(FORTUNE Magazine) – THE EUROPEAN Community's drive toward an open market by the end of 1992 is suddenly starting to bump hard against the very barriers that the EC is trying to tear down. As the deadline nears, powerful cartels -- especially in automaking, agriculture, and aviation -- are fighting ferociously to hang on to their privileges, and the Community is caving in to them. To compound the problem, the certainty of slower growth and the possibility of recession triggered by higher oil prices are weakening the resolve of EC members. Says Karel Van Miert, the EC's commissioner of transportation: ''Liberalization is much more difficult now than it was a year ago.''

We've been here before. The first oil shock, in the early 1970s, beached a promising 1992-style program as governments scrambled to protect jobs. Europe is better prepared this time because although it is still dependent on imported oil, it needs far less than it used to. Still, oil at more than $30 a barrel has done plenty of damage. The EC now thinks gross domestic product will expand by just 2.75% in 1990, down from the 3% forecast before Iraq invaded Kuwait. Even if the crisis is resolved early in 1991, the hangover from expensive oil would linger well into the year, holding growth to a tepid 2.25%.

That hardly seems like a disaster. There's a crucial difference, however, between the old and new forecasts. With 3% growth, Europe can keep on creating the jobs that have cut unemployment from 11.5% in 1985 to around 9%. That's still a painfully high rate, but it has been heading in the right direction. A 2% growth rate could slow job creation to zero. The timing couldn't be worse. The EC is just starting to deregulate the big, protected industries, from autos to textiles, which must shed millions of jobs to become competitive. An economic slowdown is sure to spur the most protectionist countries -- France, Italy, and Spain -- to rally around their bloated, state-owned companies. MEMBER COUNTRIES will not give up on 1992 outright. Too much progress has been made. Begun in 1986, the program consists of 279 proposals designed to eliminate most trade barriers. Of those, 183 are on their way to becoming law. Capital can now move freely across borders. The hodgepodge of mobile telephones has been replaced with a single Europewide system. All customs formalities between countries are set to end by 1993. In October all the member states except Britain voted to create a European central bank starting in 1994, clearing the way for a single European currency in the late 1990s. Now that skeptic Margaret Thatcher has stepped out, Britain could well make the move unanimous. But the last 96 measures include the hardest cases. The risk is that EC members will water them down by pushing for delays or exemptions. The European consumer will be the big loser. The test is shaping up in the three most protected industries: cars, air travel, and agriculture. The car market has long been a nightmare. Europeans pay more, and have less choice, than auto buyers in the U.S. In France, Italy, Britain, Spain, and Portugal they can't get their hands on many Japanese cars. The quota in France is just 3% of the market; in Italy about 1%. In countries that have no restrictions because they don't have their own auto industries, including Ireland, Greece, and Denmark, the Japanese have more than a 30% share. THAT CUTS DOWN options for buyers in the restricted countries. Typically, Japanese carmakers have been leaders in offering advanced equipment. The new midsize Nissan Sunny, due in showrooms in March, will be the first car in its class in Europe to have a powerful 16-valve engine as standard equipment. The Japanese also lead the field in reliability. In a recent survey, British car buyers rated 21 makes on number of breakdowns and frequency of repairs. Honda, Mazda, Mitsubishi, Nissan, and Toyota shut out the Europeans by taking the top five spots. Since the Japanese can make cars so much more cheaply than can the protected, overmanned European automakers, they ought to be able to offer bargain prices, even after paying a 10% import duty. That would force down prices of competing European models. But since quotas prevent them from gaining market share in half the EC countries, the Japanese have no reason to offer deep discounts. Instead, they simply match the prices of European cars. The Japanese reap enormous profit margins -- and the buyers get hammered. A study by professors John Bridge and Garel Rhys of the Cardiff business school | in Wales concludes that the Japanese could drop their prices for midsize cars by $2,300, or 25%, if the quotas disappeared. That would set off a cycle of price and cost cutting among European producers that would save consumers $33 billion a year. The quotas wouldn't hurt so much if buyers in high-priced protected nations such as France could easily buy a car in, say, Belgium, where Japanese competition makes all cars cheaper, and bring it home. In theory such cross- border trade is the foundation of the Common Market. But in practice a second barrier keeps the markets separate. It is the little-known ''block exemption,'' an exception to EC competition laws granted to the auto industry in 1985 for ten years. The exemption allows manufacturers to impose highly restrictive agreements on all their dealers -- hence the term ''block.'' Under it Peugeot, Volkswagen, or Ford of Europe can bar their dealers from taking on a second