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Merger Plans Reignite EU Energy Market Competition Row

While the European Union is calling for more cross-border competition in the energy market, France and Spain have recently taken protectionist steps to protect their energy companies from takeovers by foreign firms.

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The Suez energy group is at the center of the latest row

The latest row over the question of free markets versus "economic patriotism" is between France and Italy. The Italians are furious that France's state-owned Gaz de France has announced plans to merge with French energy group Suez, making a takeover of that company by the Italian rival Enel much more difficult.

"We are dealing with an extremely serious action by the French government which has used major financial resources to carry out a raid which goes against the free market," said Italy's Industry Minister Claudio Scajola.

On Tuesday, Italian Economy Minister Giulo Tremonti visits EU Competition Commissioner Neelie Kroes in an effort to get Brussels to take action, since Rome argues the takeover is being spurred on by the French government and violates EU competition rules.

Gaz de France Fusion mit Suez SA

French Prime Minister Dominique de Villepin, center right, announces the merger between Suez and Gaz de France

Claudia Kemfert, head of the department of Energy, Transportation and Environment at the German Institute of Economic Research, agreed with the Italians that the case is about protective measures being taken by France.

"France is pointedly trying to create a large company," she said. "But we want more competition on the European energy market."

Violation of EU objectives

On Monday, EU Transport Commissioner Jacques Barrot said that while the plan was apparently legal, it amounted to economic protectionism and violated the spirit of European objectives to create continent-wide energy groups.

"France seems to have given a privilege to a national formula," the commissioner told the Corriere della Sera daily. "In the energy sector we say that there must be more European integration and then the French government puts the emphasis on the logic of national champions."

France has long had a policy of "economic patriotism," as it calls it, insisting, however, that it is not protectionist.

Wolfgang Pfaffenberger, head of the Bremen Energy Institute, considers the intervention of the French government in the case as excessive.

"The Suez energy company is not only in France, but active on the international market," he said. "So it's difficult to understand why an Italian company shouldn't play a role on the French market."

Many critics of France's behavior point to the fact that while the country throws up walls around its companies, it is not reluctant about buying firms beyond its own borders.

Pfaffenberger cited the example of London, where electricity is supplied exclusively by Electricité de France.

"The English weren't exactly happy about that, but they allowed it," he said. "Of the 12 energy distributors in England, about half are in foreign hands."

Spain and Germany

24feb_jou_eon.jpg e-on Logo auf Fahne energiekonzern

Spain would rather E.ON stay away

While experts talk about "protectionism a la francais" in this case, France is not the only country which has experienced a bout of patriotism when it comes to its energy suppliers. The Spanish government is trying a bit of "la proteccion espanola" in working against the takeover of energy supplier Endesa by Düsseldorf-based E.ON. Spain wants Endesa to stay in Spanish hands.

For DIW's Kemfert, such measures are unfounded and make little sense.

"It doesn't matter which company is dominant in a country," she said.

Liberalization slow going

The path toward energy market liberalization in Europe has been a rocky one. In 1997, the first European guidelines for an internal electricity market were established and in 1998, a directive for the gas market followed. But this month, the EU Commission had to admit that its liberalization program was not proving to be in the best interests of the consumer in all cases.

Logo von Gaz de France

A French treasure

Kemfert said part of the reason that the process has been slower than, say, the telecommunications market is that investments needed tend to be capital intensive, since they involved more costly equipment, such as pipelines.

Some countries, however, have been more successful in privatizing their energy sectors, namely, England and Scandinavia.

"Even before the EU guidelines were passed, there were well-functioning markets here with many smaller companies," Kemfert said.

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