Schröder’s dilemma after MobilCom bail out

Date: 03/10/02

THERE'S a funny irony in it somewhere. The governments partly responsible for the spectacular downfall of the EU's telecoms sector are back.

This time, instead of fleecing operators with huge licence fees for fast '3G' mobile services, they are looking at ways to bail them out.

It's already happening in Germany, the EU's biggest economy - and depending on how the European Commission reacts, other governments, many still shareholders of telecoms firms, could follow suit.

'It's funny how the telecoms sector has moved from an M&A sector to a state aid sector,' says London lawyer Christian Ahlborn, competition specialist at Linklaters & Alliance.

'Politically it's inevitable,' adds Ahlborn. 'You would wish that it doesn't happen and we would prefer for companies to go bust. But there is no reason governments should be virtuous when it comes to telecoms. As long as they believe they can score points they are going to do it,' he argues.

In Germany, newly re-elected Chancellor Gerhard Schröder did just that when he announced, on the eve of polling, a soft-loan package worth up to €400 million for stricken mobile firm MobilCom including an initial cash injection of l50 million for the firm - left high and dry after its French parent France Telecom turned off the tap.

What happens now that Schröder has won his election battle will have a big impact on the sector. That is because, compared with mergers and cartels, state aid control is a political battleground. So what are the German chancellor's options?

If he plays by the rules, he will likely try to get quick approval of the initial €50 million handout as 'rescue aid' to keep MobilCom alive in the short term. Such approval could come within two months if Germany applies for clearance now.

If greater 'restructuring aid' is also needed, lawyers say Germany must put this up for discussion with Brussels immediately. If mooted now, such an aid package could be approved in the next few months - but it would have to be accompanied by a detailed plan for turning MobilCom around.

If such restructuring aid won approval, Monti would almost certainly demand concessions in return, such as sell-offs and reductions in capacity. The price the Commission extracts depends on how much aid MobilCom receives from the German exchequer.

The only problem for Schröder is that the Commission may decide to open an in-depth investigation into the €50 million handout. This probe could take up to two years to complete. Too long, for any stricken telecoms company to survive.

That leaves one alternative for Schröder: pump in aid now, answer the questions later - an approach guaranteed to do yet more harm to German relations with the EU executive.

No one believes the jobs of a few telecom workers will weigh as heavily on Schröder's mind as did the cosseted state banking system or the plight of stricken building giant Holzmann. But Ahlborn admits the pay-now-answer-the-questions-later approach may be an attractive option. 'They have done that in aid to VW in Saxony - a blatant breach of competition law.

'Unfortunately, Germany is moving in the direction of saying 'what do I care about EU competition law', so it's not unthinkable - but they shouldn't.'