Germany Goes Against EC on Deal With U.S. : Telecommunications: Pact opens a major market for the United States and averts sanctions for Germany. EC is stunned.

WASHINGTON — Germany broke ranks from the European Community on Thursday to strike a surprise telecommunications deal with the United States, averting sanctions on both sides.

The bilateral deal--which flies in the face of EC unity--caught Europe utterly off guard. Officials said the split in their ranks was a dangerous precedent.

“We reached an agreement with the German government that they would not adopt discriminatory telecommunications practices,” said U.S. Trade Representative Mickey Kantor. “We have agreed to not invoke sanctions.”

Last month, the United States imposed sanctions on nine of the 12 EC members, saying that they discriminated against outsiders in government procurement of telecommunications equipment.

The European Community retaliated but Kantor said since Germany had agreed to end its discrimination, neither set of sanctions would apply between the United States and Germany.

“We have shown that by working with our European trading partners we can open markets and move forward,” he said.

Kantor announced the surprise deal at a congressional hearing on government procurement, which has long been a sore point in transatlantic trade relations.

Brussels was caught short by the news, with no immediate reaction from Kantor’s EC counterpart, Sir Leon Brittan. An EC spokeswoman also declined to comment.

The dispute centers on access to government bids.

At the start of this year the EC adopted a new rule favoring European companies over outsiders in bidding for utilities contracts. Washington insisted that the rule must go, while Brussels said it first wanted far greater access to U.S. government business at the federal, state and local level.

The row--while it focused on telecommunications and heavy electrical equipment--had threatened to escalate into a far bigger tit-for-tat between the world’s biggest trading blocs.

But a partial deal emerged in April and both sides scaled back the rhetoric and imposed limited sanctions only.

On May 28, the United States imposed curbs on the EC that cost the bloc about $20 billion in lost business. The EC swiftly retaliated with sanctions worth about $15 million.

Exempt from the U.S. sanctions from the start were Portugal, Spain and Greece, which were not party to the EC rule on utilities and which all agreed not to discriminate.

Now Germany, which had signed onto the EC directive, has won an exemption: a fact not lost on its European partners.

“To say the least, this is most unusual. We thought the Germans were supposed to be very keen on Community solidarity,” said a European official on condition of anonymity. “There will no doubt be debate in Brussels.”

The official could not recall an occasion when an EC member broke ranks to strike an outside deal that appears to violate the Community’s own rules.

A violation could lead to internal EC proceedings against Germany, an official said, but a U.S. negotiator said Germany believed that it had broken no EC rules.

“Shocking. This is a very serious matter,” said another European official, noting that Germany had gone along with the EC stance throughout the debate.

Simultaneously, however, it was apparently working a secret deal with the Americans right over the head of the EC.

Kantor said the Germans approached him about the telecommunications dispute and that both sides discussed the matter in Paris last week, striking an agreement by telephone Thursday afternoon.

Kantor said he hoped to clinch more deals with other EC members but had no indications further pacts were forthcoming.

“We’re just hoping that this sets a precedent,” he said.

That is just what Europe dreads, and one official said Brussels would be so angered by the secret bilateral deal that it might hurt Kantor in Europe more than it helps him.

“I’m not going to speculate about ramifications and reactions in the Community,” said a senior U.S. trade official on condition of anonymity.

“Neither side wanted to discriminate or impose sanctions, so why should we lock ourselves into that situation?”

The United States is not currently engaged in similar talks with other EC members, he said.

But the main prize has already been captured. The U.S. official estimated that Germany harbors the largest potential telecommunications market in Europe, about $4 billion out of $14 billion Community-wide.

With a holiday in Germany, officials were unavailable for comment.