The news apparently took the financial community by surprise . EADS and BAE systems, who are the European giants in the fields of civil and military aviation, respectively, have announced they are in talks about whether to merge into a single 38 billion euro operation to create the world's largest aerospace manufacturer.

David Cameron and especially Nick Clegg, his LibDem deputy, are said to be broadly in favour of the deal. The arguments in favour go something like the following, according to people at EADS pushing for the deal.

There is too much duplication in European military procurement, and money is spent nationalistically and therefore inefficiently. A single European manufacturer would help against that. Europe would finally have a giant to compete on the scales of Boeing - which, lest we forget, has a large military component.

BAE Systems, which has close links to the States, has suffered from declining defence spending in the United States and the UK. In contrast EADS, which has endured many years of losses from absorbing the development costs at Airbus, has become a runaway success as a civilian airliner provider as a result of the growth of air traffic in Asia.

Airbus's A380 super jumbo, after rocky start, is selling steadily. However, EADS, though it has a military arm, is a less experienced military manufacturer than BAE - more importantly, it has far less penetration in the United States. BAE might be on its way down as EADs is on its way up, but they complement each other, goes the lobbyist spiel.

The idea is to list the company in both Paris in London - in the same way Royal Dutch Shell is listed in Amsterdam and London. To run the new company separate from political interference the EADs has so far endured, thus move beyond the micromanagement EADS has experienced under its Franco-German political control in the past, and thus grow faster than it has been so far.

Scepticism has been rife. Some British commentators fear their corporate managers are happy to sell off the national manufacturing crown jewels under pressure from the City looking for commissions. In this narrative, deal hungry Mergers and Acquisitions investment bankers and lawyers are circling around the company. Hundred million dollars in transaction and management fees have been touted as the cost of pushing through the merger. The City of London's deal men haven't faced the prospect of such a bonanza in years, since the crisis began. They must be salivating. The future of British manufacturing and a British skills base is a secondary consideration, say critics.

There is a lack of faith in some circles that the new entity will be free from national political control. The French government seems reluctant to relinquish its 15% stake in EADS, which currently allows them, and the Germans, who have a similar influence, to have a say in the strategy and the hiring and firing of senior executives. There are said to be various mechanisms in the proposal to prevent one nation taking over, but guarantees are one thing. Let's look at history.

Past transnational mergers involving UK and French companies have usually ended up with the UK drawing the short straw, not least because, at the end of the day, the British government is much more laissez faire than the French about such things. Latterly there has been a realisation that this can me a crucial laws of R&D facilities and skills expertise if you let go of the reins. Twenty years ago GEC and Alstom created a merger in order to become a world beating rail transport manufacturer. Today the skills have moved across the channel. Just this yeat International Power tried to runs its operations from two centres in France and the UK; but this year the French majority share owner bought out the UK minority owner. When expertise is offshored, the supply chain of hundreds of UK suppliers breaks up.

Criticism has been coming from particularly Germany too: according to the German press, the Germans trust neither the French nor the Brits, quite . One reason for merging with BAE, a company going through difficult times, is that company's privileged position on the Pentagon's procurement lists. BAE have worked hard to establish a good relationship with the Americans.

It comes down to the excellent security relationship between the US and the UK. That could change if France became a partner. France's relationships with the United States have been famously difficult for decades. France even pulled out of NATO 's military cooperation arm for 40 years. The new merged entity might have less access to American procurement dollars than before, if the Americas don't trust the French, which would seriously reduce the attractions of BAE in the eyes of continental Europeans' eyes. So suspicions are mutual. Some German commentators doubt where there really is any point in looking for synergy between a military aircraft manufacturer like BAE and chiefly civilian plane maker EADS. A further fear is that such military activity that EADS has engaged in has chiefly been carried out in Germany. Germany, too, fears loss of jobs, R&D and expertise if London became the capital of the merged entity's military arm.

My feeling is that British politicians don't seem to have thought this through. Or perhaps they have, and there is some horse trading going on behind the scenes. Britain is being seriously threatened by exclusion from the EU's centres of power. A closer federal union may yet be the result of the financial crisis with the Greeks, and Britain's being on the outside could have serious consequences for the city of London.

Defence is one area where Britain has expert, capacities and experience that Europeans really need. By throwing this "bone" to Europe perhaps the coalition feels it is re-establishing its European credentials.

Of course, the reason may be more banal. As Bernard Jenkin MP pointed out in the Daily Telegraph this week, the deal has been managed on the government side by Sir Jeremy Heywood, who used to be an adviser to BAE when he worked for Morgan Stanley. Who knows what golden parachute awaits him in industry when he quits his post as cabinet secretary, Jenkin speculated, mischievously. Who had really been pulling the strings behind the government decision: a conflict of interest here perhaps?

The next deadline is 10 October when the two firms will have to say, according to British legislation on mergers, whether they want to go ahead. But there have been rumours that this deadline will be extended, and that this story will run for a while. Institutional investors are also said to be concerned, a British parliamentary report is being drawn up, and the German parliament has hinted it may force a veto on the deal.

