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Airbus Blamed for Poor French Economic Growth

By Thomas Lifson

French economic growth is slumping and the problems at Airbus are getting blamed for it. The two year delay in delivery of the A380 super jumbo is reverberating throughout the French and EU economies. Politics, always a factor at the mammoth "social enterprise," continues to intrude, as fear of unemployment and fear of failure motivate politicians to take measures dumping yet more tax money into Airbus.

The aerospace business, at the level occupied by Airbus and Boeing, is mind-bogglingly complex, technologically sophisticated, and extremely large in scale. Inevitably, the national interests of great nations are at stake in the fate of companies and even products. The business generates and perfects new technology consistently, literally living on the leading edge of innovation. Its products are a key part of the driving force of globalization.

This business really matters in terms of its leverage on the way the world grows and changes. That is why I have devoted an extraordinary amount of time and space to coverage of Airbus since the A380 began having its public troubles.

The two year delivery delay (announced in steps) is having consequences for many other companies with their own employees, cash flow worries, and futures to navigate. They, too, have suppliers, employees, and communities. The food chain is very large and long.

The scale is so great that it is starting to affect France and the EU. The full effect will be felt some time in the future.

Ambrose Evans-Pritchard of the UK Telegraph writes,

The French economy slumped in the third quarter as the Airbus crisis began to exact its toll, dousing hopes that Europe would take over as world's growth engine as America slows. [....]

Jean Michel-Six, an economist of Standard & Poor's, said French exports were suffering a loss of global market share due to high labour costs and the strong euro. "I am afraid that loss of exports is the major factor behind this bad surprise, and Airbus may be starting to play a role. Airbus deliveries generate $1.5bn (£1.01bn) a month for French exports and this is now in question. There had originally been plans to deliver 25 of the A380 jumbos in 2007 and instead there will be just one."

Prime minister Dominique de Villepin was caught flat-footed by the data after playing up the French recovery "miracle" earlier this year. "Sadly we're seeing a pause in growth but this should inspire us to yet more grit and determination," he said yesterday.

There is almost no chance of France meeting the growth rate of 2.5pc predicted by the European Commission for 2007. The European Central Bank is expected to press ahead next month with a quarter point rise in interest rates to 3.5pc, arguing excess credit has swamped the system with excess liquidity.

Companies are unable to deliver and get paid for components and systems meant for the A380s that were to be delivered starting late this year. They have a hole in their cash flow. Some could perish in bankruptcy, unable to pay their own bills and liquidated, subtracted from the French and European aerospace production complex. The French understand intuitively that dependence on outsiders for key production inputs must be avoided. It compromises the strategic independence they prize.

French prime minister Dominique de Villepin has rushed to the rescue with a 145 million euro ($186 million) package of loans, according to AP:

Villepin promised $103 million in government loans and guarantees for Airbus suppliers from 2007-2008, and a further $83 million in funding and tax breaks for aerospace and related industries--some of which would be earmarked for research facilities in Toulouse.

"We are standing by Airbus and all of its subcontractors," Villepin said during a visit to Toulouse, southwestern France, where the European jetmaker is based. Villepin was visiting one of Airbus's subcontractors.

This state aid, even if the loans are not officially called "forgivable" will only aggravate the World Trade Organization complaint the US filed today against Airbus for subsidies. (For its part, Airbus has a counter-complaint against subsidies enjoyed by Boeing). The French state is unlikely to foreclose and destroy jobs, no matter what the official terms. As for the ultimate terms of any rescue, no doubt they will be quite negotiable, depending in no small measure on the personal political connections of the patron.

The extreme coziness of the French state with key interests involved in Airbus is well-revealed in a remarkable investigatory report published this week in The Economist. Reviewing the very complex history by which the French conglomerate Lagardere came to hold a major share of stock in the parent of Airbus, the magazine discovers some very peculiar odors.

The tale is a sorry one: of a Socialist government selling off a state company--Aérospatiale (a leading partner in Airbus)--at a bargain-basement price to a firm belonging to an influential entrepreneur; of his protégés spending more time fighting each other than attacking Airbus's rival, Boeing; and of the new owner baling out at a vast profit, in part by selling shares back to the government, just before the scale of the mismanagement was made public.

The large, powerful, and well-connected interests usually make out fine in most countries, of course. But the degree of French state penetration of the economy and its willingness to intervene financially and strategically make this tendency even more dangerous there than in many other countries.

The biggest current question mark hanging over Airbus is whether or not EADS, the parent of Airbus, will approve a plan to develop and produce the A350XWB high tech fuel efficient medium-size intercontinental airliner to compete with the hot-selling Boeing 787 Dreamliner. The head of EADS, Louis Gallois, says that a decision will come by the end of the month.

If the decision is yes, then EADS and Airbus must somehow come up with about 10 billion euros to fund its development costs. But access to cash is only part of the problem for development of the A350XWB. Airbus, which manufactures in the euro zone, has costs which are simply too high to compete with Boeing, anchored in the dollar zone. As a result, Gallois is warning current Airbus suppliers,

'We cannot launch a programme if we are not certain of being competitive,'

By this he means not only should suppliers prepare to cut their own costs, they should prepare to see work given to competitors located in cheaper wage and currency countries, like Russia and China, both of which are building ties of influence within Airbus. Unless Airbus can reduce its costs, it will not earn cash that should fund future products.

Like the French Revolution devouring its young, Airbus is going to begin devouring some of its employment base, those jobs in contractors and suppliers whose employment security is part of the motivation for the vast sums of public monies already thrown into the project.

Airbus is probably too big to fail. Cancellation of the A380 is not going to happen, and Airbus will be rescued with whatever money is necessary, WTO be damned. The launch of the A350XWB, according to Airbus' marketing executive, American-born John Leahy, is "imminent." Of course, marketing executives are not hired to say negative things about future projects.

The longer term question for France and Germany, and indeed the entire EU, is how many more public resources the citizenry will tolerate being employed so counter-productively, given the strategic necessity of shifting jobs elsewhere? Given the commitment to a an independent aerospace capability and the historic tolerance for insider dealing, the answer is probably a lot more.

Airlines, passengers, and the aerospace industries of Russia and China will win big. Taxpayers in the EU will lose. Boeing, which uses market signals to decide matters, and which is disciplined by capital markets, is doing quite well under this arrangement, and can always look forward to a possible day of reckoning for Airbus at the World Trade Organization.

Thomas Lifson is the editor and publisher of American Thinker.

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