brand. ACCORDING TO carmakers, the block exemption helps consumers by requiring that all dealers perform repairs. Consumers may want that, but they also want lower prices. Even within national markets, exclusive dealerships push up prices. In the U.S. the dealer -- and the consumer -- are king. The market is dominated by big dealerships that sell as many as a dozen brands. By hawking Toyotas alongside Fords, the megadealers wring big discounts from manufacturers, which battle for orders the way coffee companies fight for shelf space in supermarkets. By contrast, Europe is a land of Lilliputian, high-cost dealers totally subservient to the producers. Says Jean-Claude Rouves, president of Eco System, a French company that purchases cars from Belgian dealers for French customers: ''The system is medieval. In the producer's mind, he's the lord of the manor, and the dealers and consumers are serfs.'' In Europe, an average Peugeot dealer does $3 million a year in sales; a comparable dealership in the U.S. does four times that. To win the block exemption, the industry pledged to hold prices for the same cars selling anywhere in Europe within a band of 12%. Automakers are blatantly violating those terms, according to a 1989 survey by the European Consumers' Organization, a Brussels-based research and lobbying group. It found that prices for identical models often vary by 60% across Europe, before taxes. On average, cars in Denmark are 45% cheaper than the same models in Spain or Italy. A compact Citroen AX costs $1,500 -- or 19% -- more in France than in < neighboring Belgium. Given the big price differences, consumers and resellers ought to be having a field day chasing the best deals from Brussels to Copenhagen. It should be simple -- find the lowest pretax price, then pay the value-added tax at home when you register the car. But the block exemption has an answer to that too. It prohibits dealers in one country from advertising in another. It also restricts companies from, say, buying 1,000 cars at a time in Denmark and reselling them in France. On the other hand, individuals have the legal right to buy cars abroad, as do small-volume ''agents'' who must first recruit customers in their home country, then present the foreign dealers with a stack of signed orders from their clients. Using their immense leverage with dealers, the manufacturers do everything possible to block legal imports. Last year Peugeot wrote a letter telling its dealers in Belgium to stop selling to France's Eco System. The feisty importer took the case to the European Court of Justice, the EC's judicial arm. The court issued a preliminary order forcing Peugeot to sell cars to Eco System pending the outcome of a full-scale trial. But the battle is hardly won. Manufacturers demand that their Danish dealers give first priority to local customers, then arrange deliveries so the dealers have few cars left for foreign buyers. Governments help out by smothering both agents and individuals with special taxes and red tape. To import a Belgian car, a French buyer must first register the vehicle in Belgium and then import it as a used car into France. The final step is replacing the Belgian white headlights with the yellow lamps required in France. The whole process takes two weeks, and can cost $830 in extra taxes and mechanics' fees. Instead of scrapping the block exemption, the EC is planning a perverse agreement with the Japanese that could make it even worse. Until late last year the European Commission -- the body comprising the EC's staff -- promised to eliminate all national quotas by 1993, replacing them with a Europewide limit that would rise gradually before disappearing in three to four years. The Commission also pledged that Japanese cars produced in Europe could sell freely, in accordance with regulations of GATT (the 105-nation General Agreement on Tariffs and Trade). But in September the EC made an embarrassing U-turn. It proposed allowing Japanese imports and locally produced cars to capture up to 19% of the market & by 1998 (vs. 9.4% now), when all restraints would disappear. But instead of opening all borders, the EC is pushing the Japanese to agree to a ''voluntary restraint agreement'' that would allow them to raise their shares in the now- protected markets only gradually -- and would count not only imports but cars they make in European plants as well. The agreement is ''voluntary'' for a reason: It is strictly illegal both under the open-border policy of 1992 and GATT rules. FOR CONSUMERS the deal is a bummer. The temporary quotas would hold up prices by allowing the Japanese to divide their allocation among themselves without competing for market share. Since the agreement has no legal standing, there's no guarantee it will disappear in 1998. Worse still, it will contain a ''safeguard'' clause that could extend restrictions in case the market deteriorates. The industry is already pressing Brussels to extend the agreement to ten years and lift controls only if Japan offers ''reciprocity,'' not just in cars but also in financial services and big public works projects. The measures will also make it very hard to get rid of the block exemption. During the transition period, the EC needs a mechanism for keeping Japanese cars from flowing from the open markets such as Germany into so-called monitored markets like France. The EC is shying away from passing a law that would prevent Japanese dealers from selling to foreign