One genuinely good argument for the deal is that a British company will have a share in the hugely successful Airbus project from which BAE unwisely divested itself I 1996, reducing the British firms in the project to subcontractors, with all the consequent loss of security for workers at the wing-making plant at Broughton that entailed.

That has to be weighed against the fear that BAE will end up with effective political control from Paris, as has happened in many other joint ventures. And the deal could still face the veto from Germany, which has its own doubts about the deal. The story will run for a while yet.

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Pelle Neroth -- EU correspondent

The British car industry is doing well.

Jaguar Land Rover is taking on staff and is enjoying record sale increases in foreign markets. Vince Cable, the business secretary, has persuaded General Motors to keep Vauxhall's Ellesmere Port plant going - possibly at the expense of Opel's plant in Bochum, Germany.

A union chief there called British manoeuvring a declaration of war on German industry. BMW, which owns Mini and Rolls-Royce, plans to spend 500 million pounds in the UK by 2014. And Nissan's decision to build its new small hatchback in the north-east completes the good news.

Britain is now the fourth biggest car manufacturer in Europe, selling more than it imports for the first time since 1976, and within a snip of overtaking Spain as the third biggest car maker.

Under foreign ownership the British car industry - with British workers, designers and engineers - is doing rather well.

The picture for carmaking as a whole in Europe looks gloomier. Volume manufacturers for the European masses are particularly hit. Peugeot and Fiat are doing badly. So are some niche companies. Saab is in receivership. The Swedish "thinking man's" car was dropped by GM having failed to make a profit for them since 1999 and is just this week looking for buyers to take it out of bankruptcy.

The Swedish carmaker was looking at a Chinese buyer, Youngman cars, but GM vetoed the deal because it did not want to see the intellectual property work ploughed into Saab transferred to a Chinese company. Another deal may yet be in the offing, but whether that will solve Saab's chronic unprofitability problems is another matter.

You could blame the economic crisis. Europeans have less purchasing power than they used to and unemployment, particularly in southern Europe, is soaring. The binge that followed euro entry is truly over.
Europe's volume car makers are squeezed from below by cheap and increasingly well-designed Korean cars. The Kia Cee'd uses a German design team that worked on the Audi.

They are squeezed from above by entry level models of prestige car makers like Mercedes. The European company doing best, VW, benefits from a segmented product strategy using common platforms and for having the reputation for being a little bit more prestigious than its counterparts at each level it is competing at.

European management is sometimes said to be a problem. Much vaunted French management skills have come under criticism. French executives are parachuted in from other industries. German car executives, in contrast, are said to be passionate about motoring - and it shows. Conservative uninspiring designs are said to be a factor in at least some models.

Car makers know they are in trouble, and that they are suffering from enormous overcapacity. It is good to be a buyer on the Continent; show rooms are offering up to 30% discounts on new models. More long term solutions are already being worked out. Peugeot is taking the partnership route.

General Motors took a 7% share in the French company earlier this year, and the two will launch a raft of new models on shared platforms from 2016. Even so, there is speculation, Peugeot may have to close plants in France. The car makers themselves want to move more production abroad, keeping prestigious design and management elements back in Europe - though politicians on the continent are loath to allow this, regarding assembly plants as the visible sign of manufacturing a sign of virility. What persuaded the Americans to keep the Vauxhall plant going was commitment to wage restraints and full shifts.

But that is sure to produce overcapacity, Europe's problem, so not everybody will be able to do that. Going upmarket to appeal to the newly rich of the BRICS countries is again not a solution for volume car makers; besides taking a brand up market takes many years as the example of Audi shows. Europe's big motoring corporations are in a real bind. Solutions on a postcard.

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Pelle Neroth -- EU correspondent

The Emissions Trading Scheme was the kind of flagship European policy which Europeans, divided over the growing euro crisis, were supposed to be able to unite around.

The scheme is about enterprises paying for the carbon they emit by purchasing permits - as a means to incentivise the introduction of lower carbon emitting modern technology. It's the environment - everyone is for that!

The ETS has been going since 2005, gradually increasing its coverage into more and more industrial and transport sectors in the EU. But the latest move - to extend the ETS to international aviation - has brought the scheme into unprecedented controversy, with the Chinese claiming their airlines would be prejudiced against. The Chinese government has banned its airlines from joining the scheme. As a result, companies that stand to lose from any political spat with China, such as Airbus, have also expressed concern.

The European plane manufacturer's chief executive Tom Enders told Reuters on Monday that:

"I am very worried about the consequences of that. What started out as a solution for the environment has become a source of potential trade conflict and that should be a worry for all of us."

Aircraft makers are worried that China has used trade instruments before: in the 1990s, when France sold military equipment to Taiwan, China cut its Airbus imports in protest. In the latest conflict, China has withheld its signature from $4bn worth of Airbus A380s for Hong Kong Airlines.

Manufacturers are not the only European firms worried about the spat over the ETS charge. The union's airlines are concerned that they will be hit by tit-for-tat charges, or reduced traffic rights to Beijing and Shanghai, according to Reuters.

The Chinese have a problem with the fact that the cost of carbon will be levied over the distance whole flight. They say it would be fairer if the cost were levied only over the distance their airlines cover in European Union territory, and questions the EU's right to legislate over non European territory. Other Asian airlines, governments and lobby groups have also expressed concern.

