The criticism of Germany's "Volkswagen law" by a top adviser to the European Court of Justice this week will be welcomed by those who dream of mergers and acquisitions taking place unhindered across Europe. The fact that the case has been so vigorously pursued by the European Commission, which argued that the law restricts the free movement of capital, should be welcomed just as warmly by the M&A sector.

The EC has been criticised for standing in the way of some mergers, but it has in fact recently waged a concerted attack on national protectionism. Cynical Europhobes may still argue that only the UK plays by common market rules - that at the same time as foreign acquirers consume UK industries and corporations, their European counterparts too often step in to protect their own national industries. But as the Volkswagen case demonstrates, the EC's attempts to eradicate state interference in cross-border acquisitions has reached an unprecedented level.

Last month, the EC issued formal infringement proceedings against Spain following its intervention in energy giant Endesa's potential €36.5 billion takeover by E.ON. That alone showed that the Commission is serious about bringing states that have failed to engage in the spirit of single-market economics into line, according to Anthony Woolich, an EU and competition lawyer at Lawrence Graham. "It goes to the heart of protectionism," he says. "The European Commission is not going to allow member states to derogate from their obligations under EC merger regulations. It means that the internal market can’t work. I don’t think the Commission will let this one go."

In a speech on September 3, 2005, Neelie Kroes stressed the importance of competition rather than protectionism as the basis for a thriving European Union economy. "It is not through protectionism, but through competition that firms innovate," she said, adding that European competitiveness was at the top of the Commission’s agenda.

Lawyers in the City predict this tough stance will fuel an already heated merger scene.

Sonya Branch, an EU and competition lawyer at Clifford Chance, argues that if some of the UK's openness, which has encouraged foreign acquirers to snap up numerous major companies, permeates the rest of the EU, merger activity could reach new heights. "In successfully pushing the single-market objective to a new level, the European Commission is anticipating that its action will encourage more cross-border activity," she says. "There is in any event a likely market movement towards more cross-border activity in a number of key sectors, such as energy and financial services."

The EC's stance also vindicates the willingness of UK authorities to engage with single-market rules. In an era of frantic cross-border merger activity, industries here have become prime targets for European and international acquirers. Witness last year's sale of airport operator BAA to Ferrovial, the Spanish building group. Scottish Power is one of the last remaining energy utilities to surrender to the foreign ownership - to Spanish energy company Iberdrola.

Simon Priddis, former senior director at the Office of Fair Trading (OFT) and now a competition lawyer at Freshfields Bruckhaus Deringer says: "Certainly, the DTI, OFT and sector regulators have been pretty relaxed about nationality questions. And that's been borne out in practice. If one looks at ownership of UK utilities, it's a broad nationality mix."

Spain has not embraced the common market format with such passion, to date preventing its corporations from capitulating to foreign money as British companies have. According to mergermarket, European bidders spent €245 billion in acquiring British targets during 2006, as opposed to a mere €113 billion on Spanish targets. The Spanish Government imposed a string of conditions on E.ON’s €36.5 billion acquisition of Endesa, even after the European Commission approved the merger in April last year.

After appearing to favour a lower bid by Spanish energy rival Gas Natural and the creation of a national champion, the Spanish Government was given until January 19 to drop the conditions placed on E.ON's bid. It failed to do so, leading to the EC instigating formal infringement proceedings, which could see the Government appearing before the ECJ.

France, too, has proved stubborn - ironic, as Ms Kroes has pointed out, given that its companies are among the most acquisitive in Europe. In 2005, the French Government announced it would protect certain "strategic" industries from foreign takeovers.

Lawyers believe the Commission is worried about the prospect of France pulling out of the EU if its antipathy to the common market is not accommodated, but its recent actions and statements suggest otherwise - that protectionism will not be tolerated. Ms Kroes has warned: "No one should doubt the Commission's commitment to ensuring Europe's businesses can operate on a level playing field to the benefit of Europe's consumers, businesses and the economy as a whole."

Michael Grenfell, an EU and competition lawyer at Norton Rose who is also a member of the Times Law Panel, believes that the Commission’s decision on Endesa is critical.

"If it had let the Spanish get away with these tough conditions, which is effectively a poison pill, that would send a signal that it might be too risky to initiate cross-border mergers, especially in the utilities arena," he says. He suggests tough action could cause the opposite. "It will encourage people to do more and more. Utilities are being privatised one by one and there is plenty of scope for merger activity. This will give the green light."

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