buyers -- outright discrimination against the Japanese. Instead, it's considering a proposal to tighten the block exemption, making it even tougher to sell any cars across borders. The industry loves the idea. Hence, even if limits on Japanese cars are eventually phased out, the block exemption will likely remain. Keeping the block exemption would be 1992 in reverse: It would inhibit the cross-border trade that's the foundation of 1992 and maintain segmented markets with immense price differences for decades to come. For airlines, liberalization looks impressive on paper. But it's doing precious little for travelers. The cost of a plane ticket in Europe is outrageous: 20% to 30% more on average than in the U.S. A round-trip ticket for the 50-minute flight from Brussels to Frankfurt sells for $488, vs. $278 for the Pan Am shuttle from New York City to Washington, which covers the same distance. Dominating the industry are state-owned flag carriers with sky-high costs. Powerful unions have inflated wages and hobbled productivity. At Italy's $ Alitalia, Germany's Lufthansa, and Scandinavia's SAS, flight engineers earn more than $100,000 a year, while flight attendants get more than $40,000 -- double the levels in the U.S. At Air France, 299 employees, mostly pilots, earn over $180,000 a year -- more than President Bernard Attali. UNTIL RECENTLY the industry had a blank check. Each international route had two flag carriers that jointly set a price and divided the number of seats -- and often the number of passengers -- fifty-fifty. The rules also grounded potential competitors. Even if one nation chose to license a second international carrier, the other countries could refuse to allow its planes to land. Since 1987 the EC has passed two packages of measures designed to progressively dismantle the aviation cartel. An airline newly licensed in one country can fly anywhere in the EEC. The reforms have also ended capacity sharing and allowed airlines to grant special discounts of up to 70% So far the reforms haven't helped much. One carrier can propose a lower fare. But the government at the other end of the route can veto it and often does. In 1989 British Airways proposed steep reductions in its fares to cities in France, Germany, Spain, and Italy. Amazingly, all four countries turned down the bargain prices, discouraging British Airways from trying such a sweeping effort again. Even when special fares do get through, they are of little use to business travelers because they usually require a Saturday night stay. In 1993 governments will lose their veto power, clearing the skies for fierce price competition -- or so it would seem. But to force the flag carriers to compete, Europe needs a flock of low-cost, aggressive new airlines. Despite fanfare about liberalization, only Britain and Ireland have abandoned their flag carriers' monopolies by promoting competition. The benefits to British travelers ought to encourage other countries. Four British carriers now fly from London to Paris: British Airways, British Midland, Air Europe, and Dan Air. The round-trip economy fare at average 1990 exchange rates is $275, cheaper per mile than the New York-Washington shuttle. Other than British Airways, they're all lean machines. Air Europe, for example, has no union agreements. On average, each of its employees serves 7.5 customers a day, vs. 1.4 for BA. In June the European Commission proposed new regulations that would have compelled member states to follow Britain's example. It would have required governments to license any new candidate, provided it's financially and technically sound. Put to the test, the member states delayed. On the pretext of drafting uniform licensing rules, they effectively shut the door to new airlines until mid-1992 at the earliest. THE DELAY gives the flag carriers two crucial years to gobble up competitors and monopolize scarce airport capacity. Most voracious is Air France. It is about to buy two potential competitors, Union des Transports Aeriens (UTA) -- a privately held airline that flies mainly to French West Africa -- and Air Inter, the French domestic airline. Both had wanted to open big route networks in Europe. Air France President Attali scoffs at charges he's ducking competition, and in fact the airline did not get the total monopoly the government sought for it. In exchange for approving the acquisitions of UTA and Air Inter, the EC is forcing Air France to allow competition on some routes. The possible rivals -- mainly charter carriers seeking to become regularly scheduled airlines -- aren't overly impressed. Says Rene-Fernand Meyer, president of Minerve, a charter line: ''The routes we're getting are the refuse.'' In neighboring Belgium, British Airways and Holland's KLM have launched a joint bid for 40% of Sabena. And Lufthansa wants to absorb the former East German airline Interflug. The takeover wave wouldn't be so dangerous if new airlines were sure to sprout in 1992 or 1993. But even if newcomers manage to get licenses, they may not be able to fly. Many airports, including Frankfurt and London's Heathrow, are overcrowded. The existing carriers have grandfather rights to takeoff and landing slots, meaning they can hang on to them forever. To expand, the big flag carriers are setting their sights on airports with spare capacity. By taking an interest in Sabena, KLM and British Airways plan to turn Brussels's sleepy Zaventem Airport into a hub that would channel