TCS Daily


Power Games

By Carlo Stagnaro - May 2, 2006 12:00 AM

The European Union is not at all united, as the fragmentation of its energy market illustrates all too clearly. Consider two recent planned acquisitions: German utility E.On made a bid for Spain's Endesa; Italy's Enel announced it would make acquire France's Suez, although the real goal was Belgium's Electrabel (which is owned by Suez). Both operations had strong industrial motivations and would have made Europe's energy market more integrated and more competitive. Plus, as companies grow to a European level, they tend to have less the character of national champions, and the rationale for protectionism at the national level falls, with great benefit for consumers. Alas, this was not to be.

Madrid's government changed Spain's laws in order to make foreign takeovers more difficult; Prime Minister José Luis Rodrìguez Zapatero said the administration would oppose the merger, despite its friendly nature. In France, Prime Minister Dominique De Villepin and Economy Minister Thierry Breton revealed a project for a merger between Suez and the state-owned giant Gaz de France. Even though Paris denies this had anything to do with Enel's bid, it was clearly a political move aimed at preventing a hostile takeover.

TCS talked to Professor Pascal Salin, an economist at the Université de Paris IX Dauphine and one of the brightest free market intellectuals in Europe, about the implications of these market interventions.

TCS: The French decision to stop Enel's bid for Suez by favoring a merger with Gdf will strengthen similar reactions in other members states (as is happening in Spain). Do you believe it is still possible to talk about a European market?

Pascal Salin: The French decision is incredible. It is contrary to all the traditional principles on which European integration is founded and which the French authorities pretend to support. A market exists as far as competition exists, i.e. as far as anyone can freely enter into this market without any state interference. The French decision - which, it may be recalled, is not the first one of this kind - does mean that financial integration is not perfect in Europe. French authorities - either from the right or the left - have always pretended to be the leaders as regards European integration. But, the present decision makes clear once more that the meaning of European integration for French authorities is exactly the reverse of what integration ought to mean, namely integration of markets and free competition.

In the opinion of these authorities integration rather means cooperation between national authorities (which would be better named "cartellization" of public decisions). Thus, according to this notion, there are efforts for negotiations and common decisions by the national governments and the European institutions. But, whenever it is felt that some "national interest" - completely arbitrarily defined - could be shaken, then the "national interest" ought to prevail. Therefore, it is important to make public opinion understand that a real and profitable European integration means something quite different from what some national authorities - particularly the French ones - seem to understand.

TCS: As a Frenchman, how do you react to the government's decision? Do you think it will bring about any benefit for French consumers?

PS: I have to recognize that there is one positive aspect of the present decision. In fact, Gaz de France is still a public monopoly (the state owning about 80 percent of the shares). Thus, the merger with Suez - which is a private firm - will automatically mean a privatization of Gaz de France, since the French state will own only about 40 percent of the new firm. And privatization is good for consumers. But, in the present case, privatization is made for the wrong reasons, just because it is the only way found by the French government to avoid the purchase of Suez by an Italian firm. It would have certainly been better that Gaz de France be privatized without any merger and that, later on, any merger with Suez or any other firm, French or foreign, could have been considered by the new owners. But the French government dares not privatize Gaz de France because it fears the reactions of the trade-unions. Thus, the present decision is the consequence both of nationalistic feelings of the French authorities and of their timidity, which is not very glorious.

TCS: In Italy a vocal opposition is calling for retaliatory measures, such as freezing EdF's stake in Edison or preventing BNP Paribas' bid on BNL. How do you address such threats?

I understand these reactions since, whenever you are attacked, you want to react. And it may play the role of a deterrent if ever the French government is tempted to take the same sort of decisions in the future. However, one never gains by doing what others wrongly do. It is not because other governments are deciding stupid things that you must do stupid things. By preventing the free working of the market (which means the free decisions of individuals) a government is necessarily hurting the interests of its citizens. Moreover retaliations are followed by other retaliations and, finally, all lose in such a game.

TCS: National governments still play a major role in defending domestic markets, under the idea that a country needs national champions in strategic sectors. Would you speculate on this?

There cannot be any rational justification for the idea that national champions ought to exist and ought to be supported by national governments. In fact, the optimal size of a firm is not easy to define and it is changing over time. But two things are certain: there is no reason for the optimal size of a firm to coincide with national borders and no one can decide from outside what is this optimal size. Only those who are responsible - namely the share-holders and their representatives - can decide whether a firm ought to stay national, whether it ought to merge with a foreign firm or whether it might even split into different entities. By deciding on the existence of "national champions", politicians get the feeling - at the expense of others - that they are powerful, that they play an important economic role. Or they may even help bad managers - who belong to the same nomenklatura as they do - to keep the power in their firm by avoiding the take-over of more efficient foreign managers.

Whatever are their reasons, they have nothing in common with the criteria which ought to be used in the strategic decisions of firms and which would be profitable for share-holders, wage-earners and consumers. Governments label an activity as "strategic" whenever they are short of arguments in order to justify their nationalistic policies. But, particularly in a globalized world, such a label can be attributed only arbitrarily. Thus, it could be considered that producing bread is a strategic activity, so that there ought to be a "national champion, producer of bread" in order to make sure that citizens could get their bread...