Siim Kallas, the European transport commissioner, has said the European commission was willing to find a flexible solution but that it would go ahead:

"Europe will implement its system with difficulties, with conflicts, with court cases, whatever.The system will be introduced," he said, speaking at the Singapore Airshow held this week.

The ultimate sanction could be preventing airlines that don't pay the charges from landing at European airports. The European Commission hopes to raise 1.2bn euros this year. Though it sounds a lot when added together, the EU is keen to stress it is the equivalent of only two euros per passenger per long distance flight.

Today Thursday the situation seems to be that Connie Hedegaard, the EU's environment commissioner, has suggested that talks be resolved at UN level, through the UN's aviation agency ICAO. But the Chinese appear to have agreed with Russia, the United States, India and other nations to meet in Moscow next week to construct an approach against the EU demands. That may include reciprocal environmental taxes.

You might say it's a failure of European diplomatic clout, which makes you wonder how the negotiations were handled. Is there perhaps the sense that airlines are the wrong target?

Aviation may be a fast growing area of emissions, but it still only accounts for 3% of the global total - and airlines have been rapidly hit by rising fuel prices. In addition, airlines have long been burdened with growing "Air Passenger Duty" charges - passed on to the customer as every traveller knows - which now comes to scores of pounds per passenger and whose original purpose was environmental.

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Sweden's engineers take paternity leave

Can fatherhood boost your career? Certainly the skills learned can help you cope on the job - if Swedish engineers are to believed.

A recent survey by the Swedish engineering association Sveriges Ingenjörer polled 1,200 young engineers of both sexes, aged between 25 and 45, and found a big increase, a big rise in paternity leave taken compared to the last survey in 2005: 80% of male engineers took several months' paternity leave and 29% took more than six months off. Ninety-seven percent of Swedish women engineers take six months or more off. Only one tenth of men believe that that careers and salaries have suffered, a much lower figure than seven years ago. Lots of engineers reported positive consequences for their professional skills: better workflow prioritisation, said some respondents. Better at multitasking after being with a baby for a year, said other male engineers.

The Swedish engineering association's staff continually travel around the country holding seminars, encouraging the men to take time off to enrich their life experience. Maybe there is something here for the British engineering panjandrums, always complaining of the macho attitudes, the sharp edges and the incredibly low female participation in British engineering?

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Pelle Neroth -- EU correspondent

Edited: 16 February 2012 at 04:30 PM by Pelle Neroth

Boris Johnson must be gritting his teeth. London may have snaffled the Olympics, and he has just introduced 'Boris bikes' after the Paris Velib scheme, but now Paris has stolen a march on the mayor again with the new electronic car scheme.

The French capital hopes to revolutionise the concept of urban transport and at the same time establishing Paris in the global public mind as a serious technology city.

Foreign journalists are swooning over the Autolib scheme, preliminarily showcased two weeks ago, which will see 3000 electric cars let loose on the City of Light; just as with the bicycle scheme, there will docking bays, with rechargers, and destination bays can be ordered and booked ahead.

The cars will be radio linked to an Autolib mission control centre, if help is needed, and max speed is 80mph for 150 miles. Rental charges are five euros for half an hour. Considering local parking fees, that is pretty cheap.

The rivalry between France and the UK is murderous, as we know.

I'd say these days France has the edge over the UK. Numerous quality of life surveys, and the UN index of development, long put France ahead: better health and transport. Recently France has overtaken UK on the nation brand index, which is more about prestige and importance in the world, not just quality of life

In contrast, I feel London leads Paris - still. Paris lost its cultural capital status to New York in 1940s, while London is still joint world capital of finance. Paris is still the favourite of tourists, gourmets, and lovers, but London is the serious city: the centre of information, news gathering, consultancy, auditing and law, but also a leader in art, theatre, and having a much bigger publishing industry.

London's Brit-art scene is thriving while some critics regard Paris as a bit culturally stuffy and conservative. London has better universities - and, according to a AT Kearney report recently, has the world best talent pool of skilled workers, witness the 300.000 French people working in the UK, many from the top Paris engineering schools.London, not Paris, is the playground of Europe's ambitious go-getting young, the so called Eurostar generation.

Even so, several bits of EU legislation on hedge funds have reduced London's heft - and a few weeks ago, finance commissioner Michel Barnier launched a new assault on the City with proposals for a financial transaction tax.

So it is all the more important that London continues to be seen to be ahead. Attracting the elite of talent becomes self perpetuating, and it attracts companies too - not least companies outside the financial sector which London is going to need for a post financial future. London needs to hold on to those smart people.

I remember meeting the head of one of France's top engineering schools who talked with great enthusiasm about Sarkozy's plan to establish a new Paris of 2030.

The school was situated in a gleaming new suburb, a "technopole", linked by fast train to the centre. Many of the students, I noticed, were international: east European, Chinese. Sarkozy's 2030 plan is the result of a nine month study to make Paris the first global (green) technology metropolis, with an expanded metro, sprawling new public parks, and big new infrastructure plans. Parisian regeneration offered a focus, my contact said, for the civil engineers leaving his school.

