Europe's Auto Industry

On Wednesday The New York Times produced an article that examined the European automobile industry.  Te article is titled "Europe's Auto Industry Has Reached Day of Reckoning".  A lot of it as to do with how one understands economics and how one's culture operates.  Cultural issues like paying taxes is bedeviling Greece at this time.  It turns out that folks paying their taxes is important.

Here are some comments on the article, by someone with some experience in Europe:

A New York Times story today highlights the inefficiencies that bedevil Europe's auto industry.   There are three culprits, especially in such as Italy and France:   economic regulation, corruption, and economic illiteracy.  
 
Inefficiencies.   According to the story, "The most dreadful year for car sales (in Europe) in more than a decade may require the industry to deal with the overstaffed, underused factories that have been undermining earnings for years ... The question is whether any of the companies can do it fast enough — or at all — in the face of restrictive European labor laws and stubborn political resistance to cutbacks."  
 
These challenges, however, cut across all industries in Europe.   They come into sharper relief only because of the current economic crisis.   Increased awareness may spur sharper debate:   Should Europe move toward a more competitive, risk-taking economic model?   Ours is freer and more entrepreneurial than most European economies, despite growing regulation, entitlements, and politically-driven resource flows, e.g., subsidies for green energy, inefficiency in delivery of health services.   Europeans are not unaware of their lack of economic dynamism.   For example, they know thay have missed out on much of the worldwide IT boom of the past two decades.
 
Corruption.   The 2011 corruption perceptions index published by Transparency International ranks 183 countries and territories around the world according to perceived levels of public sector corruption.   Selected 2011 rankings are:  Finland, 2; Germany, 14; France, 25; Italy, 69 (tied with Ghana); and Russia, 143.   The NYT story points out that BMW and Mercedes "continue to thrive," and Mercedes will shift some production to Finland to meet strong demand.   On the other hand, car-makers in southern Europe are "suffering the most, especially Fiat and Peugeot."
 
Economic regulation and corruption are positively correlated; the former often abets the latter.  In assessing how to fix their economies, Europeans need to tackle both, if they wish to create more productive and competitive economies, for example, conditions that would encourage a future European Silicon valley.
 
Understanding of economics.   Fiat and Chrysler CEO Sergio  Marchionne has been heralded for his business genius, but it seems not to be matched by his knowledge of economics.   According to the NYT, he called on the European Commission in Brussels (the EU's executive branch) to "coordinate a rationalization of the industry across the producing companies ... the French and the Germans have not taken out any capacity at all ... (but) everybody should take haircuts.”
 
This prescription implies that the European Commission ought arbitrarily to level, at least to some extent, differences in production capacities and market access of more and less efficient auto manufacturers.   How can a world-class CEO advocate such a thing?
 
In Marchionne's formative years (he was born in 1952), socialist economics was widely taught in European universities, especially those with large communist parties.  Thus, we should not overestimate the economic sophistication of leaders there, such as French Prime Minister Francois Hollande.   On the other hand, Italian Prime Minister Mario Monti studied economics at Yale under Nobel Laureate James Tobin and is a noted exception.

What should they do?  And why?

In the mean time, is CEO Marchionne's a reasonable solution to balancing out production capacity?  Should Mercedes cut production to help out Peugeot or Fiat?  Would you forego a Mercedes and buy a Peugeot to help out the workers in France?  (Full disclosure, in 1977 I sold a Morgan +4 and bought a Peugeot Station Wagon.  Family size was the reason.  But didn't bring it back to the states.  Bought a Jeep Cherokee for the assignment to Alaska.)

Regards  —  Cliff