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The Tufts Daily
Where you read it first | Monday, June 24, 2024

Europe should keep hands off of energy market

It is only slightly ironic that as Europe proceeds on its own path towards opening up energy markets, the man who spearheaded the initiative in the United States, former Enron CEO Ken Lay, is sitting on trial.

Market liberalization is a completely different affair in every country and region, and though the lessons from this side of the Atlantic do not entirely apply, regulators must be aware to avoid these and other pitfalls. While all government decisions are plagued by the politics of the day, it must be economics which dominates the logic of regulators.

Based on the way France and Prime Minister Dominique de Villepin have reacted to the Gaz de France (GdF) and Suez merger, it seems that European technocracy will develop yet another convoluted solution which only further stymies free markets.

De Villepin has announced that he will allow the GdF and Suez merger to go through. In doing so, he will significantly reduce the French government's share holdings. Existing legislation states that the government must own at least 70 percent of outstanding shares. It now owns approximately 80 percent - and the parliament is expected to vote this week.

On the surface this seems to be sensible economics, in that government is reducing its monopoly stakes and allowing for free market consolidation, but the motivation behind the merger reeks of protectionism and flawed politics. The French government has gotten involved in the energy bidding frenzy solely because of what de Villepin calls "the strategic importance of energy."

For a country which has lambasted the United States for its invasion of Iraq as a petroleum-focused strategic decision, France's move amounts to protectionism, and will ultimately disturb energy markets as much as the American military has destroyed Iraq. De Villepin's 180 degree shift towards support of the merger is based on his contorted view of economic patriotism and his desire to ward off Italian based Enel's foreign bid for Suez.

Europe has clung to its visions of national industrial giants for too long. Though large companies do have an advantage in the energy sector, it is pointless to decide the composition of these companies based on flag colors.

If the European Union is to function as a unified body, there must be no geographical discrimination. De Villepin's actions not only hamper free market capitalism, but they add to a growing list of European double standards that affect everything from agriculture to immigrants.

Energy has always been extremely important to governments because of its vital importance in all areas of the economy. However, despite its significance, prices vary by nearly 100 percent across Europe. The European Commission has set a deadline of July 2007 to accomplish its liberalization measures, but it is unlikely that these will function in practice.

Though energy market liberalization can be extremely dangerous, as in the case of the Enron-driven California blackouts in 2001, it also has had great success in Britain. The key to allowing for successful liberalization of the sector will be for governments to spend their time controlling markets when they become manipulated and abused, not intervening as in the case of the Suez-GdF merger. The role of the government in a free market should not be that of an economic player, but rather that of a referee, preventing the pitfalls of liberalization and not creating them.

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