Industrial policy: Creating Euro giants

What is the French and German plan to create bi-national champions really about?

THE latest attempt by France and Germany to revive tired old industrial policies by jointly creating European business champions got off to an inauspicious start. Before the German chancellor, French prime minister and their respective economy and finance ministers could hold their summit in Berlin on June 1st to hammer out the details of the plan, on May 17th Nicolas Sarkozy, the French finance minister, and Mario Monti, the European Union's competition commissioner, agreed a rescue deal for Alstom, a troubled French engineering firm, that flies in the face of the new spirit of co-operation.

Siemens, a huge and prosperous German firm, has expressed a strong interest in buying Alstom's turbine business - on the face of it, a perfect opportunity to create a symbol for the new policy. Instead, under the deal between Messrs Sarkozy and Monti, Alstom will remain a French company, bailed out by the French state. This decision led several German officials to complain about France going it alone. Siemens is considering a legal challenge, once the details of the rescue package are official.

In theory, at least, the French and Germans have in mind a different sort of national champion to the inefficient, protected monopoly, state-subsidised sort of which Alstom is a reminder. A classic example of the old-style champion, says Louis Schweitzer, chairman of Renault, is Fiat before the EU forced open the Italian car market. The new sort of national champion, or Euro champion, would have a somewhat different objective, says Mr Schweitzer: to ensure that Europe, or a given European country, has firms able to hold their own in competitive global markets, particularly against America's mighty multinationals. This, he says, is the logic behind the recent controversial drug merger, pushed by the French government, of Sanofi-Synthelabo, a French company, with Aventis, a Franco-German firm.

We are the champions

France and Germany launched their new plan on May 13th, when they declared an intention “to formulate a joint industrial policy aimed at creating a framework for mergers and joint-ventures between major German and French corporations”. Together Germany and France could create a number of industrial champions modelled on EADS, the European Aeronautic Defence and Space firm, formed in 2000, said Jacques Chirac, the French president.

Such a policy would have its downside even if it was being pursued in conjunction with general economic liberalisation. But there are reasons to think that the big talk about cross-border action may be mere cover for various politically driven national initiatives in France and Germany, many of them protectionist.

Germany recently tried to discourage a mooted foreign takeover of Deutsche Bank by pressing Germany's biggest bank to bid for Postbank, a division of Deutsche Post, the national mail service. (America's Citigroup has reportedly been in talks with Deutsche Bank.) France's intervention record has been offensive to economic liberals since long before the recent sagas. Liberalisation exists to create champions, not to destroy jobs, said Mr Sarkozy at a recent press conference. “Sarkozy has been very nationalistic and protectionist in his policy decisions since he became finance minister,” says Richard Portes of the London Business School.

Frits Bolkestein, the fiercely liberal European commissioner for the internal market, is furious about the “pathetic” Franco-German plot to nurture industrial champions. According to Mr Bolkestein, the “Lisbon strategy” agreed by EU leaders in March 2000 was all about the creation of conditions in which business, not bureaucrats and politicians, could transform Europe into the most competitive economy in the world by 2010. “I cannot help feeling a sense of deja vu”, says Mr Bolkestein. In the 1960s France pursued a highly interventionist industrial strategy under the governments of Georges Pompidou. Le Monde, a French daily, recently called current policy “un pompidolisme chiraquise” (Pompidou's policies the Chirac way).

There are good reasons to think that when Mr Sarkozy talks of European champions he really means French champions strengthened by a link with Germany - when that suits France's interests. And, despite their anger over Aventis and Alstom, the Germans are going along with the joint industrial policy out of political expediency. They fear that if they do not do the same as the French, they will be at even more of a disadvantage, says Frederique Sachwald, an economist at IFRI, an institute for international relations in Paris.

Can national champions work? Sometimes, but only in exceptional circumstances. Air France and Renault, two national champions that are now prospering having almost gone bust, are examples of successful state bail-outs, says Ms Sachwald. But in general, any artificial promotion of national champions tends to hinder the development of a successful corporate sector, says Colin Mayer of the Said Business School in Oxford. Far better to create the right environment, as per the Lisbon strategy, through deregulation, competition and so on.

The first big cross-border Franco-German merger since the new policy was launched may not be far off. On May 17th ThyssenKrupp, a German steel conglomerate, announced a merger of its shipyards with Howaldtswerke-Deutsche Werft, a German submarine-maker. The Thyssen-Krupp/HDW deal is likely to result in a merger with France's Thales, a defence company with naval interests, and DCN, a French state-owned shipyard. Klaus Rettig, the boss of Thales in Germany, reportedly thinks that Europe needs a “naval EADS”. After the ThyssenKrupp/HDW deal, Ekkehard Schulz, head of ThyssenKrupp, said that a European solution will be the next step. Thales has long been interested in HDW and is already working with DCN on a new aircraft-carrier. A naval EADS would make business sense as it would take some capacity out of the market, say some analysts. A Franco-German naval group might also be better placed to compete with America's naval giants, Northrop Grumman and General Dynamics.

But the French government is not always driven by the business case in its industrial-policy choices. If it were, it would surely have let Aventis merge with Novartis in spite of the latter's Swissness. Likewise, it should let Siemens buy Alstom's turbine business. “The French do not let the market for corporate control function,” says Philippe Haspeslagh, a professor at INSEAD, a business school.

The new industrial policy may anyway fall foul of Brussels. Both Mr Bolkestein and Mr Monti have become increasingly assertive against state aid and monopoly - and they or their successors seem unlikely to reverse that course. If France and Germany persist in blocking investments in their champions from further afield, the European Commission can pursue them under EU rules on free movement of capital, as it is doing with a German law that protects Volkswagen, says Mr Bolkestein. If they pump subsidies into their champions or give them tax breaks, the EU can block them. Mr Sarkozy went to Brussels three times in the past two weeks to discuss Alstom. Maybe he should buy a season ticket on the Thalys, the high-speed train built by Alstom to link Paris and Brussels.

What is the French and German plan to create bi-national champions really about?

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