Economic Boom or Protectionism? : Europe’s Goal of Unified Market Spurs Hope, Fear

Belgian business magnate Etienne Davignon’s shadow reaches all across Europe, but his car phone doesn’t.

As chief operating officer of Societe Generale de Belgique, Belgium’s largest financial services conglomerate, Davignon sometimes drives to France and West Germany--about the distance from Los Angeles to Las Vegas. But the cellular telephone system used in Belgium is not compatible with those of other European countries, rendering Davignon’s car phone useless.

“What you need is to have three different kinds of phone in each car,” Davignon says jokingly. “Then you could get through without any trouble.”

It is not only car phones that cannot cross national borders in Europe. With about 20 cramped countries, each with its own language, culture and business practices, Europe is a nightmare of widely differing standards, restrictions, prices and product specifications governing everything from banks to car mirrors.

Help may now be on the way. After 31 years of trying unsuccessfully to establish a true Common Market, the 12 countries in the European Communities finally have agreed to forge a single, integrated market by 1992. Business should flourish, they predict, and stagnant national economies should boom.

The potential is staggering. The 12 nations have pledged to eliminate all existing barriers to the free movement of people, capital and goods over the next five years, creating a unified market of 320 million consumers--comparable to that of the United States and Japan combined.

But “1992,” as the movement here has become known, has also raised concerns in the United States and Japan that, while Europe tears down its internal barriers, it will simultaneously put up new walls designed to interfere with foreigners’ ability to compete with European firms.

“I’m really worried about protectionism,” says Alfred H. Kingon, a former Reagan Administration White House official who is now the U.S. ambassador to the European Communities here.

Close Scrutiny Urged

Eamonn J. Bates, Brussels representative for the American Chamber of Commerce, which is coordinating lobbying efforts for foreign-headquartered multinational firms, already sees signs that at least some Europeans want to use the 1992 movement to keep out some foreign goods. “This thing has to be watched like a hawk,” he warns.

And some trade experts fret more broadly that the emergence of a new European trading bloc may accelerate the creation of regional trade compacts in other parts of the world that eventually could undermine the current global trading system. That could spell the end of international efforts to cope with the inevitable decline in the U.S. trade deficit.

To some, the trend is already dangerously under way. The United States and Canada are in the process of ratifying a free-trade pact to create a single market in North America, and Japan is pushing to hammer out a similar arrangement with the United States. Former U.S. Treasury Secretary James A. Baker III has warned that the United States will move toward bilateral trading blocs if it cannot win what it wants in trade-liberalization talks now under way in Geneva.

From Europe’s point of view, 1992 should have happened decades ago. Doing business here poses obstacles hard to imagine in the United States.

Plethora of Car Mirrors

Juergen Hubbert, a deputy director of Daimler-Benz AG in Stuttgart, West Germany, says that his firm must offer 36 kinds of mirrors to market its Mercedes-Benz autos across Europe because each country places different standards for auto mirrors. Electronics makers must manufacture seven models of each television set to accommodate local specifications.

Just moving goods physically can be a chore. Jam-ups at national borders are so long that some transcontinental truck drivers spend as much as 30% of their time waiting on line to clear customs every few hundred miles--sometimes for up to 36 hours--adding significantly to transportation costs throughout Europe. And financial institutions face a myriad of cross-border controls and restrictions.

Insurance policies can cost four times as much in France as in Britain. Telephone tariffs are up to 50% higher in some countries than others. There are dozens of different electrical outlets on the Continent. Even sheets and pillows come in different sizes and shapes in each country.

“It’s as though we had an entirely different set of standards and requirements in each of the 50 states,” says Michael Calingaert, a State Department analyst who is on leave at the Urban Institute, a Washington-based research group.

On paper, at least, relief is only four years away. According to the plan for 1992, border controls will come down all over Europe, financial regulations and product specifications will be standardized and the 12 countries of the European Communities--West Germany, France, Britain, Italy, the Netherlands, Belgium, Luxembourg, Denmark, Ireland, Spain, Portugal and Greece--will make their tax laws compatible with one another.

