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An EADS Eurofighter Typhoon at the Swiss air base in Emmen, central Switzerland. There was some industrial logic to the merger of Britain’s BAE and Franco-German EADS – the launch of a formidable rival to America’s Boeing – but the merger was doomed the moment it was conceived and it was euthanized on Wednesday. (MICHAEL BUHOLZER/REUTERS)
An EADS Eurofighter Typhoon at the Swiss air base in Emmen, central Switzerland. There was some industrial logic to the merger of Britain’s BAE and Franco-German EADS – the launch of a formidable rival to America’s Boeing – but the merger was doomed the moment it was conceived and it was euthanized on Wednesday. (MICHAEL BUHOLZER/REUTERS)

ANALYSIS

Money, politics and fear: What the BAE-EADS fiasco says about Europe Add to ...

They do business differently in Europe.

Take the proposed €35-billion ($44-billion) merger of Britain’s BAE and the Franco-German EADS (owner of Airbus), a deal that would have created the world’s biggest defence and aerospace player.

There was some industrial logic to the merger – the launch of a formidable rival to America’s Boeing – even if the idea seemed a bit rushed.

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But the merger was doomed the moment it was conceived and it was euthanized on Wednesday.

What went wrong?

Blame the political agenda in Paris, Berlin and London. The rights and independence of the executives and the shareholders were quickly buried under an avalanche of fears that the head office would be in the wrong country; there would be too much state control, or too little; jobs would disappear in one country and pop up in another; and industrial decision-making left entirely in the hands of management and owners risked damaging national agendas and the preservation of national corporate champions.

And so on. The whole affair descended into what’s-in-it-for-me political bedlam.

Now you know why it’s taking so long to fix the euro crisis. Based on the BAE-EADS fiasco, the euro zone will be extinct by Christmas.

Political interference is inevitable in any important industry in any country – note that Stephen Harper’s government killed BHP Billiton’s takeover of Potash Corp. of Saskatchewan two years ago and the Chinese were given the bum’s rush when they tried to buy Californian oil company Unocal (now part of Chevron) in 2005. But the degree of political interference in Europe is off the charts by North American standards and has reached the point where it is doing more harm than good. While governments see state influence or outright control as an agent of industrialization, the opposite is more likely the case as short-term political goals displace long-term strategy.

The BAE-EADS merger attempt shows that state capitalism is alive and well in Europe, especially in France and Germany, whose governments were lobbying for a collective 27 per cent stake in the enlarged group while Britain was lobbying for those same stakes to be eliminated. It has always been thus and for many decades, it more or less worked. After the Second World War, governments from Britain to Italy used state-controlled companies and national projects – from building the world’s best highways and nuclear reactors to wet-nursing the auto makers and aerospace companies – to revive the destroyed continent.

Along the way, there were spasms of state sell-offs, notably in Britain under the privatization-mad Maggie Thatcher, and there is no doubt the role of the state has declined throughout Europe since the 1990s. But it has far from disappeared. France remains the biggest advocate of using equity stakes, proxies and yes men to influence entire industries. It still has a minority stake in Air France-KLM, one of the world’s biggest airlines, controls the nuclear industry (in good part through Areva) and has a 15-per- cent stake in EADS and wanted no less than 13.5 per cent in the enlarged company if the merger had gone ahead. It is the biggest shareholder in GDF-Suez, the electricity utility and power generator with more than 230,000 employees.

State influence in big industries seems to have done France no favours in recent years. The ailing auto industry is one sorry example. French auto maker Renault was controlled by the government until 1996, when it was privatized. But the government could not resist hanging on to a 15-per-cent stake, presumably to protect France’s national interests in a high-value-added industry. Renault has lost almost 70 per cent of its value in the last five years. So much for protecting the taxpayer.

Renault’s rival, Peugeot Citroën, has no government ownership. Still, Paris delights in telling it what to do. French President François Hollande and his ministers were enraged when Peugeot announced it would shutter its Aulnay factory near Paris at a cost of 6,000 jobs. Mr. Hollande described the closing as “unacceptable” (though it is now going ahead). Peugeot has lost 90 per cent of its value in five years.

Car production in France, meanwhile, is in free fall. In 2005, it peaked at 3.5 million; last year, it was 2.3 million.

Air France is in trouble too. It lost €895-million in the three months to June, partly because it has lagged its rivals in cutting labour costs. The state influence over the company no doubt has something to do with this. Meanwhile, the airline has come under pressure from the French parliament to order planes from EADS-owned Airbus instead of rival Boeing. Air France has lost 80 per cent of its value in five years.

While a huge variety of factors have conspired to push down the values of these French companies, state control or meddling has not worked in their best interests. BAE and EADS might well survive, even thrive, on their own. Or they may not. Turning Boeing into a diversified military and civil aviation company worked wonders for the U.S. giant. Politics denied BAE and EADS the right to try the same thing. Short-term strategies usually work against long-term interests, as any good investor knows.

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