Italy dashed hopes it would drop its veto on a free trade agreement between the European Union and South Korea, leaving Prime Minister Silvio Berlusconi to make a final decision at an EU summit.

EU trade deals with third countries require the backing of all 27 member states, but Italy has withheld its approval due to concerns about how the deal could affect its motor industry.

Despite being offered concessions, Rome used its veto over the pact, holding out for a delay to when the trade agreement comes into force.

A final decision is now expected to be made by Berlusconi, who will meet EU leaders in Brussels.

“Everybody thought that Italy would be in a position to lift its reservation, but this was not the case,” an EU diplomat said on the sidelines of a meeting of EU foreign and Europe ministers in Brussels.

“So the presidency (of the European Council) asked for Italy to come back with a final position.”

EU officials say the free trade agreement, initialled last October, will create about 19 billion euros’ ($24 billion) of new exports for EU producers. Combined EU-South Korea goods trade was worth about 53 billion euros in 2009.

Other Concession

Italy fears the treaty will flood the European market with South Korean cars and wants to delay the deal until after June 30, 2011 rather than launching it next January.

EU governments refused Rome’s demands for a six-month delay during a meeting of trade ministers on Friday but made other concessions diplomats hope will eventually soften Rome’s line.

Among them are a promise that an EU-South Korea treaty will be at least as profitable as South Korea’s planned accord with the United States, and a mechanism to protect car makers such as Fiat from surges in small car imports.

“I expect Silvio Berlusconi will reserve the right to make a final decision on whether or not to back the treaty,” German Minister of State Werner Hoyer said.

The European Parliament, which must also approve the treaty, informally backed a provision last week that will allow Europe to tax or limit South Korean car imports in the event of a sudden import surge.

“This sends a terrible signal to the rest of the world. We should declare the EU as open for business but instead we are pulling up the drawbridge,” said Robert Sturdy, a lawmaker and member of the European Conservatives and Reformists party.

“This is too big a deal for us to walk away from now. If we do not reach a deal with Korea soon, there is a significant chance that the United States will beat us to it, putting us at an enormous disadvantage.”

Separately, Italy opposed a motion by European governments on Monday to update textile labelling rules, saying the new rules would not adequately protect Europe’s textile industry.

Italy wants all clothing imported from non-EU states, such as China and India, to carry compulsory ‘Made-In’ labels in the hope of encouraging European consumer loyalty.

A reform proposal endorsed by all EU states except Italy foresees stricter textile labelling rules but does not include compulsory origin markings. (Reuters)