And the standardization effort is already reaching well beyond that to encompass everything from patent law and banking and insurance regulations to broadcasting specifications, professional qualifications and health rules for breeding livestock.

“This may be as important historically as the creation of the Common Market itself was,” says Rudiger Dornbusch, a Massachusetts Institute of Technology economist.

Ivan Kingston, a London-based trade consultant, contends that economic unification and Continent-wide deregulation are just what the doctor ordered to get Europe’s long-stagnant economies on their feet again and finally enable European business to exploit economies of scale.

Prod Global Economy

Unification could also provide a major new stimulus for the global economy and help ease the massive economic adjustment that the major trading nations will have to make as the lower dollar pushes the U.S. trade deficit steadily back toward balance over the next few years, threatening to squeeze some of America’s major trading partners in the process.

The European Commission, the Brussels-based body that serves as the Common Market’s executive branch, predicts that creation of a unified market will yield economic gains equal to 4.5% of Europe’s economic output over the next few years, cut prices 6.1% and spur 1.8 million new jobs from Denmark to Portugal.

“It will be a major contribution to international growth and to achieving the elimination of trade imbalances,” says Willy de Cler, the European Communities’ trade minister.

Outside Europe, however, government officials and business executives worry that Common Market countries will use 1992 to create a new Fortress Europe.

Umberto Agnelli, deputy chairman of Fiat, fueled such fears when he asserted in a speech last April that Europe must use its new single market for the benefit of Europeans first and “negotiate very specific quid pro quos “ with the United States, Japan and the newly industrialized countries of Asia.

“The EC is already more open as a market than it was, and we want it to remain that way,” Agnelli said. “It should be clear that we are not about to offer it up on a silver platter to our competitors. We must be able to defend it from the competition and lay the bases for the development of European groups of companies and top-level competitive products.”

Senior EC officials insist that they have no plans to keep foreigners out. But De Cler himself has warned that Brussels may have to adopt “transitory” import restrictions in industries such as autos, textiles and financial services. That would impose across Europe a portion of the import quotas now being maintained by countries such as Italy and France.

Bargaining Chip

And De Cler has served notice that while foreign firms already in Europe will be safe from new restrictions, the commission will use entry to the newly integrated market as a bargaining chip to demand reciprocal trade concessions from Japan and from newly industrialized Asian countries that currently restrict European products.

U.S. officials worry that the Europeans may also use “reciprocity” demands to gain access for European financial services firms in the United States and other industrial countries. Under proposed Common Market rules, subsidiaries of foreign banks will be able to take advantage of the new, more liberal EC banking regulations only if their own governments grant similar access to all European institutions.

That means the United States might have to guarantee that all banks in, say, Greece can enjoy the same privileges in America that they have under European regulations--even though Europe’s banking system is far different from that of the United States.

The specter of a possible new Fortress Europe has sent shock waves through the Far East. An obviously worried Japanese Prime Minister Noboru Takeshita has made two trips to Europe--a rarity--since taking office a year ago in an effort to ward off any new restrictions on Japanese manufactured goods.

Europe watchers in Asia’s newly industrial countries are similarly worried. “Not only will (the Europeans) continue import quotas, but we are afraid they will make them worse,” says David Li, chairman of the Bank of East Asia, one of Hong Kong’s leading banks.

Regardless of the dangers, some analysts say that unification is inevitable no matter what governments do. “Economic momentum is forcing the politicians to move,” says Rimmer de Vries, economist for Morgan Guaranty Trust Co. in New York.

The European Commission has already put into effect about 80 of the 285 directives that are needed to eliminate barriers and standardize financial and industrial practices.

‘European’ Passports

Ministers of the 12 member governments have approved sweeping new steps to move the process ahead further, paving the way for the eventual creation of a common central bank and, someday, possibly a common currency. Early last autumn, the Common Market began issuing burgundy “European” passports to replace those from individual countries.

