Up to now, straight state subsidies were a big non-no in the EU, except in extremely rare and narrowly defined special cases, say farmers, Airbus, windmills, and a catalog so long that it needs a special website. Subsidies to carmakers definitely were against the rules, except in the guise of “green” programs. That was then. For the sake of political expediency, “soft loan and loan guarantee schemes put forward by Britain, France and Germany in an attempt to help companies through the current economic crisis have been approved by Brussels under the recently-relaxed state aid rules,” the Financial Times reports. Bailouts are cool, at least temporarily.
All these approvals have been granted under the so-called “temporary framework” for state aid, which Brussels introduced in December. This after heavy pressure from member states who wanted to give more assistance to firms outside the financial sector struggling with the economic downturn. The temporary framework involves a relaxation of the normal state aid rules in some specific areas for a limited period. Which will last as long as needed.
France’s President Nicolas Sarkozy’s threat to drag the US in front of the World Trade Organization to consider the legality of American aid to its domestic automakers sounds a bit hollow now. Either that or it was a brilliant tactical ploy to make Brussels more pliant.
I think “political expedience” in this case means “sudden awareness that a vital industry will collapse if gub’mint doesn’t pony up bailout bucks.”
Everyone hates government intervention in the private sector, until they don’t. Ask Hank Paulson.
All this aid is distorting the competitive marketplace on a global basis.
Companies from continent E, suffer in their business in continent N, because other, poorly capitalized companies, also from E, destroy commodity prices in N, and just before collapsing into BK, they are rescused by a state-aid package.
So, in effect, the state underwrites the zombie-survival of one company as it, through its subsidy, spreads it’s virus to the healthy company, eventually risking turning it into another wonder of profitless prosperity.
If the philosophy becomes that even the bottom-feeders are also too big to fail, and consolidation of the marketplace is stymied thru such action, then this dance is gonna (sic) go on for a long time (cue Tom Petty’s video Last Dance With Mary Jane) and is likely to end in tears.
subsidies are like drugs – only a short relief but with a huge mortgage to pay off later on. I’d kill off all subsidies (except for some research or to start up some new industries). there is no benefit to subsidize an old industry with over-capacity. they subsidized the coal industry in Germany and coal mines that are scheduled to close in 2 years still start apprenticeship programs,…
Comparing subsidies to drugs makes a lot of sense. Also to a virus spread from zombies to the still-living. Subsidies never work. But they never lose their ability to entice.
It’s all fine and good to be blindly devoted to free market ideals when times are good, but even the most strident idealogues who have the responsibility of dealing with the global economic meltdown (commies like Greenspan and Paulson) have set aside their religious convictions in the face of reality.
I’m not talking pure free-market, a but more pragmatic fair-market.
In situations such as we find ourselves, and in many cases, pragmatism trumps dogma. I am not advocating, that in the current environment, all subsidies are bad and should be eliminated. Far from it.
The parallel between winter, drought, and natural herd culling and its economic equivalent in the business world is well known.
Discontinuities, be they seasonal, or economic, help to set the stage where the fittest survive and improve the overall health and well being of the herd.
The risk of subsidies being too liberally dispensed, without any attempt to foster the consolidation that is necessary, to prevent the weak from yielding the ground to the better part of the herd, puts the long-term viability of the herd at risk.
Just as the idea that we could forego the need for delayed gratification with respect to mortgages, loans and personal debt, the risk with subsidies, is that the natural desire to avoid pain and suffering, or to hang-on to what is no longer, distorts the recovery cycle and places the system in a different kind of economic peril.
Being blindly devoted to free-market principles does not help. On the other hand, abandoning free markets when trouble strikes does not help either.
History shows that the government has a role in the financial markets. I’m no expert, but I cannot find any example in history where the government (any government) has done any good in any other industry. There are, on the other hand, plenty of examples of subsidies and industrial policy that have wasted money in trying to pick winners and in trying to keep losers alive.
One case in point. We currently have 11 mid-level government bureaucrats in the Department of Energy reviewing 25 car-company business plans to decide which companies to give $25 billion to. $25 billion. Invested by 11 people who have no background or experience to suggest that they could wisely invest $25.
The free market is far from perfect. But it does much better than the government in picking winners and losers. At least, I have not seen any example anywhere in the world or in history of a government that has succeeded when it has helped any particular industry through subsidy.
The successful examples I see, especially here in the United States, have all been where the government has promoted business in general. In other words, the government set the rules and cheered from the sidelines, but let all players fight it out in a free market.