TCS. What do you think would be the proper role of the European Commission?

The Commission cannot do anything, since the French state owns Gaz de France and it can legally decide a merger with Suez (if the owners of Suez agree). Anyhow, I would be reluctant to give the Commission power to control such governmental decisions. In fact, I strongly object to the possibility for the Commission to forbid mergers.

TCS: Finally, the EU failed to promote the Bolkestein directive on services. Energy is still regarded as national market. What do you think will be the future of liberalization in the EU? What impact will this have on economic growth?

One never knows the future. But we have to be anxious when considering these facts. There is this growing tendency of some countries to develop national industrial policies. There is the considerable step backwards with the recent vote of the Parliament against the main features of the "Bolkestein directive" which was essential for the development of competition in services (which amount to about 70 percent of total activities in EU). These events will benefit to some of the less efficient producers who fear competition. But their gains will be at the expense of European individuals who are thus deprived of an opportunity to have a more dynamic economy.

Mr. Stagnaro is Free Market Environmentalism Director of Istituto Bruno Leoni.

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Socialist marketeers
Energetic readers might enjoy this background essay, unfortunately unpublished in English, on the Spanish energy takeover. Big is not necessarily comptitive and monopolists not necessarily marketeers.

Josep C. Vergés
verges@valles.com

Red amigos, by Josep C. Vergés

The Condor Legion has once again come to the aid of Madrid. At the eleventh hour the hostile takeover of bloated former State company Endesa by smaller but efficient and always private Gas Natural has been halted by another giant monopoly (no ex here) who has ridden in as a "white knight" according to Der Spiegel. German E.on, having failed to land Scottish Power, was all ears when Aznar cronies came crying for help. Their objective was a modest 25% stake in floundering Endesa, enough to block the takeover with the help of PP controlled regional bank Caja Madrid who had been strategically buying shares in Endesa since the PP lost power. The reason is that Gas Natural had already tried the takeover of another former State electrical company, Iberdrola, but were blocked by the PP in power. Now the PP had only Caja Madrid to keep Madrid companies, not much used to competition, out of the hands of market operators. But beware of Germans bearing gifts! E.on decided to take over the whole company.

How does E.on have the cash to do so? Thanks to the gross monopoly profits at the expense of German gas and electricity consumers paying the highest prices in Europe. And what will be the result of the "friendly" takeover for Europe? According to Der Spiegel, a European giant free to dictate gas and electricity prices. Shareholders are to decide, but the playing field is being levelled during play by Spanish socialists following the same guidelines as German socialists. When E-on swallowed Ruhrgas in 2002, chancellor Schröder advisor Alfred Tacke gave the go ahead. His arguments were identical to those now being used by Zapatero: Only E.on buying up Ruhrgas guaranteed that there would be a German energy provider in the long run with the capacity to play in the international arena. Thanks to his services Tacke moved in 2004 to a post in E.on controlled RAG. Frankfurter Allgemeine ironically editorialised: "Red amigos": "State secretary Tacke has boxed for the takeover against all comers. Left lying on the floor are competition in the energy market, an injured competition watchdog, the misuse of ministerial power, and lower gas prices. Now comes the final round. Tacke has gone to RAG and the scandal is complete. The hope is that this personnel flight is the beginning of the end for the Schröder government." How true! Of course Schröder has also taken good care to land another fat job with the Russian energy monopoly and is now reputed to have brokered the current deal from his tax-free office in Switzerland.

So what are we to choose marketwise- the Condor Legion from Germany or the Red Amigos from Madrid? Let's leave the socialists out of the ring for a minute. It all started when a private company, Gas Natural, wanted to expand in the recently privatised, by Brussels fiat, electricity sector in Spain. They were stopped once and had little welcome the second time until the dreadnought panzers were within shooting range when the Madrid government rushed to stop the breach. The question is not whether the pot or the kettle is blacker, or redder, but whether private companies have the right to take over privatised State companies run by cronies Argentine style. Catalans are not welcome in Madrid as major Gas Natural shareholder, La Caixa president Ricard Fornesa says: "The E.on takeover (of Ruhrgas) was no problem for Germany nor the fact that it is run from Düsseldorf rather than Berlin seen as any kind of danger. The feeling Catalans have that they are victimised in Spain has been proven correct." For Barcelona based Gas Natural the natural outlet is Spain and modernising inefficient State companies.

European Commission president José Manuel Durão Barroso, who criticised the Chirac-Blair budget spat last summer as "self-defeating nationalist rhetoric," has repeated the same words now adding: "We cannot face globalisation with 25 minimarkets in energy." Catalan firms are well advised to go to Europe which is rhetorically a single market. For example Scottish Power would be an excellent catch for Gas Natural, far from socialist double dealings. At least while Blair wears Thatcher trousers he is no red amigo.


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