Even day-to-day living has been profoundly affected. In Lyon, headmistress Anne-Marie Salz has decided to add a high school to her 200-pupil bilingual elementary school because she believes French youth “must learn to speak English well” in preparation for 1992.

“English is already the language of commerce, and it will become more so after 1992,” she says. “Our children must learn it or face great handicaps in the future.”

The prospect of 1992 has permeated corporate decision-making in Europe. Eager to position themselves for the huge new integrated market, large European firms have embarked on a frenzy of mergers, acquisitions and joint ventures designed to take advantage of potential new markets and to tap into new technology.

“Almost overnight, 1992 has become the big subject in all the board rooms,” says Helmut Albrecht, president of Schmalbach-Lubecke, a container maker in Braunschweig, West Germany.

Francois de Laage de Meux, president and chief executive of CGE Alcatel, a Paris-based multinational, says that his firm is revamping its entire European operation “to have a critical mass” in time for 1992. “We want to be more competitive,” he asserts.

The most immediate beneficiaries will be traditionally more insular countries such as France and Italy and the smaller, low-wage areas such as Spain and Portugal.

The 1992 movement “will force French companies to get together and restructure,” says Gustav Strain, president of Link-Tech, a Paris-based consulting firm. French and Italian banks are already flooding into Madrid and Lisbon. And many mainline European companies are setting up branches in Spain and Portugal so that they can take advantage of lower costs there.

To Help Multinationals

The integration is also expected to benefit foreign multinational firms that have operations in Europe. Under the standards being proposed now in Brussels, such firms will technically qualify as “European” firms.

Most analysts agree that U.S. corporations in Europe are better positioned for 1992 than European companies because they came here to do business Continent-wide. Thus, when unification finally comes, “they will have only one hoop to jump through, not 12,” the American Chamber’s Bates argues.

Never ones to miss out on a good bet, large Japanese companies--and those from other countries as well--have begun buying into Europe in force to get a foothold there before 1992. Over the past few months, for example, Seiko and Sumitomo have taken over factories in France, Matsushita and Canon in Britain and Amada in West Germany.

“The Japanese will buy anything,” Link-Tech’s Strain says.

And smaller European countries in the European Free Trade Assn., which so far have eschewed formal membership in the Common Market for fear of offending their East Bloc neighbors, are negotiating with Brussels to share informally in the effort without having to join by independently adopting new regulations that are compatible with the 1992 directives.

Some skeptics still doubt whether Europe’s new economic integration will come on time--or even make much of a difference.

“The claims are a bit premature,” says Dimitri Balatsos, a London-based economist for Kidder, Peabody & Co. “The bureaucrats in Europe are very well entrenched, and they will do everything they can to make it stall. I don’t think 1992 will matter one way or another.”

And Peter Korn, economist for the West German Chamber of Commerce in Cologne, cautions that 1992 “is mainly a political date.” The actual unification of the European market may not be completed until the late 1990s or possibly later, Korn says.

Internal Problems

The 1992 effort could still be derailed by internal problems as the changes break up cozy cartels throughout Europe and provide unprecedented new mobility for European workers.

Achim A. Stoehr, a director of accountants at Arthur D. Little Co.’s Wiesbaden subsidiary, warns that the elimination of national immigration barriers and the liberalization of work rules “will cause a tremendous shake-up in some industries” and spawn massive shifts of workers and professionals from lower-wage countries such as Spain and Greece to higher-paying countries such as West Germany and the Netherlands.

With political traditions across the Continent so widely varied, standardizing current tax laws and procurement rules will not be easy. A West German official points out that rewriting national laws to make European tax systems fully compatible would cost Denmark 38% of its national revenue. “We are going to have to find ways to enable countries to make up for such losses,” he concedes.

Virtually all analysts agree that the integration could be stalled seriously if the world falls into a serious recession before 1992. “A real economic downturn could spark resistance,” London’s Kingston concedes.

Davignon remains optimistic. “It’s a no-risk situation to anticipate 1992,” he says. “If it happens, you’re prepared, and if not, then you’re more competitive. It’s a better way to say to business: ‘Invest and expand more than you are.’ ”