Growing tensions between Brussels and key EU states over national economic interests are fast emerging as a major test of German Chancellor Angela Merkel's stance on the promotion of free markets in the 25-member bloc.
After clashes between Berlin and Brussels in recent years over government protection of industry, a new battle is shaping up between the EU Commission and Europe's biggest economy over access to German phone giant Deutsche Telekom AG's new VDSL high-speed network.
This month the European Commission threatened legal action against Germany if it insisted on giving Telekom temporary protection from competition as part of the Bonn-based company's drive to develop the high-speed system.
Merkel used this month's opening of CeBIT, the world's biggest computer and telecommunications fair in the German city of Hanover, to throw her weight behind Deutsche Telekom.
"We will do everything to create the right conditions for Telekom," said Merkel, whose government has prepared a new law to shield Telekom while it develops the new 3 billion euro (US$3.6 billion) optical fiber network.
In exchange for protection as it rolls out the new network, Telekom has pledged to establish VDSL service for Germany's biggest cities.
EU officials have labeled the measure as "protectionist."
"If the text of the draft law remains as it stands, I will not hesitate to launch infringement proceedings against Germany," said EU Information Society Commissioner Viviane Reding after a meeting with top-ranking German officials earlier this year.
Berlin is now trying to prevent a legal storm by saying it will delay the legislation -- which has broad political support -- until later in the year.
Merkel's backing for the law is at odds with her recent expressions of concern over aggressive moves by other EU states to shore up key sectors and to protect them from cross-border takeovers.
In particular, this follows French moves to broker a merger between two French-controlled utility companies to head off a foreign takeover.
At a joint press conference last week with French President Jacques Chirac, Merkel sought to dispel claims of differences between Berlin and Paris on the issue of foreign investment.
But she went on to say: "This is up to business. We need foreign investment and we need the internal European market."
Merkel's Minister for Economics and Technology Michael Glos was more forthright. He told an international business conference this month: "We do not need industrial patriotism."
He insisted foreign investors should be welcomed with open arms, and said that forced mergers and attacks on foreign investment were not instruments of market economics.
But Germany has not shied away from economic patriotism in the past when it perceived that national economic interests or leading companies might be under threat -- even if this meant being on a collision course with Brussels.
Both Merkel's Christian Democrats and former chancellor Gerhard Schroeder's Social Democrats have bitterly defended Germany's so-called Volkswagen law in the face of enormous pressure from the European Commission to dismantle the controversial rule.
The law, which is aimed at shielding the north German-based auto group from hostile takeovers, is now being challenged by Europe's monopoly authorities in the European Court of Justice.
Under the Volkswagen law the voting power of any single shareholder is capped at 20 percent, while a 20 percent minority can block strategic decisions.
Public sector banks are another area where Berlin fought a battle with the EU which it eventually lost.
After a protracted fight over what Brussels saw as the privileged status of Germany's 11 public-sector banks, the state-controlled Landesbanken finally relinquished their state credit guarantees last year following a ruling by the European Commission.
The long-running privilege enabled the states, which in many cases have acted as house banks to Germany's powerful state governments, to arrange refinancing through capital markets at very favorable conditions.
This was then passed on in the form of cheaper borrowing costs to their customers and at rates much lower than those offered by privately owned competitors.
Brussels, however, is still not satisfied with German banking reform and is considering taking legal action against Berlin for protecting public sector Sparkassen(savings banks).
The European Commission objects to the fact that German law bars private takeovers of any of the Sparkassen chains.
German Finance Ministry officials vow to fight any moves which point to Sparkassen privatization and say the bank's name must apply only to public sector banks.
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