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BRUSSELS/OTTAWA (Reuters) - Germany's rejection of part of a multibillion-dollar trade deal between the European Union and Canada threatens to derail the agreement, in a potentially embarrassing re-run of a breakdown a year ago.
On Friday, Canadian Prime Minister Stephen Harper and European Commission President Jose Manuel Barroso are due to announce in Ottawa the end of five years of negotiations on the trade accord, with the finalization of a 1,500-page text that its architects say should increase two-way trade by a fifth, to 26 billion euros ($33 billion) a year.
But what was supposed to be a straightforward signing ceremony now risks becoming another embarrassment for both sides, in difficult negotiations that began in May 2009 and are widely seen as a blueprint for a much bigger deal being negotiated between the European Union and United States.
Last October, Harper and Barroso said over a celebratory lunch that the pact was sealed and it was "a landmark achievement for the transatlantic market". Then problems on difficult issues such as pharmaceutical patents to emerge.
This time, both Germany and the European Parliament, which must ratify the treaty for it to take effect, are raising objections to part of the agreement that allows companies to bring claims against a state if it breaches the trade treaty.
It is a mechanism that Berlin also wants removed from the deal the EU is negotiating with Washington.
Failure to agree a deal with Ottawa would bode poorly for the EU's chances of a more ambitious accord with the United States that would encompass almost half the global economy.
Germany shares the concerns of EU lawmakers and consumer and environmental groups across Europe who say the mechanism would allow multinationals to bully the EU's 28 governments into doing their bidding, disregarding environmental, labor and food laws.
"It is completely clear that we reject these investment protection agreements," German Economy Minister Sigmar Gabriel told a German parliamentary debate on Thursday, saying Germany would try to get the clause in the EU-Canada deal changed.
EU lawmakers believe they now have about eight months to pressure for changes to the language on investor-state dispute settlement, known as ISDS, despite leaders' hopes that Friday's ceremony can draw a line under negotiations.
Germany is also pushing for EU national parliaments, not just the European Parliament and the Canadian parliament, to sign off on the accord, potentially slowing down the ratification process and delaying its economic benefits.
In the European Parliament, which must ratify the accord and which has rejected trade deals in the past, there is growing opposition to the EU-Canada deal because of ISDS.
"I doubt an agreement with Canada containing ISDS will find a majority in the European Parliament," said Bernd Lange, a German socialist who heads the parliament's influential trade committee. "The new European Commission should not exclude the possibility of re-negotiating this critical part."
Following the worst financial crisis in a generation and the collapse of global trade talks, the world's big developed economies are seeking ambitious trade deals to reduce barriers to business, create jobs and compete against China.
The deal would make Canada the only major economy with preferential access to the world's two largest markets, the EU and the United States, home to a total of 800 million people.
EU and Canadian trade negotiators have resolved significant issues since talks began, ranging from quotas for Canadian beef to protecting Europe's local cheeses. Canadian cheese will be allowed in European supermarkets, for example, but only cheese from Greece can be called feta.
But the issue of ISDS has been caught up in the wider discussion in Europe about a trade deal with the United States, known as the Transatlantic Trade and Investment Partnership.
Germany is credited with coming up with the first Investor-State Dispute Settlement Mechanism in the 1950s.
But many in Europe fear that U.S. multinationals will gain too much power if they can challenge established rules in trade-arbitration courts instead of in the conventional legal system. Having such a mechanism in the Canada deal would set the wrong precedent, trade unions, consumer and green groups say.
The issue of dispute settlement proved so contentious that Australia rejected it in a trade deal with the United States that came into force in 2005, arguing that its own existing legal system was robust enough to resolve problems.
In talks with the United States, the European Commission, the EU executive, suspended negotiations on the Investor-State Dispute Settlement Mechanism earlier this year and opened a public consultation to defuse some of the opposition.
The results are due at the end of November.
Additional reporting by Markus Wacket; Editing by Alastair Macdonald, Larry King