Presidential-style central planning has never been London's thing. Its secret has always been to let diverse communities in, let them rub shoulders, develop their own genius. I am sure Boris is up to speed on maintaining London's top status - but can he put across the message to jaded Londoners?

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Pelle Neroth -- EU correspondent

Is this piece of old political gossip going to cheer BAE systems up in the wake of their mass redundancies, or make them more miserable?

Searching through the recently released Wikileaks cable file* looking for technology-related diplomatic dispatches (so you don't have to) I found the following interesting documentation of national conflict at EADS, the mainly French-German aerospace giant BAE had a close collaboration with, through Airbus, until BAE sold its 20% share in Airbus in 2006.

Two very senior German EADS officials met the political officer of the US Brussels embassy. Talking frankly, they said EADS's problems stemmed from "France's inability to come to terms with the fact it was incapable of maintaining its own national aerospace industry".

In the 1960s, France launched the Dassault Mercure, a French attempt to compete with the Boeing 737, but it only sold 17 units.

Despite this failure, the Germans said that the French view seems to be that France is the innovator, uniquely capable of coming up with aircraft concepts/designs, while the Germans are content with product execution.

"Not only was this not the case, but the A380 was actually the brainchild of a German engineer," one said.

The embassy described one German official looking at the other and saying, in mock astonishment. "What, you mean to say we are not a French company??"

Airbus has been very successful, unlike France's solitary efforts.

In 2005, the French CEO Neil Forgeard was ejected, leaving a trail of controversy and a drop in share prices.

"He tried to abolish the dual leadership structure, two CEOs, one from Germany, one from France, in order to grab the top job for himself."

The German official added that the power grab was driven by prestige, because "to be on an equal footing with his counterparts in French industry, namely the CEOs of the CAC-40 firms, Forgeard needed to be unrivaled in his leadership of the company -- not a co-CEO".

On another note, the German EADS officials said BAE' s selling its shares in EADS was a case of "good riddance" since it couldn't decide whether it was a European or a quasi-American company.



*251,000 US diplomatic cables here, browsable
http://www.wikileaks.ch/cablegate.html

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Pelle Neroth -- EU correspondent

Edited: 28 September 2011 at 12:31 PM by Pelle Neroth

Europe's high speed train manufacturers are in intense competition with one another. France's Alstom, which has dominated the market since the TGV was launched 30 years ago, is losing ground to Siemens, a relative upstart.

At the heart of the conflict is the growing market for high speed rail investment around the globe. It's really big. Europe could have thousands of kilometres of additional high speed rail tracks by 2025; China is poised for an even more impressive 25,000 km, by 2015.

Japan is a mature market but will still have over 3,000 km. Brazil, the USA, Morocco and maybe other countries may have smaller networks of a few hundred km each. Europe is an important battleground. As analysts put it, a company that can win order on its home ground is more likely to win them outside Europe.

Alstom rolled out its new AGV model, a successor to the TGV, three years ago. Its top speed is an impressive 360 km/h, and uses distributed power, that is to say the train is powered by motors distributed along the entire train under each carriage rather than by locomotives at the front and at the back of each train.

Unfortunately SNCF, the French state-owned train company, Alstom's loyal customer for three decades, shunned the new train, for all its impressive technology. SNCF runs high capacity double-deckers on France's large high speed network, and distributed traction works badly with double-deckers. SNCF is sticking with Alstom's older models.

Then, last year, Alstom bid against Siemens for a 10 car contract for Eurostar, worth 650m euros. Siemens won, on merit, apparently winning 19.5/20 in Eurostar's technology assessment tests while the AGV achieved just 12 points. These new Siemens e320 Velaro trains, based on the German ICE3 trains that run on Germany's extensive high speed network, will also use distributed power.

The Velaro will be quieter and faster than the current TGV-based ageing Eurostar trains and, because they are specially equipped, will be able to run on German tracks, which the current Eurostar trains are unable to do. With the new rolling stock, Eurostar have hinted at services to Amsterdam and Cologne, and Frankfurt, and perhaps other places. This, incidentally, could impact heavily on the airlines.

Deutsche Bahn, the German rail company, will also be running Siemens Velaro trains into London starting in 2013, under new open market regulations passed by Brussels. So there will be competition on the route. With the choice of two operators, travellers out of St Pancras may soon experience lower prices and a greater choice of destinations in addition to the comfier trains

However, the French government was furious than Eurostar plumped for a German model. France has always done its utmost to advance Alstom, regarded as a National Champion.

SNCF, 100% state owned, in turn owns a 55% share of Eurostar, so Paris expected Eurostar to do the patriotic - ie French - thing. When they didn't, they tried other ways to at least get the rival cancelled . Two of Sarkozy's cabinet ministers, for environment and transport, wrote a letter to the Channel Tunnel Safety chiefs, saying the distributed design was unsafe for travelling in a long tunnel.

The basis was the old rules that specified a two locomotive approach in the first place. With distributed traction, it would be harder for travellers to escape noxious fumes if a fire started in the motor underneath their carriage. SNCF also sacked two of their appointees to the Eurostar board.

