THE VIEW FROM EUROPE: You say protecting jobs, we say protectionism

While the British had a good laugh at press reports of President Bush’s alleged gaffe that, “The problem with the French, is that they don’t have a word for entrepreneur,” in truth, we are not without some sympathy for the sentiment.

Sep 1st, 2007

By Annie Turner

While the British had a good laugh at press reports of President Bush’s alleged gaffe that, “The problem with the French, is that they don’t have a word for entrepreneur,” in truth, we are not without some sympathy for the sentiment.

The British would claim to have Europe’s most liberalized economy, that is, the most open to competition. Indeed, since the 1980’s when Mrs. Thatcher was prime minister, privatization and the market economy is something of a mantra that has even been embraced by the current Labor government which formerly held nationalized industry sacrosanct. The French have fought against free market economics, holding the social responsibilities of the state more dear than enterprise.

Consequently, eyebrows were raised when the new French President Nicolas Sarkozy, lectured his fellow European leaders on industrial policy the eve of the 47th Paris Airshow in June. He argued for consolidation of the European defense industry, reportedly saying, “Europe can no longer afford the luxury of five land-to-air missile programs, three combat aircraft projects, six attack submarine programs. The future is in common programs and in consolidation of the European industry. I hope the two will go hand in hand.” He also said that these sentiments would govern a comprehensive review of France’s military spending strategy.

Mr. Sarkozy faces substantial challenges. Firstly, the French believe it is one of the government’s primary functions to protect their jobs, but at the same time, there is a heavy tax on capital investment, making France less attractive in which to do business. The president claims he will change this, but there will be fierce opposition from the various regions who are the beneficiaries of this tax on investment.

Secondly, the British government seems to have rejected the French proposal to share the building of the next generation of aircraft carriers after British companies warned that the plan could delay the ships’ entry into service and derail the restructuring of the industry, which is underway. BAE and VT Group are merging their shipyards on the Clyde in Scotland and in Portsmouth, England, better to accommodate the forthcoming carrier program.

Thirdly, he will need to sort out the shambles at EADS, the Franco-Hispanic-German defense group which is in a woeful state due to the constant meddling of the various governments as well as a crazy, dual management system which has two chief executive officers (one German, one French) and two chairmen (same again). Not to mention the mess at the EADS subsidiary Airbus.

Le President invited the main industrial shareholders-French media group Lagardère and German carmaker Daimler-to join him and German Chancellor Angela Merkel in a meeting in July, but however cordial the meeting turned out to be, it is unlikely to offset the public and political ructions if and when Airbus sells some of all of the six Airbus factories in Europe to the Chinese.

AVIC I is China’s biggest, state-owned aviation firm that wants to build large aircraft to rival Airbus and Boeing. The factories it is eying would otherwise be closed down as part of Airbus’s Power 8 restructuring plan, which includes shedding 10,000 jobs in France, Germany, and the United Kingdom.

While EADS has hogged the limelight for all the wrong reasons, the Italian defense company, Finmeccanica, has been making a quiet but impressive comeback from disaster in the late 1990s. Just ahead of the Paris Airshow, Finmeccanica announced it had been awarded a $6 billion contract to build transport aircraft for the U.S. military.

This was a just reward for Pier Francesco Guarguaglini, Finmeccanica’s chief executive, who has refocused the company on defense electronics, spending $2.7 billion to own wholly helicopter maker AgustaWestland and acquire BAE’s avionics unit. Guarguaglini is keen to do more business in the U.S. and United Kingdom, and is succeeding, even though the Italian government still owns a third of Finmeccanica and previous incumbents were severely hampered by its interference.

Somehow he has managed to please his political masters while attracting institutional investors, convincing them that the company is shareholder-centric. He’s pulled off another difficult balancing act too, winning contracts with rival airplane makers Boeing and Airbus.

However, he has some way to go before he can match BAE’s expansion into the American market; 45 percent of the British defense group’s sales come from the United States, which is why the U.S. Department of Justice is launching a formal investigation into BAE’s alleged bribery of various members of the Saudi royal family to secure the $80 billion Al-Yamama rolling contract for Tornado combat jets and their maintenance 20 years ago.

It is deeply ironic that the contract was signed when Mrs. Thatcher was prime minister and the “sweeteners” apparently paid with her government’s knowledge and approval. The justification? To secure British jobs, which is bizarre from a government that fought a bitter prolonged battle against the coal miners who went on strike for more than a year in a bid to save their collieries from closure. There is still great bitterness about this now and the shipbuilders and steelworkers didn’t fare much better in the 1980s, either.

The good news is that the U.S. government doesn’t appear to be unduly worried by the accusations of BAE’s corruption and the pending Justice Department enquiry. Rather, the two governments just went ahead and signed a treaty to open up the U.S. market to British defense firms and enable the transfer of technology from the United States to the United Kingdom, which has long been a bone of contention.

It is another irony that this agreement has finally been reached as rumors surfaced that the United Kingdom will not be bringing the Joint Strike Fighter into service until 2017 due to a lack of funding; there is likely to be other fall-out from the Al-Yamama revelations elsewhere.

Not surprisingly, the Saudis are less than amused in having their dirty laundry thrust into the public eye, and BAE is still waiting for the Saudis to sign a contract for 72 Eurofighter aircraft. If the Saudis pull out, BAE will lose a contract worth $20 billion over five years.

Proof that protectionism really doesn’t work?

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