Fortress Europe

Last year French voters put a spectacular stop to Europe's drive for political union by tossing out the EU constitution. Now their leaders are finishing the job on the economic front, systematically rolling back the single market in open defiance of the EU institutions and treaty law.

By orchestrating a merger of Gaz de France with Suez to thwart a bid by Italy's Enel, Paris is playing the rare card of strategic national interest against an EU ally. Such moves have consequences.

Italy is not Iran, or Communist China, or Vladimir Putin's Russia. It shares a currency, a central bank and federal court, and 90,000 pages of joint law with France under a treaty pledging "ever-closer union".

Italy's economy minister, Giulio Tremonti, said Europe was drifting into crisis. "We all need to stop and reflect over what we're doing, or we'll end up like Europe's royal families after the Great War: all pointing fingers at each other saying 'you started it'."

Dominique de Villepin French premier, biographer of Napoleon and promoter of "economic patriotism" is in effect pushing through a step-by-step withdrawal from the EU's economic system.

The French financial code is being amended to shield strategic sectors with "sensitive technology" against foreign takeovers, covering biotechnology, computers, defence, energy, and aviation among others (though not yogurt).

Thierry Breton, the finance minister, went a step further, resorting to the "atomic weapon" in the words of one Paris expert of a poison pill law enabling French national champions to fight off foreign bids by issuing stock purchase warrants at a discount.

"Let me be clear: I certainly don't want to turn French companies into fortresses that never have to answer questions," he insisted. But answer to whom? Clearly not the market. The Paris law firm Proxinvest said it gave corporate chiefs a "blank cheque".

The clash with the European Commission these days viewed by Paris as a captive of Anglo-Saxon interests is at root cultural. Under French tradition, and German constitutional law, shareholders do not have licence to dispose of company assets as they see fit.

They are trustees, with a primary obligation to safeguard the welfare of workers. Hence the fierce reaction to Lakshmi Mittal's swoop on Arcelor, the employer of last resort in the grim rustbowls of the Meuse and the Moselle.

Brussels has been loath to provoke a showdown with Paris, saying it is "too early" to determine whether these French moves are illegal. As feared, France's poison pill law has proved instantly contagious. Italy's Tremonti now says his country will have to follow suit.

"I don't think this is the right way but reciprocity has to be guaranteed. Italy's takeover law is the most open in Europe and it can be changed with a single decree," he said.

Emboldened, Spain's socialists cut rough over E.on's recent 29 billion euro bid for the electricity group Endesa even as Ferrovial bids for BAA with Madrid's support, and Telefonica digests O2.

"Markets are very important but the citizens are even more important," said Jose Luis Zapatero, the prime minister.

The bid wrecks his plans to create a Spanish global champion by fusing Endesa with Gas Natural. "Germany may be interested in having big national companies: so is Spain," he said, tartly.

He denied plans to invoke Spain's golden share in Endesa to veto the bid, even while insisting that it "remained in force".

His Cabinet has found a better ruse, choosing to harden Spain's '55/99 Law' passed in 1999 to fend off advances by EdF. It allows Madrid to limit E.on's voting share of Endesa to 5 per cent.

Strictly speaking, the law applies only in energy takeovers where 3 per cent of the predator is state-owned.

E.on is private except for Bavaria's 2.5 per cent stake, but the German state still has a golden share of sorts dating back to the group's takeover of Ruhrgas in 2002.

A clause allows Berlin to thwart takeovers for strategic reasons, in extremis.

Brussels now seems a helpless spectator as populist governments walk away from EU obligations. Not to be left out, the Poles are blocking a takeover of Bank BPH by Italy's Unicredit, despite EU infringement proceedings.

It has been a grim month for the liberal cause in Europe. Socialist and Christian Democrat MEPs combined to gut the services directive the Bolkestein law as it is known in French demonology.

The law was supposed to enact Part II of the EU's single market, bringing free trade to banking, insurance, software, etc everything the British happen to be good at, and 70 per cent of the EU workforce more than 20 years after it was established for goods (which the French and Germans are better at).

Healthcare and transport have been excluded. "Wage dumping" what we call wage competition has been proscribed. The Polish plumber will be kept at bay.

In spite of all this, cross-border bids in Europe were rare 15 years ago, when Leviathan states still owned the energy and telecom companies. Now criss-cross takeovers are happening every month, surpassing $1,000 billion in mergers and acquisitions last year, ahead of the United States.

Will it last? The question is whether the tide of economic integration has begun receding again as the ancient nation states of Europe revert to type, or whether it is just the season for political bluster.

In almost 60 years, no member of the European Union (or Community) has refused to comply with a Brussels directive once it has been upheld by the European court.

Last month's takeover revolt is taking the union perilously close to snapping point. Perhaps that is exactly what the French political elite now intends.