The letter was rejected. The rules were updated this year to account of the growing safety of train technology and the Channel Tunnel safety group saw no reason to change them back. French "safety concern" motives were regarded as rather transparent. "It's a heck of a coincidence, isn't it?" one insider was quoted as saying in a UK newspaper. "There are many other long tunnels across Europe that have allowed distributed traction for some time."

Alstom, feeling hard done by, then issued legal challenges to Eurostar but lost in a High Court judgment made last October. It may get some damages on the basis that Eurostar changed some of the details of its tender, but Eurostar's decision to go for Siemens will at least not now be countermanded.

New pastures

This week, Alston and SNCF have put in a bid to design Russia's new high speed railway, linking St Petersburg and Moscow. It will be a dedicated rail link following the controversies around the Russian effort in this area: the Sapsan (Russian for "Peregrine falcon") high speed service has been running between the two cities since 2009 --- on the regular line.

Critics have complained that the demands of high speed rail have clogged capacity on this most important of Russian railway lines. The high frequency of service, and special restriction of fast trains, means closing the level crossings en route for much of the day, preventing ambulances, fire engines and commuters from crossing from one side to another, and even splitting communities built around the track.

The Sapsan also runs at less than maximum speed, 200 km/h. The Sapsan trains are in fact, again, Siemens Velaro model variants, adapted for Russia's broader gauge. Success with dedicated tracks that would relieve congestion and allow new AGV high speed trains to go at their full speed would be a boost for Alstom. For all its investment in the AGV train model, Alstom has only managed to win one AGV order in three years, from a private train operator in Italy

The big prize is, of course, China. This year, according to the BBC, the country will have more dedicated high speed rail tracks than the rest of the world put together, over 12,000 km. Compare that to the 100km length of Britain's sole high speed track, dubbed HS1, that links St Pancras to the mouth of the Channel Tunnel.

And yet China's capacity could double again over the next decade. The country has already ordered 1,000 high speed trains from western manufacturers.

Alstom has won some offers, but again Siemens have done well, as have Canada's Bombardier and two Chinese train manufacturers. One of these last two, CSR railways, having acquired technology from western joint venture partners, is already beginning to export it.

It's competitive times for the makers of the TGV, icon of France's leadership in technology. But competition is clearly a good thing. With Deutsche Bahn and Siemens having outcompeted it on the cross-channel market, it has arguably already given better outcomes for British customers .

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Pelle Neroth -- EU correspondent

Edited: 24 August 2011 at 05:09 PM by Pelle Neroth

So, rail manufacturer Bombardier's Derby plant is set to lose half its workfrce, a thousand jobs, because the government chose to award the £3bn contract for the new Thameslink trains in 2015 to Siemens.

Though Bombardier is headquartered in Canada, it would have built the carriages in the UK. Siemens, with some modest UK outsourcing, will now be making the carriages in Germany.

With an empty order book after a London underground contract has been completed, the last UK-based rail manufacturer's future is now uncertain, and many British subcontractors are set to lose business too.

The whole decision comes at a very odd time. After all, the consistent line coming out of government has been that British manufacturing has to be supported as much as possible. It certainly needs some kind of boost. The country last month fell to 10th place in the global national manufacturing rank, behind even South Korea.

Two years ago to was sixth. Yet. as Labour politician Peter Mandelson said in the wake of the financial crisis which ruined the dream of a merchant banking driven economy, the UK must have more real engineering and less financial engineering, We know the coalition agrees. So how come the failure to favour Bombardier?

Officially. the reason is the government does not have a choice. The UK is constrained by EU public procurement rules that require all public sector contracts issued by local authorities, central government and utilities of £100,000 or more for services and supplies, or £4 million or more for works, to be advertised throughout Europe. (In the EU's Official Journal.) The Thameslink train upgrade tenders falls under these rules. Siemens won because it offered a cheaper contract. Furthermore, discrimination on national grounds in the awarding of contracts is prohibited.

Yet that is not quite the whole story. Open EU tendering is practised in the spirit of the original law consistently only by the EU's small crew of committed free traders, in London and Stockholm and maybe Dublin. In practice, according to the Woods Report for the UK government published a few years ago, there is a lot of favouritism on the continent to ensure domestic producers get picked in a way that the rules don't blatantly appear to be circumvented. In reality, they are backing their own.

The Woods Report mentions numerous examples, designed to exclude foreign companies from havig a realistic chance of winning public procurement contracts in countries like Spain, Germany and, above all, France. Tenders are written precisely so that only a domestic contractor can fulfil it. Contracts are sliced up into parts so that each slice falls below the minimum required for compulsory international tendering.

And when all else fails, there is a loophole paragraph that states the final choice does not have to be on most competitive price alone, but on best value, an amorphous concept which allows domestic bidders to be favoured on aesthetic, environmental or social factors. On top of all this, some countries give two ot three times more state aid to their firms than the UK does, obviously distorting competition.

The result is that the single market in procurement is often a bit of chimera, with countries often supporting home industries as much as they can, with the exception of Britain and some of the Scandinavian countries. Have you ever seen French cops driving Range Rovers? Thought not. But domestic favouritism hasn't harmed the countries that practise it.

With strong domestic manufacturers, with a whole gamut of functioning local suppliers, these manufacturers have an excellent compact home base from which to expand into other countries which have opened their markets. (While their own markets remain effectively shut.) Many British businessmen quoted in the Woods report talk, with understatement, of an uneven playing field.

