Commission rejects devaluation subsidies

Date: 02/11/1995

By Tim Jones

THE European Commission this week firmly rejected the idea of compensating large industrial companies for profits lost due to major appreciation of the currencies where their production base is housed.

Unveiling its much-leaked report into the impact on the internal market of Europe's post-1992 currency swings, the European Commission found the effects to be limited to a maximum 0.3&percent; off the growth rate this year.

However, car-makers and clothing firms as well as some border regions in strong currency countries have seen a “more visible impact” from the 33&percent; fall in the lira, the 28&percent; fall in the peseta and 21&percent; fall in the pound since 1992.

The sheer speed of the adjustment in these areas to the new exchange rates has had a “negative effect on economic operators, is curbing investment and is slowing growth”, the report acknowleges.

But this is very different from the calls for compensation which had been made from some parts of French industry.

Jacques Calvet, the president of PSA Peugeot Citroën, called for aid to exporters, warning that every one-percent fall in the value of the lira or the pound cut his profits by between 5 million and 20 million ecu.

Some north European politicians went further and even urged the erection of safeguards against products from devaluing countries.

But Economics Commissioner Yves-Thibault De Silguy and Single Market Commissioner Mario Monti ruled this out. “We don't want a regressive response that would hinder the working of the single market,” said Monti. “Measures that put obstacles in the way of goods would go against the rules and spirit of the single market.”

On the other hand, the commissioners left the door open to temporary and targetted aid payments. “If industry has to change and the state aid regulations are respected, it can be done according to certain rules,” said de Silguy. “The Commission will take into account all specific factors.” This could involve allowing funds to be paid to a severely loss-making company with a low-skilled labour force specifically for retraining.

The question of generalised exporters' compensation funds was left open. The only recent example of this was Ireland's Market Development Fund, set up in October 1992 at the height of the Irish pound crisis and wound up six months later. This fund allowed small- and medium-sized enterprises, largely in the food and drink and clothing sectors and highly dependent on the UK export market, to claim 60 ecu per worker per week to cut the wage bill.

The Commission cleared the aid scheme as “unique and exceptional”, determined by the historic links between the UK and Irish economies, the small and open nature of Ireland's market and the fact that Ireland is one of the EU's four poorest countries. If these are the criteria the Commission use, the biggest companies in northern Europe can expect little help.

For the Commission, safeguard measures miss the point. “The solutions adopted cannot and should not tackle the consequences but should attack their causes,” says the report. “These causes are directly linked to the insufficient progress made towards convergence, particularly as regards the reduction of government deficits.”