EADS/Airbus Government Ownership, Protection, Intervention & Subsidies: The Effect on American Free Enterprise and National Security

Government ownership of a company, whether partial or total, is the very opposite of free enterprise. Popular economists, from Friedrich Hayek (whose works are enjoying a new popularity) to Milton Friedman, have tried to educate policymakers and an often more receptive public on the terrible effects of bureaucratic inertia on a nation’s wellbeing.  In spite of a recent history in which the U.S. has experienced the largest government bailouts in U.S. history, and a historic expansion of the national debt, the virtues of free enterprise are still self-evident to most: competitive businesses survive or fail by their own skill and efforts. With EADS/Airbus, a non-competitive set of conditions prevails, in which several governments sustain a massive international company, shielding it from having to face the consequences of true and fair competition. The results are predictable and, in a free market, would lead to business failure: inefficiency, mismanagement, lack of accountability and red tape.   Yet due to the generous subsidies and preferential treatment of its government owners, EADS/Airbus—Europe’s original “too big to fail” conglomerate—continues to operate and even thrive, while doing great harm to free enterprise competitors.

EADS/Airbus Government Control

Political influence is also a problem associated with government ownership. This is quite separate from any apprehension over national security concerns regarding U.S. military equipment being built by a foreign government-owned company. Most Americans would be shocked to learn how differently the European state-run or statesubsidized industries operate. As the Center for Security Policy’s previous paper on EADS showed, the state ownership of these companies can create something of a whirlpool effect; corruption, patronage and cronyism cancels what would be, in a free enterprise environment, promotion based on merit, achievement and productivity. After fostering this atrophied corporate culture, the state steps in to do what it can through subsidies in order keep pace with leaner, better managed companies. The Financial Times summed up the situation as thus:

The French and German governments will have to take some forceful action rather than continue tinkering with [EADS’s] unsatisfactory structure and governance. If they finally heed the lessons of the past, the governments and their hand-picked representatives should acknowledge they pose too many dangers for a company that has to respond to the pressures of global competition. They should all get out and let this company live as a normal, albeit strategic, private sector enterprise^.13

In the case of European government-owned companies like EADS, the management to date has been able to ignore those “pressures of global competition” due to political influence.  Decision-making that should be in the board room shifts inexorably to the “hand-picked representatives” of government bureaucracies.

Many executives of state-run enterprises are appointed by their former colleagues in government, so it is not surprising to find that companies like EADS and Airbus are led by seemingly unaccountable technocrats. Because of the company’s ownership structure, politicians have a direct voice in selecting their representatives on the EADS Board of Directors. For example, the latest appointee is Louis Gallois, who moved from Airbus to EADS in 2007. Prior to that job, he was at another French government holding, the Société Nationale d’Étude et de Construction de Moteurs d’Aviation (Snecma), where “critics noted that Gallois was unsuccessful in resolving many … basic problems, including an overabundance of workers, inflexible work practices, protectionist pricing and corporate extravagance.”¹⁴

Seeking the view of an old comrade in the radical student protests of the 1960s, a 2006 BBC profile cited the glowing review of Gallois by French Socialist leader Francois Hollande, who said, “He has a sense of duty to the state and in this company [EADS] you also need to talk about a sense of duty to the state and the national interest.”¹⁵

Even French President Nicolas Sarkozy—the great hope of Americans and Europeans supportive of free trade and economic liberalization—does not deviate from the protectionist mindset of his French predecessors concerning EADS and Airbus. In 2007, he promised his government would continue the flow of cash into EADS if new shares were issued, saying, “the French state will do its duty if there needs to be a capital increase.”¹⁶ The Economist, taking stock of the rhetorical changes in Paris, noted that

At the heart of Sarkonomics is a contradiction: Mr. Sarkozy promises both to create an entrepreneurial, risk-taking society and to protect workers, factories and jobs. When he was running for president, his campaign stop of preference was the factory floor, where he would surround himself with industrious-looking men in hard hats and promise never to let France lose its factories, because, “Once the factories go, everything goes.” He may call himself a liberal but he also believes in national champions and in a strong industrial policy to defend them.¹⁷

Particularly in France, Airbus, and now EADS, is foremost of those “national champions.” France’s dirigiste dealings with EADS and Airbus have caused constant wrangling about the precise continental makeup of the EADS Board of Directors.¹⁸ At issue is the creation and maintenance of jobs in Europe, always a competition between manufacturing plants in Germany and France. A different mix of corporate directors can tip the scales to one nation or the other, factoring in which nation has just provided the most subsidies for a new EADS venture.