5th June 2009
The Malta Independent - Friday Wisdom
The depth and suddenness of the
economic recession which is hitting the EU is putting under severe strain the
basic concept that underpins the Union’s foundation. That it is a single market
for products and services where capital and people can move freely.
The recession has exposed the contradiction embedded in the EU structures where the responsibility for the preservation of the single market is vested in the Commission but the budget to sustain (or offend) such single market is the sovereign preserve of each individual member country.
Nowhere is this more evident than in the European car industry. It is quite natural that the uncertainty brought about by the recession has forced the European car market to shrink abruptly. Whilst basic needs of food, drink, clothing, shelter and entertainment have to be attended to irrespective of the state of the economic cycle, acquiring or replacing a car is generally a purchase decision that can wait better times.
Governments have tried to ease the pain by stimulating demand through subsidies to buyers of new cars that replace inefficient old ones. Still the overall car market has shrunk causing financial stress to most car manufacturers who had to resort to their governments seeking urgent bailout funding.
Inexplicably the single market rule book and the regulations prohibiting state aid that distorts fair competition were thrown out of the window by the major EU countries, basically France and Germany, who seem to think that the rules are meant for the others to observe and for them to break at will and with impunity.
France was the first to intervene with state financial support for its car manufacturers with barely hidden obligations that any restructuring necessary to reduce production capacity to bring it in line with the contracted market conditions, should not come from factories located in France. Germany could not resist the temptation when Opel, the European subsidiary being sold by General Motors, which is itself undergoing restructuring through state support in the US, would have been compelled to shut down its production factories mostly located in Germany without state intervention, including finance subsidies to the chosen acquirer and cash flow funding in the period while the deal is being executed. Coming so close to the June European election, Chancellor Merkel was forced to do what many in her own party, including her economic minister, strongly objected to.
Those who object to such flagrant state bail outs argue that such intervention erodes the very foundation of the single market which has generated so much efficiency and economic wealth. Technically the process is referred to as ‘creative destruction’.
By allowing those who are not strong enough to withstand the economic downturn to fail, the economy gets weeded from its weakest components making space for the stronger units to grow and for new entrants to sprout with more updated technologies and without the legacy costs of those that have been rendered uncompetitive.
In simple language, by giving state aid to Opel, the German government is discriminating against FIAT who have survived well this financial turmoil and who could have bought out the Opel outfits at a cheap price in bankruptcy if the German government kept a hands off approach. So in the end the German government, through its intervention, has obstructed an EU supplier with an automatic right to invest and sell on the single market, and instead offered illegal state aid to new investors from Canada and Russia to keep the old plants running with the least possible disruption, at least until the national elections due in September get out of the way.
One should be little surprised that very soon after the Russian/Canadian team was chosen as the preferred bidder, Russian president Medvedev lost little time to express satisfaction about this success by a Russian private organisation and expressed hope that the Russian car manufacturing industry will be strengthened through this acquisition. Could this lead to the transfer of production facilities out of the EU to Russia?
With our first hand experience of the rigidity with which the Commission has imposed restrictions on state aid for our shipyards, we are entitled to wonder how the Competition Commissioner is allowing these flagrant breaches of the single market regulations to proceed with impunity.
These subsidies are not only dangerous because they undermine the very basic concept of the single market, but they are a perilous slippery slope to internal protectionism. It is glaringly obvious that once a sovereign government hands out taxpayers money to bail out those that cannot withstand free competition, the taxpayers rightly demand that conditions protecting the narrow sovereign interest of the country are attached to such financing if even such conditions break the wider EU single market rules.
Creative destruction is an essential part of a healthy restructuring and it must be allowed to take its course in most but the most exceptional cases where only temporary assistance may be considered. We must not perpetuate the current practice of being international in life and turning national in death or in case of acute problems. Even fiscally and morally this does not make sense. If this is allowed we create a crazy system where profits are privatised and problems and losses are socialised!
This inbuilt contradiction between the narrow sovereign interests of a fiscal policy determined separately by each member state and the wider obligation to run an efficient market economy without barriers in the whole EU area, can only be addressed through the European Parliament which is the only organ that gets its mandate though direct democratic pan- European elections.
