Business Analysis: Europeans clash over the way forward

EU's Enterprise Commissioner raises hackles with call for 'European champions'

The President of the European Commission, Jose Manuel Barroso, may not have the phrase-making skills of the former US president, Bill Clinton, but he is thinking along the same lines. Today, Mr Barroso will outline his big idea for his five-year term of office, and his top priority can be summed up in four, familiar words: it's the economy, stupid.

The President of the European Commission, Jose Manuel Barroso, may not have the phrase-making skills of the former US president, Bill Clinton, but he is thinking along the same lines. Today, Mr Barroso will outline his big idea for his five-year term of office, and his top priority can be summed up in four, familiar words: it's the economy, stupid.

A strategy document launched in Brussels today defines the "most urgent issue facing Europe today" as "growth and jobs". The first of his objectives will be "to put Europe back on the path to long-term prosperity".

Relaunching the economic modernisation programme started in Lisbon four years ago, Mr Barroso will bury the original ambition of overtaking the US economy by 2010. But the question of how to revitalise Europe's sluggish economy has sparked an ideological dispute and set national capitals and European Commissioners against each other.

At the heart of the debate is a direct call from Paris for increased state intervention to help the private sector create national or "European champions" in key sectors. Meanwhile Germany is lobbying for its big industrial players, especially its car makers.

British officials recoil at suggestions that the European Union is in the business of defending vested interests, let alone picking "winners" for the future. The British viewpoint is supported in the main by the former communist countries of Eastern Europe which have benefited from jobs being relocated from the former industrial heartlands of Europe.

Yet only last week the French President, Jacques Chirac, highlighted the launch of the world's largest aircraft, the Airbus A380, as proof that governments can band together, intervene in the market and help create European "champions". Praising the Airbus project, he said: "Let us do the same for future sources of energy, the telecommunications of tomorrow, for the drugs of the future. Let's work together with a real European ambition."

Signs that the pendulum was swinging towards greater state intervention emerged at a summit of the British, French and German leaders in Berlin last February when M. Chirac highlighted the need for "national champions". The baton was picked up by his main political rival, Nicholas Sarkozy, who, during his spell as Finance Minister, negotiated terms for the state rescue of the engineering giant, Alstom. That involved lengthy negotiations with Brussels, which tried to impose tough conditions on the deal.

This month the political drive for more intervention came to a climax with the publication of a report by Jean-Louis Beffa, the chief executive of Saint Gobain, the French maker of construction material. He proposed an industrial innovation agency to help set up scientific and technological projects, and M. Chirac pledged €2bn (£1.4bn) to help it forge new private-public partnerships.

Meanwhile, in the past five years the German Chancellor, Gerhard Schröder has clashed repeatedly with the Commission, as it outlawed state guarantees to Germany's regional banks and fought with Volkswagen over a share structure which impeded takeover bids.

Berlin wanted an economy "super-Commissioner" in the new Brussels lineup, ultimately settling for a beefed-up industry portfolio for its representative, Günther Verheugen. Mr Verheugen has already raised hackles. Yesterday one of his enemies argued bluntly he is "in the pocket of the German government and the car industry".

Mr Verheugen's new job coincides with the departure of the two Commissioners who took the toughest, most liberal, line when dealing with Europe's big companies. Frits Bolkestein and Mario Monti have left the Commission. Perhaps to shore up the cause of the liberalisers, the British Trade Commissioner, Peter Mandelson, has been given a key role on the committees related to the Lisbon agenda.

Nevertheless Mr Verheugen, who has taken some of the internal market portfolio to add to the industry dossier, has seized the initiative. This month, he called for a debate about how competition policy is applied towards mergers, adding: "If that favours the appearance of European champions, I am clearly in favour of it". Though he claimed too much was read into his words, they provoked a sharp exchange with the new Competition Commissioner, Neelie Kroes, at an internal meeting.

The German Commissioner's language has since been more cautious. Mr Verheugen told The Independent: "Normally, European champions shall not be created and propped up by national governments or by the European Union. They have to result from a market-driven dominance. We need a modern policy that strengthens European industry. This is not a question of protecting against structural change but of future-oriented developments. We must concentrate on strategic issues concerning the future development of our societies, which undoubtedly include topics such as the environment, security, education, health and tourism."

One of Mr Verheugen's first acts was to set up an inquiry into the predicament of European car makers, publicly casting doubt over the wisdom of a recent decision to liberalise the strict rules under which manufacturers controlled networks of showrooms.

Meanwhile, Ms Kroes has positioned herself as a clear free-marketeer but has also marked out differences from her predecessor, Mr Monti. He had a track record of blocking high-profile mergers. Her new allies say she believes the scale of mergers does not necessarily make them a threat to fair competition. "You don't have to block mergers on grounds of size," one said. Furthermore, Ms Kroes' experience of the board of a host of companies has given her a different perspective from Mr Monti, an Italian academic and economist. As she puts it bluntly: "I do not consider business to be my natural adversary."

Where does all this leave M. Chirac's vision of European champions? The term will not feature in today's Commission document, though a more detailed text next week may nod towards the agenda set in France by M. Beffa.

One idea is to allow big business to harness some of the fruits of the EU's multibillion-euro research budget. Under this plan closer relationships would be built up between research programmes and large companies.

Though a change to EU competition rules to help big companies is not on the agenda, piecemeal moves are possible. They include a concerted effort to cut industry regulation - something welcomed in Berlin and London. Mr Verheugen has promised all future EU laws will be subject to a "competitiveness test" and an impact study before launch. And on key competition decisions, expect the Commission to take the interests of Europe's industrial giants as seriously as it can without compromising its strict rules. As one senior official put it: "You will not find a dramatic change in policy. It is more a question of implementation, flexibility and maybe taking business's interests into account more than before."