UPDATE 1-France seeks to remove competition from EU treaty

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By Paul Taylor

BRUSSELS, June 21 (Reuters) - France sought on Thursday to remove a key reference to "free and undistorted" competition from a treaty to reform the European Union.

French President Nicolas Sarkozy confirmed to reporters that Paris had made the request and said the German EU presidency had granted it.

"There was some play on that, but today's presidency document satisfies our demand," he told a news conference.

EU diplomats said Paris also sought to add the promotion of economic growth to the missions of the European Central Bank, alongside maintaining price stability in the treaty.

As EU leaders debated a negotiating mandate for a treaty to replace the defunct EU constitution, the diplomats said Paris' two demands ran counter to the free market philosophy and economic orthodoxy of the 27-nation bloc.

The French were also among several countries seeking an exemption from EU internal market rules for a swathe of "public services of general interest".

French officials said the demands reflected concerns expressed by people who voted against the constitution in a referendum in France in 2005.

Sarkozy has said the EU must protect its citizens and not act as a "Trojan Horse" for globalisation.

The diplomats said the German EU presidency had at France's request removed a crucial phrase declaring among the objectives of the Union "an internal market where competition is free and undistorted" from the draft mandate.

"As a consequence, for the first time since 1957 undistorted competition would not be mentioned at all in any of the horizontal provisions of the treaties," an EU official involved in the negotiations said.

ALARM

He said the European Commission had voiced alarm at the proposal, especially since another legal tweak would mean the EU executive could only use its broad powers to act in support of objectives of the Union as set out in the treaty.

Accepting the change would make it much harder to resist arguments for "national champions" or "industrial policy" in future state aid and merger control cases.

"It could considerably weaken the European level of competition enforcement at a time when markets are increasingly international and beyond national competition enforcers," the official said.

Under EU law, the Commission has sweeping, exclusive powers to investigate and force repayment of illegal state aid that distorts competition, and to bar large-scale and cross-border mergers on the same grounds.

It has used those powers to fight industrial subsidies and prevent the creation of dominant market positions.

However, a presidency source said references to free markets appear in a dozen other parts of the text and played down the significance of the French push, saying it would have no legal impact.

No decision would be taken on the French wish until Friday, he added.

France has long wanted the ECB to pay more attention to boosting growth with its monetary policy, saying the euro's strength as a result of rising interest rates has hurt its exports.

"We should not be the only area in the world where the currency is not put in the service of growth," Sarkozy said in a keynote economic policy speech on Wednesday.

The German Finance Ministry said on Thursday the strong euro against the dollar had harmed the vitality of its exporters since February. (additional reporting by Francois Murphy, Yves Clarisse and Noah Barkin)

Keywords: EU TREATY/COMPETITION