A dispute over the place of competition policy in a European Union reform treaty was resolved at a summit on Friday after free-marketeers reached an agreement with France.

The row began when French President Nicolas Sarkozy persuaded the German EU presidency to remove mention of the principle of free and undistorted competition from the objectives of the Union in a mandate for a new treaty, raising concern among practitioners about the legal implications.

But the European Commission and EU president Germany said it was resolved when an acceptable arrangement was found to reaffirm the legal basis of Brussels' sweeping authority to regulate cartels, big mergers and antitrust violations.

After contacts between European Commission President Jose Manuel Barroso and Sarkozy, the leaders agreed that a protocol would be added to the treaty negotiating mandate.

German government spokesman Ulrich Wilhelm said that following concerns expressed by the business community and the Commission, a formula was agreed at the leaders' lunch which solves the problem.

I can confirm that President Barroso is satisfied with the solution that was found on competition, Commission spokesman Johannes Laitenberger said.

The deal removed what Sarkozy considered ideological wording in the defunct EU constitution that appeared to make competition an end in itself rather than a means to the goal of prosperity, a French spokesman said.

COUNTER-OFFENSIVE

Britain, the Commission, the EU's top business lobby and senior lawyers had launched a last-minute counter-offensive after word of the quiet Franco-German move leaked from the summit late on Thursday.

British Prime Minister Tony Blair raised the issue with Sarkozy, insisting the treaty be clear about the EU's commitment to antitrust principles.

That has now been resolved, because people have resolved a protocol which makes it clear that the legal basis of the internal market remains as it already is, Blair told reporters.

The EU executive vowed to fight any attempt to roll back the bloc's power to police open markets and punish governments that subsidize firms illegally and companies that breach the rules.

Respected former EU competition commissioner Mario Monti said removing unfettered competition as a core objective could be the beginning of the end of European economic integration.

This would in a sense begin to disintegrate the Union, Monti told Reuters, adding that large states could exploit such wording to carry out industrial policy to the detriment of the small member states.

But EU officials said the Commission's lawyers were privately less concerned, arguing there was still a strong legal basis in existing treaties for Brussels' competition powers.

There are 13 other references to competition in the treaty so legally the situation on competition will not change in any way, Blair's spokesman said.

French presidential spokesman David Martinon said Sarkozy had also won the addition of a phrase pledging that the EU would contribute to protecting its citizens.

Some free-marketeers see this as code for economic protectionism, although French officials dispute that, saying it is aimed at reassuring French people who voted against the EU constitution in 2005.

Brussels competition lawyers said the European Court of Justice would have had to take account of a change in the EU's fundamental document.

It would modify in potentially far-reaching ways the long-established legal principles in every area of competition policy, said John Temple Lang of Cleary Gottlieb.

It would open the way to protectionist measures by both member states and the EU as a whole, he said.

(additional reporting by Huw Jones and Adrian Croft)

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