So what next? With a little imagination, saving the British workers could surely come under the social consideration loophole that would allow the government to support British manufacturing without contravening EU law. Business secretary Vince Cable has now written to David Cameron gently suggesting a more nuanced, less obviously price driven approach to public procurement, so we will see what happens.

However, it must be emphasized that this is not just a story about dodgy foreigners against the upstanding but duped Brits. Underlying the European commission's rules on open procurement - much pushed by the Brits, at the time - may be a romantic, ideological, in fact unsustainable, faith in the 200-year-old ideas of the economist David Ricardo.

As economist Ian Fletcher and others have argued, the idea of open markets always leading to win-win situations for everyone simply does not apply in the 21st century. Fletcher's essay brilliantly explains why. Open borders and allowing each counttry to find their area of "comparative advantage" while allowing its uncompetitive industries to go to the wall benefits not both sides equally - as Ricardo claimed - but the stronger party.

"All open markets are good" is simplistic and short termist. Retaining a skills base is much more important than short term price benefits of buying cheaply from a foreign competitor. The Germans and French have always been lukewarm about frree trade fundamentalism and rightly so. It's probably time the British felt the same.

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Pelle Neroth -- EU correspondent

Edited: 28 June 2012 at 05:30 PM by View from Brussels Moderator

The EU's decision to force airlines to pay for carbon they emit by including the industry in its emissions training scheme (ETS) is flying into heavy weather, with Chinese officials saying the country's airlines will refuse to pay the levies..

The trading scheme, which has been running since 2005 for industry, but from which airlines have been specially exempt, is being introduced from 2012 and will apply to all airlines flying within and into the European Union.

The commission thinks it is high time aviation was brought into its flagship climate change-fighting scheme. It claims it would reduce annual carbon emission from the aviation industry from 300 million tonnes to 200 million tonnes per year, instead of seeing them rise to 500 million tonnes. The idea is that airlines will be pushed to introduce more planes that use less fuel - or at least run on a mixture of kerosene and biofuels.

Airlines have not unexpectedly been grumbling. Many will pass on the costs to their passengers, They say they contribute a relatively small proportion of global CO2 emissions; however. the EU claims that the industry's emissions are rising faster than those of other sectors, and that the sector's contribution could rise from 3 to 5 % of the world's total CO2 output in the next decade.

Connie Hedegaard, the EU's environment commissioner, says the average levy will only amount to 8 euros per passenger; that's smaller amounts than the taxes airports raise to fund runway maintenance and governments levy on flying travellers to subsidise domestic social policies and whatever it is they do with airport taxes. Small change when the battle is on to save the planet

China, though, claims its airlines (or, ultimately, passengers on those airlines) will lose 18 billion yuan, or about 2bn dollars, over the next decade in fees to the EU's coffers. At the International Aviation Transport Authority (IATA) annual meeting in Singapore yesterday, the deputy secretary general of the Chinese air transport association claimed the costs would be "radically unreasonable" and that China would take "legal action at a later date" unless the EU backed down.

The Chinese insist they are not against cutting CO2 emissions per se - domestically, the country has a plan to cut emissions across the whole range of industry by 45% by 2020, per unit of GDP.
It's just they say the EU's free emissions quota was set based on airline carbon output in 2006 levels, when the Chinese air industry was much less developed than it is today. These free quotas, based on outdated and very low figures for passenger kilometres carried, are effectively penalising the explosion in growth of Chinese aviation since that baseline quota date, putting them at a competitive disadvantage to slower growing European airlines.

The Emissions trading scheme works like this. Carbon in excess of a set quota has to be paid for, by "buying" permissions traded on the European carbon market. Today that cost is relatively low - 15 euros per tonne of CO2 - but aviation officials have quoted experts predicting the price of CO2 easily rising to 150 or even 200 euros in the coming years. That could hit, the Chinese say, the 11 Chinese airlines flying into Europe hard.

The EU has complained about China's attitude. "Why should a student flying from Scotland to Germany pay the fee while a Chinese businessman flying from Beijing does not," says EU commissioner Hedegaard. She has, however, held out the possibility of a compromise. Countries which promised to cut carbon on other sectors might avoid the carbon cost on their airlines.

"If you have equivalent measures of your own, you can be exempted," she told Reuters. "We can see in the Chinese press that they're working on that. We're looking at that to see -- is that what we can call an equivalent measure?"

We'll see how this political battle pans out. Meanwhile, any plans for a global emissions trading scheme look as far away as ever..

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Pelle Neroth -- EU correspondent

Edited: 08 June 2011 at 09:39 AM by Pelle Neroth

Last week saw another Icelandic volcano ash cloud threaten Europe's airspace. Thankfully, its effects were mild. But how will European industry cope with a bigger ash cloud like the one that paralysed EU airspace for many days in 2010?

The ash cloud in 2010 is estimated to have cost between 5 to 10 billion euros. Airlines suffered a 1.5bn euro loss, and the tourism industry was also heavily affected. A survey by the think tank Chatham House found that businesses reported the greatest loss in human resources areas - staff stranded abroad and dislocated management structures. If the crisis and the flight ban had lasted just a few days longer the effects would have been far greater, businesses reported.

