integration of the European economy, cooperation at the European level is indispensible," says EPC economist Zuleeg. "Unfortunately, politicians in some countries do not seem to recognize these relationships."

His CEPS colleague Gros see an "ominous spiral" developing. "The Commission does nothing, because of the resistance coming from individual countries. As a result, they decide to take matters into their own hands."

In fact, the European Commission has only very limited latitude when it comes to combating the crisis. When fair competition within the EU market is not the issue, the Commission simply lacks the necessary tools to deal with the crisis. Economic policy measures can be left largely to the jurisdiction of the member states.

The Commission is also divided, plagued by infighting instead of presenting a united front. There is "no group spirit," says one Commission bureaucrat. As a result, Europe today is only as strong as the 27 heads of government in the EU allow it to be. But views on many issues differ widely in Berlin, London, Paris, Rome, Vienna, Prague or Riga -- not exactly a basis for workable bailout concepts.

The EU's new East -- the Czech Republic, Poland and the Baltic countries -- is banking on the market's ability to fix itself. But for Dutch Finance Minister Wouter Bos, these countries are "freeloaders who do nothing and reap the benefits" provided by the active policies of others. The EU, says Bos, has not managed to find joint responses to the crisis.

Czech President Václav Klaus takes a more light-hearted approach: "Dealing with the crisis is like treating the flu. It lasts a week if I go to the doctor, and seven days if I do nothing."

By Dietmar Hawranek, Jan Puhl, Michael Sauga and Hans-Jürgen Schlamp

Translated from the German by Christopher Sultan