Yesterday, the French government signed a deal to provide Peugeot-Citroën, Europe’s second largest automaker, with €7 billion (or $9 billion) in credit guarantees.
This is yet another example of government intervention in industrial sectors struggling with plummeting sales. Peugeot-Citroën, a multinational firm with more than 200,000 employees, is highly exposed to southern European markets, where fiscal austerity and unemployment is holding down consumer spending. Recent statistics by European Automobile Manufacturers’ Association illustrate the stark decline: new passenger car registrations in the region declined by -10.8% in September compared to the year before.
What is interesting about this bailout is that it is directed solely towards the company’s financial arm, Banque PSA France (BPF). How to make sense of this bailout fund?
The Current Moment points out that financial activities constitute a large part of automobile companies’ revenue stream. This explains Peugeot- Citroën’s 3.5% revenue increase in the third quarter of 2011. Despite the decline in car sales, the company saw a positive income stream, thanks to its manufacturing arm (Faurecia), logistics arm (Gefco), and its bank, BPF.
Then again, car sales are inseparable from the BPF’s ability to offer cheap monthly deals. The government credit guarantee should be seen in light of the recent investment downgrading. Moody’s demoted the firm’s credit rating to Ba3, three notches below “junk” status last week; a similar downgrade is expected in the lending arm. Bad credit ratings would raise Peugeot- Citroën’s borrowing rates, and the firm would have to increase loan rates to customers, thus harming sales.
Moreover, the French government has great stakes in Peugeot. According to France’s newspaper Le Figaro, one tenth of the employment in France is generated by the automobile sector; Peugeot represents two thirds of the nation’s automobile production. France has a lot to lose if Peugeot goes bankrupt.
But is injecting credit to large companies a wise choice? Some economists would say no. One prominent example is the NYTimes Op-ed columnist David Brook. On the eve of bailouts to GM, Chrysler, and Ford in 2008, for instance, Brook contended that “granting immortality” to “Detroit’s Big Three” hinders the dynamic process of “creative destruction,” essential to a country’s prosperity. He appealed to the Shumpeterian argument that vanishing industries are an inherent part of the growth process.
True, history is full of examples of creative destruction at work: the monopoly of the railroad industry faded with the rise of the automobile; companies like Microsoft and Target drove other old-fashioned firms out of the market. Creative destruction seems to be an essential part of the capitalist system we have adopted. But it is not so easy to accept the downside of this evolutionary process—huge layoffs—especially in a period of huge economic downturn. Should the government swallow the bitter pill and protect jobs? Or would that hinder the innovative spirit we also value? I am not so sure. But governments cannot bail out every ailing industry, particularly if protectionist measures pit nations against each other in a time of global difficulty. We have to draw the line somewhere.