Sudip Bandyopadhyay’s Blog

As the global financial crisis deepens, European leaders are making a virtue of big government and state intervention.  This is a dangerous path to take.  Corporate bail-outs beyond the banking industry may now be an inevitable consequence of decisions to save the banks and in the US to lend billions of dollars to, say, the automotive industry,  The siren calls should be resisted.  Some European Union leaders affect to believe the crisis has exposed the failures of US style free markets and justifies a return to the state’s historically strong role in setting European economic policy.  Their response has struck a popular chord.  Italy’s Slivio Berlusconi basks in media adoration for his state sponsored rescue of Alitalia the collapsing airline, and promises of help for car makers. Nicolas Sarkozy, France’s president, advocates creating European sovereign wealth funds to save companies that are vulnerable to takeover by non-European predators.  Both need to pause for breath.  First, Mr. Sarkozy’s idea may turn out to be no more than a smoke-screen for expensive state aid and the addition of vast sums to EU member states’ national debts.  China and cash-rich Gulf oil producers may have the capital – if not the wish – to bail out France’s national champions.  But Europe does not .  Second, the reason banks need public capital injections and access to unlimited lending is that their failure poses a systemic risk to the world economy.  That aid is supposed to be temporary and conditions are attached.  It is hard to see why a lossmaking national flag carrier merits similar treatment.  Indeed, a rescue such as Alitalia’s that excludes a foreign buyer, changes anti-monopoly laws and presents taxpayers with a multi billion-euro bill sets an unfortunate precedent.  If other EU countries follow Italy’s example and intervene to save corporate champions from bankruptcy ,  their actions will lead to a beggar-thy-neighbour approach across the bloc.  France’s unilateral approval of  400m in aid for its carmakers has already set the ball rolling.  Pursued to extremes, such policies could unravel Europe’s single market and poison relations between member states.  The only “winners” would be industrial dinosaurs that should make way for nimbler competitors.  Bail-outs should never be the first response to economic contraction Monetary and fiscal policy are better tools.  Lenders can take steps to case viable companies’ cash flow problems.  Foreign takeovers of vulnerable manufacturers are preferable to disparate actions and competition between countries over subsidies for their industries.  Bankruptcy gives stricken businesses protection while buyers are sought .  Any loans to companies need to be short term and agreed by the European Commission. Unilateral bail-outs pave the road to protectionism and a more prolonged downturn.