Economic Patriotism and the Mittal Effect on Europe

Twenty years after the European leaders committed themselves to a "new Europe" where barriers to the free flow of capital, goods and services across the Continent would be a thing of the past, the scenario today sadly resembles a "construction site", littered with the debris of half-baked measures and half-hearted attempts to push forward its still evolving self-congratulatory agenda. It seems to have also spawned a new breed of actors on the stage alien to the original plot.

Take economic patriotism, for instance. In an astonishing reaction to the political storm over the news of Mittal Steel’s bid for Arcelor, the biggest steelmaker in Europe, French prime minister Dominique de Villepin has stepped into the breach and in virtually a call to arms, publicly defined economic patriotism as "the mobilisation of all the participants, of all those concerned, the shareholders but also the company bosses" and urged French and other European chief executives to be far more organised to resist attacks by foreign companies. This was a blatant appeal to populism. Arcelor has almost 30,000 employees in France as well as employees in Spain, Germany, Luxembourg and the Americas. In an audacious bid, Mittal Steel, headed by Lakshmi Mittal, the 55-year old Indian-born steel magnate, has moved to swallow its largest rival Arcelor, shaking European boardrooms and stirring up a hornet’s nest in the process.

After initial expressions of horror that a firm owned by Indians, albeit ones who have lived in London for 30 years, could presume to buy a European champion, the debate in Europe has moved on to the nitty-gritty of the deal and the industrial logic behind it. It has also raised the question of whether Europe is serious about its road map of integration

Admittedly, corporate takeovers are a sensitive topic in Europe. And France has recently incurred the wrath of the EU for infringing its regulations in the matter, demanding justification for provisions in its new legislation that gives the government the right to put 11 economic sectors beyond the reach of foreign companies. Steel is not on the list of sectors. French finance minister Thierry Breton has strongly protested that he is not opposed to hostile takeovers, is not a protectionist, and is certainly not anti-Indian. There have been guffaws in Europe.

We thus have the chief protagonists, Mittal of Mittal Steel and Guy Dolle of Arcelor, battling it out for supremacy in the global steel industry. The accusations and counter-accusations have been flying thick and fast. While Mittal Steel has been flayed for its business model, its safety record and management style, Arcelor is seen as defying the strategic logic of creating a global steel giant that would be good for Europe. The future portends only a handful of giant companies in the global league.

Critics within and without the steel industry have questioned Mittal’s family-controlled style of corporate governance — his son is the CEO and CFO — and the $23 billion takeover bid has been greeted with hostility in much of Europe. Mittal has been initially stunned but has rejected charges of his firm lacking Arcelor’s "European values", pointing to his firm’s London headquarters and Rotterdam tax registration. He has even offered to move the firm’s head office to Luxembourg, in an effort to mollify Arcelor’s shareholders.

Analysts agree that consolidation of the notoriously cyclical steel industry will help it to optimise output, maintain better control over price and in the long-term safeguard employees from competition in low-cost countries such as India and China. The argument to the takeover battle has been strengthened by the emerging long-term increase in demand for steel, an industry once regarded as a ward of the state for a mixture of social and strategic reasons, which is now increasingly subject to market forces. But politicians have already stirred the broth. It strains credibility that Luxembourg’s prime minister Jean Claude Juncker and France’s president Jacques Chirac have declared their joint interest in seeing that the takeover bid is scuttled.

Innuendos by some European officials about Mittal’s nationality — he still holds an Indian passport — that almost came close to racist overtones have further vitiated the atmosphere. Politicising the issue during the French president Jacques Chirac’s recent visit to India was unwise and will not help matters either way.

In theory, the EU’s founding Treaty of Rome in 1957 should have made doing business across European borders easy through its enshrined freedom of movement for capital, goods, people and services. In practice, national barriers remained and it took the Single European Act to jolt the single market into life. While anomalies continue, supporters of the EU regime point out that the European Commission has been winning court cases to force the opening of markets. But vested interests still rule the roost.

The EU’s competition laws are favourable to the Mittal-Arcelor merger issue in that if the merger does go ahead, it will pose no anti-trust problem. The geographic presence of the two companies is seen as complementary. Together, they would control only 10 per cent of the world market for steel. According to EU rules, member states can stop a takeover bid only if it threatens public security or the country’s financial system, or if it involves dirty money. The steel merger is clean on all counts.

Takeover battles are usually gruelling. However, whether the deal succeeds or not, a good many months will go by before a white flag goes up. There is also the point that nepotism does not generally sit well on European boardrooms. The presence of Mittal junior and his sister (she of the £40m wedding in Versailles) on the board is an easy target for the Europeans on the corporate governance issue. It must be mentioned though that family-owned businesses are not unknown in Europe.

European politicians can do little to influence the course of events. But a persistently hostile government and hostile stakeholders can ultimately scupper a deal. A botched Mittal-Arcelor deal will not redound to the EU’s credit. It will reinforce the view that protectionism is still the EU’s favourite riding horse.