Modern commercial life is intensely dependent on just-in-time manufacturing processes and long supply chains. For instance, in the Japanese crisis. car makers and mobile phone manufacturers have had to halt or slow production as inventories of specialist products - electronic components and chemicals - were quickly run down. Major cities for production, trade and travel are often badly affected by any shock, rendering the concept of multiple supply chains meaningless.

However, Eurocontrol, the European air traffic control centre, ran a test a few weeks ago suggesting Europe is now better prepared for an ash cloud than it was last year. But not if the crisis lasted longer than a week because worst case scenarios were not factored in.

The report from Chatham House suggests that another challenge is communicating the problem to the public in a media- and lobbyist- saturated world. Voices from the world of science and risk management had a hard time getting on to the airwaves during last year's crisis.

These voices were arguing for the precautionary principle to prevail; instead, they were shouted down by airlines calling for a resumption of services at the earliest possible opportunity - and last week, again, Ryanair were first out of the gate.

Chief executive Michael O'Leary castigated the use of "Red Zones", no fly areas which the civil aviation authorities of Europe had designated because of the probability of higher concentrations of the abrasive ash power that can clog up engines and grind away at the aircraft's exterior. British Airways, for its part, flew an aircraft through one Red Zone and found "absolutely nothing." However that ignores the argument that Red Zones are based on probabilities, where ash is most likely, rather than definitely, found.

Airlines are also lobbying the European commission for a change in the rules regarding passenger compensation for flights that did not take off. They say that they are the only part of the European transport system with such liabilities. However, the question is whether there is political will to reopen such a contentious piece of legislation that would raise the costs of travel for the consumer.

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Pelle Neroth -- EU correspondent

Edited: 01 June 2011 at 08:36 AM by Pelle Neroth

Are biofuels good or bad? Or, rather, which ones are good and which ones are bad? At the moment, EU targets oblige member states to power 10% of their transport with biofuels by 2020. But contentious debate over the credentials of biofuels has long stalled investment and threatens the future of some producers.

After a two year debate on the issue, the European commission has admitted that the issue of land use change, or displaced deforestation, can lessen the carbon savings from some biofuels.

In July therefore, it has announced, it will introduce a new, tougher sustainability benchmark which aims to keep the least environmental producers out of the European market. Many in the biofuels industry have complained loudly about the new benchmarks. The commission says it will provide opportunities for producers of the greenest biofuels.

Indirect land use change (ILUC) has been the elephant in the room in the biofuels debate, strongly criticised by environmental NGOs, until now somewhat overlooked by the eurocrats.

ILUC means that if you take a field of grain and turn it to biofuel use, those missing tonnes of grain will have to be produced elsewhere or someone will go hungry.

The economics of the situation means the shortfall has tended to come from tropical areas, encouraging farmers there to carve out land from rain forests. Burning the forests to create agricultural land releases large amounts of CO2 into the atmosphere, negating the carbon-reducing effects biofuels were supposed to bring.

According to an EU analysis of 15 surveys it has carried out, the EU's biofuels policies over the next decade could lead to land clearance of tropical forest equivalent to the size of Denmark, or 45,000 square km.
Biodiesel, mainly palm oil produced in the once rain forest rich areas of Indonesia, is one of the worst offenders. But the commission is expected to endorse bioethanol derived from Brazilian sugar cane, which grows fast, needs little fertiliser and is cheap to transport.

(When growing extra food, Brazil has plenty of spare arable so-called cerrado land, "the world's last agricultural frontier", so the Amazon need not be deforested. That is the argument that Brazilian politicians use, and seems to have convinced the commission.)
But the main hope will be pinned on next generation biofuels.

A clear message in July, say local representatives for the biofuel industry, could speed up the adoption of this next generation source - made from agricultural residue, ie straw, after food crops have been harvested, so no longer creating a land displacement problem. Kaare Nielsen, a spokesperson for Novozymes, a large Danish producer, says these new generation biofuels (which require pretreatment) are not yet competitive but will be soon.

"The volatility of oil prices makes it a tough guess, but probably by 2020 it can compete with petrol."

She adds that the barrier is no longer so much technical, but political: that the best performing biofuels must be incentivised. That those who suffer the first mover disadvantage must given support.

Meanwhile, an NGO, Action Aid, said that monitoring of biofuel procedures were often evaded and that population displacements - on top of ILUC - were not considered when considering the costs of biofuels. The commission says that member states are responsible for verification checks, and that third party auditing covered certification systems rather than individual projects.

There's bound to be bumps ahead, but if the commission manages to steer the contentious and long bothersome issue of biofuels production in the right direction it will be quite an achievement.

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Pelle Neroth -- EU correspondent

It's been a rum week for Green progressives in Europe.In Britain, George Osborne, the chancellor, has presented a less-than-green budget, while in Germany and Finland motorists are staying away in droves from the new eco-friendly fuel its government hoped would become the new national standard for all cars.

The roll out of E10, the petrol-ethanol mix that is hoped to become the standard car fossil fuel in Europe in the next few years , has suffered a setback with major car manufacturers warning it could cause problems with engines.

