BRUSSELS (BLOOMBERG) – As the Europe Union (EU) rushes to save state-backed companies on the brink of failure, governments risk undermining efforts to upgrade their economies.
By relaxing state-aid rules, the EU paved the way for trillions to be spent supporting industries ravaged by the coronavirus pandemic. But by trying to save jobs, governments risk propping up companies already in trouble and the inevitable blowback when normalcy returns.
“Not every dinosaur should and can be rescued, especially if the company was in long-term decline already,” Guntram Wolff, director of the Brussels-based Bruegel think tank, said via email. “Long-term subsidies for dinosaurs might mean that money for new and dynamic sectors could be missing.”
Before the coronavirus forced the EU to shutter much of its economy, governments were channeling resources toward electric car batteries, renewable energy and cloud computing as part of a strategy to make the bloc a leader in the low-carbon industries of the 21st century. The question now becomes: will those lofty goals survive the crisis?
Officials have insisted the EU must keep sight of its long-term strategy even as it fights to limit the economic devastation from the shutdown.
“The EU has, with this crisis, a historic chance to finally become a great economic and political power, between the US and China,” French Finance Minister Bruno Le Maire said earlier this month. “The EU must seize this opportunity.”
But it’s not technology firms or clean energy that stand to gain from the biggest industrial bailout in European history. It’s the same old industries that formed the backbone of the 20th century labor markets.
France and the Netherlands have pledged as much as 11 billion euros (S$16.9 billion) to save Air France-KLM after the airline warned of an impending cash crunch and the possibility it wouldn’t survive the global pandemic without state help. The German government is expected to sit down with executives from Deutsche Lufthansa AG in the coming days to hammer out a package of loans, credit guarantees and equity that could be worth around 10 billion euros, according to people familiar with the matter.
The airlines were struggling to cut costs before the lockdown and seeing margins eroded by competition from challengers like EasyJet Plc and Ryanair Holdings Plc. Deepening their ties will also increase the governments’ political exposure to the labor disputes that have dogged both carriers.
Ryanair chief executive officer Michael O’Leary said he may sue the EU to stop France and other countries from “selectively gifting billions of euros to their inefficient flag carriers,” according to a letter he sent to the EU’s competition chief and seen by Bloomberg.
TOO IMPORTANT TO FAIL
Companies like Air France-KLM and Lufthansa are considered by their home states as too strategic to fail, given the importance they play in supporting national export markets, connecting with overseas territories and supporting thousands of well-paying, middle class jobs. Air France-KLM recently helped France to repatriate citizens stranded abroad and to fly in healthcare supplies.
The French government may also back a 5 billion-euro loan for Renault after the carmaker reported a 19% drop in first-quarter revenue. Renault’s vehicle sales were already falling in 2019 as the company struggled to wring efficiency savings from its dysfunctional alliance with Nissan and focused on volumes more than profits.
These types of bailouts are a far cry from the investments that European Commission President Ursula von der Leyen was envisaging when she set out her industrial strategy last month.
“This is more important than ever as Europe embarks on its ambitious green and digital transitions in a more unsettled and unpredictable world,” von der Leyen said in a statement. “Europe’s industry has everything it takes to lead the way and we will do everything we can to support it.”
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