What Could They Be Thinking? France riles neighbor Germany with its efforts to promote 'national champion' companies.

Byline: Stefan Theil, With Eric Pape and Marie Valla in Paris

It violates every tenet of European integration. It contradicts all wisdom on how to reform economies, create growth and maximize competitiveness. And it's becoming a political hot potato. Just last week German Chancellor Gerhard Schroeder angrily denounced it as "infuriating" and "extremely nationalistic."

The object of his ire? France's new infatuation with so-called national champions--companies nurtured by state aid and special protections to gain an advantage over foreign competition. Declaring that key companies "must not fall into the hands of foreigners," French Finance Minister Nicolas Sarkozy is effectively renationalizing giant Alstom, the country's flagship maker of high-speed trains, and shutting out German rival Siemens, which had been eying the financially troubled conglomerate for acquisition. By late June, Paris-based drugmaker Sanofi-Synthelabo is expected to complete its 55 billion euro takeover of Franco-German rival Aventis, whose plan to merge with Swiss pharmaceuticals giant Novartis was recently blocked by President Jacques Chirac on "national security" grounds. The deals have infuriated France's trading partners, most of all the Germans, who will make much of the issue when Chirac and Schroeder meet this week in Aachen. Paris may talk about building "European" world beaters to compete with American multinationals. But as the Siemens and Novartis cases make clear, the intention has been to strengthen French companies instead.

For years economic orthodoxy has promoted efficient markets, free competition and the privatization of state industry as the best guarantee of growth and prosperity. All three are enshrined in EU economic policies that strictly limit state aid to companies and national protectionism. But Sarkozy and other proponents of the champion theory point to Airbus, a company created with billions in state subsidies and the politically engineered merger of several rivals. Now the French-based aircraft maker is eating rival Boeing's lunch, with a 52 percent share of the market for commercial jets. With Sanofi-Aventis, France is suddenly home to the world's third largest drugmaker, capable of competing on a global scale. (At one stroke, the 90 billion euro behemoth owns America's second biggest sales force and is no longer forced to let rival Bristol-Myers market its drugs, among them the stroke prevention treatment Plavix and the allergy pill Allegra.) Long-term success will be up to the markets. But to a Frenchman today--and a worker at Sanofi--the strategy looks impressive.

It does, however, pit Paris against the EU's liberalizers. Frits Bolkestein, the Brussels commissioner responsible for enforcing single-market rules, calls the policy a "pathetic" return to the dustbin of failed economic policies. Europe's postwar history is full of expensively subsidized failures, from defunct PC makers to fast-breeder reactors and magnetic-levitation trains. Even successes like Airbus come at huge and continuing cost, warns University of Kiel economist Hugo Dicke. Instead of protecting national companies, he says, EU members are supposed to be fostering entrepreneurship and deregulating markets under the Lisbon Agenda, an ambitious program to raise GDP by 40 percent and make Europe "the world's most competitive economy" by 2010. ...