Push for European Auto Bailout Gains Speed

Posted by: Carol Matlack on November 20

Should European automakers get a $50 billion government bailout? That question has sparked a faceoff between European politicians, who want to avoid industry layoffs during a downturn, and free-market advocates, who question the justification for such intervention. The free-market advocates make a good case-–but the politicians will probably win.

No one doubts that the industry is having a miserable time. Europewide, car sales in October were down 15%, and the numbers are likely to worsen during 2009. Most European carmakers are planning temporary shutdowns of their assembly lines, and some are already laying off workers: Paris-based PSA Peugeot Citroën announced on Nov. 20 it was cutting 2,700 jobs, about 2% of its French work force. Including suppliers and related services, the Old World’s car industry employs an estimated 6 million people.

The automakers, backed by a growing chorus of political leaders, are asking for $50 billion in low-interest loans. That's an eye-opening figure, twice the estimated $25 billion bailout that the ailing U.S. Big Three automakers are seeking. Proponents say the loans would be used to retool auto factories to produce cleaner, more-efficient vehicles, to meet tough European Union emissions rules set to take effect in 2012. "It’s the right thing to do because the car industry by itself cannot find enough financing to do that alone," says Carlos Ghosn, CEO of Renault and Nissan.

Stimulating the economy, preserving jobs, and protecting the environment--who could argue with that?

EU competition czar Neelie Kroes, for one. She warns that subsidies could skew the market in favor of some automakers. For example, companies that had skimped on clean-car investments in the past could now use government money to catch up with their competitors. That would be unfair to manufacturers such as Italy's Fiat that don't need to do much retooling, because they already make smaller, more-efficient cars.

Not surprisingly, the small-car makers are demanding a piece of the action. Fiat chief Sergio Marchionne has said that his company doesn't need subsidies, but that if his competitors get them, he wants them, too. "Either [aid] is for everyone or for no one," he says.

But isn't it worth spreading money around generously, to stave off an industrywide collapse? It might be, if the industry were close to collapse, but it isn't. European automakers are in much stronger shape than the Big Three. Certainly none is close to bankruptcy. And while they're trimming their work forces and temporarily idling plants, lots of other European manufacturers--from German chemical giant BASF to plane maker Airbus--are taking similar measures. Why should the automakers get special treatment?

These are good questions. But politics is likely to win out in the end. And the torment of the Big Three only adds to the pressure for European bailouts. If the U.S. carmakers get government help, the Europeans can argue convincingly that they'll be put at a competitive disadvantage if they don't get one, too. Even if there' no U.S. bailout, General Motors Corp.'s European unit, Opel, is likely to get aid from the German government in the event that GM declares bankruptcy. That, in turn, will set off demands from help from other European automakers. Buckle up, free-marketeers: Europe's auto industry is in the fast lane to subsidies.