A higher voter turnout is desirable if the European Parliament is to carry its weight to fight against creeping protectionism which will make us all poorer and make it harder to come to grips with the recession.
The recession has exposed the contradiction embedded in the EU structures where the responsibility for the preservation of the single market is vested in the Commission but the budget to sustain (or offend) such single market is the sovereign preserve of each individual member country.
Nowhere is this more evident than in the European car industry. It is quite natural that the uncertainty brought about by the recession has forced the European car market to shrink abruptly. Whilst basic needs of food, drink, clothing, shelter and entertainment have to be attended to irrespective of the state of the economic cycle, acquiring or replacing a car is generally a purchase decision that can wait better times.
Governments have tried to ease the pain by stimulating demand through subsidies to buyers of new cars that replace inefficient old ones. Still the overall car market has shrunk causing financial stress to most car manufacturers who had to resort to their governments seeking urgent bailout funding.
Inexplicably the single market rule book and the regulations prohibiting state aid that distorts fair competition were thrown out of the window by the major EU countries, basically France and Germany, who seem to think that the rules are meant for the others to observe and for them to break at will and with impunity.
France was the first to intervene with state financial support for its car manufacturers with barely hidden obligations that any restructuring necessary to reduce production capacity to bring it in line with the contracted market conditions, should not come from factories located in France. Germany could not resist the temptation when Opel, the European subsidiary being sold by General Motors, which is itself undergoing restructuring through state support in the US, would have been compelled to shut down its production factories mostly located in Germany without state intervention, including finance subsidies to the chosen acquirer and cash flow funding in the period while the deal is being executed. Coming so close to the June European election, Chancellor Merkel was forced to do what many in her own party, including her economic minister, strongly objected to.
Those who object to such flagrant state bail outs argue that such intervention erodes the very foundation of the single market which has generated so much efficiency and economic wealth. Technically the process is referred to as ‘creative destruction’.
By allowing those who are not strong enough to withstand the economic downturn to fail, the economy gets weeded from its weakest components making space for the stronger units to grow and for new entrants to sprout with more updated technologies and without the legacy costs of those that have been rendered uncompetitive.
In simple language, by giving state aid to Opel, the German government is discriminating against FIAT who have survived well this financial turmoil and who could have bought out the Opel outfits at a cheap price in bankruptcy if the German government kept a hands off approach. So in the end the German government, through its intervention, has obstructed an EU supplier with an automatic right to invest and sell on the single market, and instead offered illegal state aid to new investors from Canada and Russia to keep the old plants running with the least possible disruption, at least until the national elections due in September get out of the way.
One should be little surprised that very soon after the Russian/Canadian team was chosen as the preferred bidder, Russian president Medvedev lost little time to express satisfaction about this success by a Russian private organisation and expressed hope that the Russian car manufacturing industry will be strengthened through this acquisition. Could this lead to the transfer of production facilities out of the EU to Russia?
With our first hand experience of the rigidity with which the Commission has imposed restrictions on state aid for our shipyards, we are entitled to wonder how the Competition Commissioner is allowing these flagrant breaches of the single market regulations to proceed with impunity.
These subsidies are not only dangerous because they undermine the very basic concept of the single market, but they are a perilous slippery slope to internal protectionism. It is glaringly obvious that once a sovereign government hands out taxpayers money to bail out those that cannot withstand free competition, the taxpayers rightly demand that conditions protecting the narrow sovereign interest of the country are attached to such financing if even such conditions break the wider EU single market rules.
Creative destruction is an essential part of a healthy restructuring and it must be allowed to take its course in most but the most exceptional cases where only temporary assistance may be considered. We must not perpetuate the current practice of being international in life and turning national in death or in case of acute problems. Even fiscally and morally this does not make sense. If this is allowed we create a crazy system where profits are privatised and problems and losses are socialised!
This inbuilt contradiction between the narrow sovereign interests of a fiscal policy determined separately by each member state and the wider obligation to run an efficient market economy without barriers in the whole EU area, can only be addressed through the European Parliament which is the only organ that gets its mandate though direct democratic pan- European elections.
A higher voter turnout is desirable if the European Parliament is to carry its weight to fight against creeping protectionism which will make us all poorer and make it harder to come to grips with the recession.
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