Several motoring organisations have called for a repeal of the new fuel roll-out; but the German government, and the oil majors, say they remain committed to the new fuel, which is comprised of 90% petrol and 10% bioethanol derived from sugar beets or grains.

The government claims 90 per cent of newer cars on German roads to be able to run unmodified on the new fuel mix, but the newspaper Welt am Sonntag reported two weeks ago that Thomas Bruener, the head of mechanical development at BMW, worried all cars, even its latest models, could be at risk.

He said E10's high ethanol content could generate water condensation that would enter the oil and dilute it. He told the Sunday newspaper that "to avoid engine damage, oil checks and changes may have to become more frequent".

The next day, Bruener clarified his remarks, saying the concerns were restricted to cars used outside the EU, where fuel standards were less refined.

But both Daimler and BMW are carrying out tests on their new models with the new fuels, it was reported.

Meanwhile, while there has been a run on regular supplies, critics have said that the amount of information on the kind of vehicles E10 is suitable for is "limited and confusing".

For instance, one guide being circulated by the car industry advised that all Volvos built since 1976 were suitable, as long as "maintenance instructions are fulfilled." But how do repair shops know what these instructions are? Or all Golf VWs were suited to the new fuel except those with the engine block number AXW and built in the month of April. But who the Hell knows what date their car was built on? critics have asked.

The quarrelsomeness over the new regulations comes as this most car-proud of countries weighs the costs and benefits of its equally ardent environmentalism. There is a big argument - heard in the UK too - whether in fact bioethanol is even that carbon friendly and that, unless the rest of Europe becomes as enthusiastic about green reforms as Germany, it's all anyway pointless.

One member of the public told German television:

"Energy saving light bulbs, waste separation, E10, house insulation, and all anti-nuclear power nonsense, why do this when our neighbours don't follow?"

While another said sarcastically: "At least we can now say we are opposing Gaddaffi - at the pump."

The ruling CDU party, which pushed the new regulation, faces the voters in Baden Wurtemberg at regional elections on 27 March - it's a big car manufacturing state, so the results will be interesting.

Meanwhile, in Finland, another country introducing E10 this spring, its biggest engineering magazine tested E10 and found it less efficient than regular 98 octane fuel, negating out its lower pump price introduced as an enticement to switch. It's a few euro cents cheaper per litre.

Helsingin Sanomat, the main newspaper, interviewed customers at petrol stations and found widespread scepticism. "I don't trust it at all," said one local, who said she might consider it for her employer's car but not her own

In both countries, conventional fuel will continue to be sold until at least 2013.

Many other EU countries, including Britain, Poland, Belgium etc, are
eyeing a the possibility greater bioethanol content at their own pumps.
If even the goody-goody Germans are complaining, how will other countries react when it's introduced?

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Pelle Neroth -- EU correspondent

One of the pleasures of motoring in Europe, for some anyway, had been that fixed penalty notices from speed cameras for gunning that beautifully engineered high performance car over the official speed limit was never going to reach them. Number plate agencies did not cooperate, or if they did, there was legal provision from extracting fines incurred in another country.

Not for much longer.

For since the Council of Transport ministers' decision in December, and subject to the European parliament green light any time soon, a new order is set to prevail. Traffic offences will be enforceable across borders. Speed down the Autoroute du Soleil to the south of France, a motorway as well known for its Riviera-bound road maniacs as its speed cameras, and a ticket from the French authorities might appear in your English letterbox two weeks later.

The offences comprise speeding, talking on your mobile phone while driving, and failing to wear a seatbelt. However, points on the licence will not be deducted, even if it would have been a points offence in the UK. Some have raised objections. One motoring organisation I spoke to warned darkly of the system being abused by countries in eastern Europe that are members of the EU but with less clean justice systems: The fines will be collected by the Metropolitan police. But if you want to appeal you will have to travel to Bucharest.

Parking offences are not internationalised - yet. But the European parliament, revelling in the fantastic new powers over domestic legislation that the Lisbon treaty has given them, has proposed a second tranche of laws that could be implemented in a few years if this set is successful at curbing tourists' speeding. (Non resident drivers are supposedly responsible for 15% of motoring offences, but only 5% of road traffic.) So one of the new proposals on the line is that member states which have above average road traffic fatalities to boost the frequency of their speed checks. One possible future proposal would be that member states must test at least 30% of their driving population for drink driving every year. And, if seatbelt use is below 70%, to carry out "intensive police checks " over periods of at least six weeks three times a year.

It is true that horrific numbers of people die on the road in Europe and the EU totally failed to achieve its goal of having road deaths between 2000 and 2010. But is it really a good idea to swamp national enforcement bodies with further red tape that smacks of Eurocrat imperialism? Could not technology do the job of limiting speeds by using nudge psychology - as outlined here a few months ago - be more acceptable to Europeans?

The EU's enthusiasm is a bit worrying because it shows that the new EU shared competence over judicial affairs may prove to be the big thing arising out of the Lisbon treaty's many and confusing provisions. Someone ought to impose speed limits - very low ones - on the legislative chambers in Brussels.

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Pelle Neroth -- EU correspondent