* Fiat CEO says Europe not ready to fight global competitors
* Says EU apears lone figure in driving free trade
* Says European carmakers must cut 20 pct overcapacity
* Protectionism will destroy EU prosperity-trade chief
By Philip Blenkinsop
BRUGES, Belgium, March 20 (Reuters) - Europe needs to get its own single market in order before opening its doors wider to foreign trade and must ensure deals are truly balanced, the head of the European Automobile Manufacturers Association said on Tuesday.
ACEA president Sergio Marchionne, also chief executive of Fiat and Chrysler, told a conference a strong and functioning single EU market was the most effective competitor to take on growing economic rivals.
However, it faced a tough road to get there.
"This is a very painful transition period. We need to go through it. There is not a single doubt in my mind that the direction in which Italy is moving, in which Europe is moving, is appropriate," Marchionne said.
"The issue is that we cannot compound the problems associated with the transition with the opening up of the European market to unrestricted free trade without ensuring we are in an effective position to compete."
Marchionne, who held talks on Tuesday with EU Trade Commissioner Karel De Gucht who also spoke at the conference, made the comments on the day that Italian Prime Minister Mario Monti sought to convince union leaders of the need for a revamp of labour laws in Italy.
Marchionne praised Monti's efforts, saying his reform drive had made far easier Fiat's decision to invest further in its Mirafiori production plant in Turin.
Marchionne, whose ACEA body represents all major European carmakers as well as the European arms of General Motors, Hyundai and Toyota, said Europe's auto sector needed tough measures to address overcapacity of some 20 percent.
Europe had to determine a plan to distribute required cuts as no country alone would take action.
"If you leave it to countries it will not happen... You have to distribute it across the European area," he told reporters on the sidelines of the conference.
Marchionne said trade deals with the EU's competitors had to be balanced and that this was not the case with a free trade agreement struck with South Korea last year.
South Korean car exports to the European Union increased by 150,000 to 436,000 last year, while those going the other way rose by just 15,000 to 75,000 units, he said.
"That's one car plant that gets taken out," Marchionne said, adding this meant some 2,500 to 3,000 direct jobs and some 25,000 people affected, including those indirectly employed.
Free trade was good, Marchionne said, but disputes abounded, such as in Latin America, where Fiat operates.
"The world is not as peaceful as it seems," he said. "I don't want us to be like Don Quixote on a white horse, being the only one that keeps on pushing the free trade agenda, while everyone else is looking after their own affairs."
EU Trade Commissioner De Gucht told the conference he recognised that the automotive sector faced challenges, but that without such challenges it might be unwilling to reform.
Japanese and Korean carmakers were also producing cars in Europe, as well as importing them.
The European Union as a whole ran large trade surpluses versus the rest of the world, so protectionism, even of a temporary nature, was a road to destruction.
"If we start behaving in a protectionist way... then you can be sure that protectionism becomes the rule. That would be the end of prosperity in Europe," De Gucht said.