French Car Wreck

The latest economic data from France look bad.  The strategy of keeping official growth forecasts high (despite the evidence) is coming under increasing pressure and there may be substantial revisions to the outlook in the pipeline – once you break through to being more honest, there is some catching up to do.

Even more worrying are the plans apparently under preparation to support the French auto industry.  Officially, these plans are still under development (AP).  But from what we can see, including unofficially this week, the next phase of assistance could well be even more problematic than the support provided to the US auto industry which, so far, only got a bridge loan.

It is quite possible that the French fiscal stimulus will morph into an industrial support package.  The announcement earlier in December already included an increased subsidy for buying a new car.

Why would more subsidies for the French car industry be bad?  The bigger global danger lurking is tit-for-tat protectionism, and this is unlikely to start with overt tariff increases these days.  Rather, countries will look for new pseudo-bailout ways to give their firms a leg up on the competition.

The Chinese, by the way, are keeping careful score, probably with an eye to their own quasi-protectionism down the road (or already, in terms of nudging the renminbi to depreciate).  It’s starting to look a lot like the kind of uncoordinated policy response that can further destabilize the situation. 

The G20 had sensible anti-protectionist language in its November communique, but this was rather high level.  Clarification from the French/British leadership of the G20 would be most helpful right around now, particularly if supported by transparent statements regarding what kind of auto industry support should or should not be regarded as a step towards protectionism.  No doubt the Germans and Japanese would also like some input into this formulation, and the great advantage of the G20 is that the Brazilians, Koreans, Indians and others can also be brought on board directly.

How about starting with a systematic official global tracking of proto-protectionist measures, in whatever form they appear?  The G20 website would be a good place to publish this kind of ruthless truth-telling.

One response to “French Car Wreck

  1. Considering how money is fungible, I can’t see the fundamental difference between what the French are proposing versus what the US government did for GM and Chrysler. Money is flowing from the government to specific companies and not others. Whether loans, subsidies or rebates, the companies will use it to try to get ahead of their competitors (or survive in the face of said competition). If there’s tit-for-tat protectionism, it won’t be the French who started it.

    In this climate, everyone will argue that this or that company is critical to the particular industry, which in turn is critical to the economy of the country. Unless there are some really unambiguous and easy-to-use metrics for determining what is protectionist and what isn’t, I doubt any global committee will be able to declare within a reasonable timeframe that country X’s policy Y is protectionist. Especially a major country with a voice on said committee. And a major country will just brush aside the label and carry on anyway, if domestic pressure is sufficient.

    The only way I see to prevent an uncoordinated response would require two or three big powers to pledge not to make any bailout move without each other’s approval. Difficult to achieve politically.