Protectionism on the Rise in Europe?

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Phil Noble / Reuters

A demonstrator holds a placard outside the Total Lindsey refinery in Lincolnshire, northern England

Just how protectionist will Europe get as the recession bites? So far, there's no obvious answer to that important question. Some European leaders have expressed concern about the region's protectionist reflexes, while others are already talking about ways to fence in their economies. In a few special cases, leaders appear to be doing both.

What's likely is that there will be at least some reversal of the relatively free-flowing trade and movement of workers of the past few years. The extent of that could be determined by just how bad the region's economies get. "We've already seen the rescue of finance sectors bleed into industries like automakers and construction at an extremely rapid rate — one that's accelerating further as frightened publics demand protection from national leaders," says Karel Lannoo, CEO of the Centre for European Policy Studies in Brussels. "This is undermining something the world learned in the past two decades, and a lesson the European Union learned in particular: everyone benefits when you decrease the boundaries and divisions in international markets and trade to a minimum, and allow things to flow as freely as possible." (See pictures of the global financial crisis.)

But it's hard to stay loyal to liberal markets when voters are demanding action in the middle of an economic meltdown. Nowhere has that been more evident than in Britain — long the European Union's most enthusiastic cheerleader of American-style deregulation and free trade. On Monday, U.K. unions held a repeat of last week's wildcat strikes protesting a decision by a French-owned oil plant to bring in 300 Italian and Portuguese contract laborers. British workers at the refinery in northeast England say they want jobs to go to locals, not to cheaper foreign workers. The move sparked rare oil-worker walkouts across the U.K. Workers want Prime Minister Gordon Brown to make good on his 2007 pledge that his government would impress upon businesses the need to create "British jobs for British workers." (See pictures of London's financial crisis.)

Officials have come under similar pressure in Ireland. Irish workers want construction companies to give precedence to Irish laborers over foreigners. Some 300,000 Polish workers flocked to Ireland's once booming building sector after Poland joined the E.U. in 2004. But the real estate market in Ireland has collapsed over the past year. Thousands of Poles have returned home, but many remain — leading to rising tensions as local and foreign workers compete for fewer jobs.

But calls for labor protection pose a problem for European leaders: they run counter to E.U. rules that ensure the free flow of goods, services and workers. Worse yet, notes U.K. Business Secretary Peter Mandelson, such moves risk beginning a chain reaction of protectionism that could make the economic slowdown even worse. "It would be a huge mistake to retreat from a policy where, within the rules, U.K. companies can operate in Europe and European companies can operate here," Mandelson said on Jan. 31. "Protectionism would be a surefire way of turning recession into depression."

That's unlikely to prevent the protectionist winds blowing elsewhere, though. Last week's massive strikes in France, for example, were motivated by demands that the government do more to protect public- and private-sector jobs threatened by both recession and economic reforms. Polls showed that nearly 70% of the public supported the demonstrations; new surveys show that more than 61% of people back renewed strikes this month.

In Germany, a recent study by Ernst & Young indicated that 78% of small- and medium-size companies favor the state embracing "protectionist measures" to shield them from the global recession — up from 43% a year ago. The cause of concern is clear: despite the government's passage of a $65 billion stimulus package, Germany entered its third straight quarter of recession in January. This month, German unemployment shot to 8.3%, from 7.4% in December. (See which country has the best bailout plan.)

Still, many in Europe remain wary of the potential ramifications of a shift back to protectionist policies. When the U.S. House of Representatives added a protectionist clause to President Barack Obama's proposed $819 billion stimulus package last week, Europe cried foul. The clause would require infrastructure projects covered under the plan to use American-made steel. Moves are also afoot in the Senate to extend that "buy American" steel requirement to other construction materials covered by the package — causing tempers to flare in Europe. "A dangerous new steel war is looming, and we need to counter it with strong and decisive actions," warned Italian Trade Minister Adolfo Urso on Monday. The problem with that, Lannoo advises, is not only that European retaliation would risk setting off an escalation of protectionist sparring with the U.S.; the powerful forces of protectionism could wind up dividing the E.U. itself.

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