traffic from all over Britain to 60 cities on the Continent. The danger is that Sabena will grab all the slots before new airlines can get into business. Says Georges Gutelman, president of Trans European Airways, a charter carrier that wants to start regularly scheduled service at Zaventem: ''The flag carriers are in the process of replacing a legal monopoly with a practical monopoly -- total control over airport slots.'' In 1993 most routes will still be dominated by two flag carriers. It's unlikely they'll compete -- regardless of the rules. Says Sir Colin Marshall, chief executive of British Airways: ''Two carriers on a route is not enough to ensure competition.'' The EC recently gave airlines an antitrust exemption so that they can keep talking to each other about fares -- something that's strictly illegal in the U.S. The cartel could keep right on flying. IN AGRICULTURE, crude protectionism is not only ripping off consumers, it's also threatening to scuttle the quest for freer world trade. The EC's Common Agricultural Policy costs Europeans $120 billion a year in higher taxes and inflated food prices. That works out to $12,000 for each of Europe's ten million farmers. Shielded by huge subsidies, European farmers are inefficient. The average farm is 70 acres in France and 42 acres in Germany, vs. 460 acres in the U.S. The tiny dairy farms carpeting the mountains of Galicia in northwestern Spain still use 1950s-vintage milking equipment, not to mention ox-drawn plows to raise alfalfa for feed. A complex system of subsidies and import tariffs creates an insulated, artificial market inside the EC. European wheat goes for about $230 per ton, compared with a world price of about $80. The gap grotesquely distorts world trade. The inflated prices encourage Europe's farmers to produce far more than they can sell in Europe, generating huge surpluses that have to be exported. Since the 1970s, Europe has evolved from a big importer of wheat, corn, sugar, beef, and poultry into a massive exporter. Handling the exports are traders who buy directly from farmers or help sell off the butter mountains and wine lakes that the EC accumulates to prop up prices. So that the traders can sell the produce on the world market, the EC grants them ''export refunds'' that bridge the gap between the European price and the world price. Today the export refund for wheat is about $150 per ton, far more than the world price. By blitzing the market with heavily subsidized produce, the EC is wresting sales from far more efficient producers, including the U.S., Brazil, and Australia. Since 1987 the U.S. share of the world grain export market has dropped from 52% to 49%, while the EC's has jumped from 12% to 16% -- even though the U.S. price is half Europe's. Third World farmers are the biggest losers. Since the mid-1980s, EC price supports have cost developing countries an estimated $5 billion a year in lost exports. Farm subsidies, especially for exports, are the hottest topic in the Uruguay Round of GATT. Led by the U.S., big farming countries from Argentina to India are willing virtually to eliminate their subsidies -- if the EC goes along. American negotiators are offering to cut import duties and price supports by 75% by the year 2000 and to reduce export subsidies by 90%. Hit by hard times, Europe's angry farmers are in no mood for change. Cheap imports from Britain and eastern Germany are menacing France's inefficient lamb and beef producers. In the village of Thouars near Tours, a mob hijacked a British truck and burned alive its cargo of 200 sheep. Frightened by such fury, the member states are still bickering over a proposal for a paltry 30% reduction in import levies and price supports -- and they won't even talk about cutting export subsidies. Most infuriating to the U.S. is the EC's demand to increase protection by slapping import duties on goods that now enter Europe tariff-free. A notable example is corn gluten, a big American export that Europeans buy as cattle fodder -- mainly because it's far cheaper than home-grown cereals. U.S. farmers and producers are fuming. ''If you want to know how mad I am on a scale of 1 to 10, it's a 10,'' says Michael Gorbitz, vice president of American Maize Products Co. of Chicago, which sells $30 million a year of corn gluten to Europe. ''The GATT was supposed to reduce barriers,'' he says. ''Now the EC wants to close the door to our products.'' THE DISPUTE threatens to wreck the Uruguay Round, which is due to wrap up in December. Without a settlement on agriculture, dozens of developing countries threaten to walk away from negotiations on foreign investment, intellectual property, financial services, and rules on direct investment. The stakes are enormous. A successful Uruguay Round could raise U.S. exports to developing countries by $200 billion over the next decade. The farm fight epitomizes the EC's dangerous drift from the original goals of 1992. France, Italy, and even Germany hail monetary and political union, but by backing the ludicrous demands of their farmers, they deny housewives cheaper groceries. Increasingly the member states salute the principle of 1992 with one hand and try to lock out Japanese cars and veto cheap air fares with the other. For consumers 1992 is in danger of turning into another Europroject that starts with a bang and ends as a bust.

CHART: NOT AVAILABLE CREDIT: SOURCE: BEUC-- THE EUROPEAN CONSUMERS' ORG CAPTION: PEUGEOT 205 HOW PRICES VARY