Sarkozy embarks on a dangerous path

The spectre of protectionism is making a fateful return to the global investment stage. World trade is continuing to contract sharply. The real concern among investors, however, is with regard to financial protectionism.

So far governments worldwide have not behaved in a provocative manner, but given the global meltdown banks will increasingly come under political pressure to focus their limited assets at home. And President Nikolas Sarkozy of France is widely viewed as the politician most likely to break ranks.

The French Finance Minister Christine Lagarde, doubtless acutely aware of protesters on the streets of Paris and Marseille, has already called for a temporary period of protectionism to shield consumers and firms against market risks, until new global regulations can be agreed.

She is also calling for tighter regulations of hedge funds and higher capital requirements for banks with ‘risky’ hedge fund clients. Lagarde, who presented her plans to the G7 finance ministers in Rome on 13 February, would like the EU to exert more control over hedge funds via prime brokers.
But the strongest indication of French intentions was voiced by Sarkozy. Speaking on French television on 6 February, he said, “It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory of a certain producer, without citing anyone, is built in the Czech Republic and its cars are sold in France.”

Protection principles

His words immediately provoked an outcry in the Czech Republic, where French carmaker PSA Peugeot Citroen has a factory in Kolin, central Bohemia.

The Czech Prime Minister Mirek Topolánek, who currently heads the EU presidency, warned against using the global crisis to bring in various forms of protectionism.

He further accused the French president of threatening the ratification of the Lisbon treaty by the Czech Parliament by advocating measures that go against the basic principles on which the EU operates. Petr Drulák, head of the Czech Institute for International Relations, spoke out robustly against Sarkozy’s comments and the chances of preventing national protectionism within the EU.

“His (President Sarkozy’s) remarks are extremely dangerous because they signal a return to protectionism, and what is even worse to national protectionism. This could undermine the European Union as such, so the issue is much more serious than the EU presidency or the Lisbon treaty. In this respect I think it is perfectly in order that Czech leaders have voiced criticism, however they should be careful to realize what is at stake.”

What can the Czech Republic - as EU president - do at this point?

“One of the main objectives is to protect the EU against protectionist instincts – both in terms of national protectionism and European protectionism – and to try to keep a level playing field,” continued Drulák. “Naturally much more intervention into the economy is needed but these interventions must be done according to the rules. These rules are given and we have to curb the temptation of some of the big counties – especially of France – to rewrite these rules according to their own national needs.”

The European Commission has also warned against protectionism, but in the wake of President Sarkozy’s remarks and similar signals from Italy, what are the real chances of stopping national protectionism in Europe?

“I think the chances are pretty good, because national protectionism is something that puts in doubt the whole European project. And I am not sure whether President Sarkozy was quite aware of what he was saying,” Drulák continued somewhat acidly. “And the reactions which came from all over Europe show that national protectionism is a threat of which people are aware and are ready to tackle.”

This perspective was shared by Czech President Vaclav Klaus, who on 9 February warned against some countries’ tendency to embrace protectionism amid the ongoing global financial crisis, saying it is not desirable and must be averted.

“It is a huge present-day task to avert this (the rise of protectionism),” Klaus said after a meeting with his Slovak counterpart Ivan Gasparovic. “I am glad to hear the Czech government saying that it considers protectionism unacceptable.”

Klaus said he feels sad about some foreign politicians’ attempt to restrict domestic firms’ expansion abroad to protect their own economies during the current crisis, but refused to comment directly on Sarkozy's statement.

“I’ve vowed not to comment on any of President Sarkozy’s statements as it would unnecessarily provoke reciprocal (reaction),” Klaus said.
The Slovak president also said that restriction of companies in one country would arouse similar restriction in another country, which is undesirable.
Meanwhile, Czech Prime Minister Mirek Topolanek sharply criticized Sarkozy's statement in an interview with the Hospodarske Noviny newspaper, adding that the French leader’s comments have threatened the ratification of the Lisbon Treaty in the Czech Republic.

“We’ve discussed the fact that the necessary feeling of solidarity (in the EU) has been somewhat diminishing. That is why we want to support projects that will preserve it. The building of the statehood and identity (by each of the EU countries) should not deprive us of the advantages we used to enjoy jointly,” the press department quoted Topolanek as saying.

“I personally consider the spirit of protectionism the principle that could extend the whole crisis and that would hamper the EU’s internal unity. In this point I and the Slovak president understand each other,” Topolanek said.

French financials

Three days after his initial provocative comments the French President was at it again. On 9 February France announced 6.5bn euros ($8.5bn, £5.7bn) in emergency government loans to its carmakers. Peugeot-Citroen and Renault will receive 3bn euros each, while Renault Trucks, which is owned by Swedens AB Volvo, will get 500m euros. In exchange, they pledged to keep French plants open, Sarkozy said.

The European Commission is concerned about the French bail-out for carmakers, and is seeking clarification.

Commission spokesman Jonathan Todd said there were “a number of concerns” about the French state aid. The commission wants to ensure France’s actions do not violate EU competition rules.

Echoing these sentiments, Czech Finance Minister Miroslav Kalousek said, “The biggest risk at the moment is the risk of protectionism.”
Czech Prime Minister Mirek Topolanek also criticised Sarkozy's stance, saying it underlined the need for co-ordinated European action to prevent “beggar-thy-neighbour” policies among the 27 member states.

“The last impulse was the really selective and protectionist steps and statements of, among others, President Sarkozy,” Topolanek said.

Commenting in Brussels on 10 February, UK Chancellor Alistair Darling said “getting lending going again is the most important thing we need to focus on in the United Kingdom, Europe and indeed throughout the world.” He also said “it is very, very important that we don't have protectionism.”

“It is entirely possible and indeed desirable that countries support their own economies - France and Germany are supporting their car industries and so are we - provided that you do these things together. Each country needs its neighbours more than ever before.”

Strong statement

The growing danger of investment protection demands both an international response and a strong statement from the new Obama administration. On the international front, world economic leaders must buttress their warnings against trade protection with an agenda that includes robust support for open capital markets and cross-border international investment.

It is of course understandable that politicians should pursue their own domestic agenda with rigour. Crises inevitably lead to introspection and to an emphasis on putting one’s own house in order. British banks, for example, have been told to shrink their balance sheets and focus on lending to British customers.

Financial protectionism cuts both ways, and given that the UK relies on overseas banks for about a third of our personal borrowing we are particularly vulnerable.

But there is a real possibility that individual national solutions to what is clearly a global problem will merely prolong and perhaps deepen the already severe recession. There is clearly no easy answer to the threat of protectionism. The last time protectionism was employed widely on a global scale was during the 1930s. And we all know how that particular chapter in history ended.