Why the US car industry bail-out succeeded and Europe's failed

Published: 08 October 2008

I don’t think I’ve ever seen the European Union make up its mind so quickly. On Monday, the European car makers’ association ACEA asked the EU for a €40 billion (£31bn) low-cost loan to help its members develop low-emission cars. Yesterday, after just 24 hours of thought, the EU told it to get lost; the loan would have equated to a third of its annual budget. ‘The idea does not even merit discussion,’ one European Commission insider is reported as saying.

The heads of Europe’s biggest car firms can’t be entirely surprised by the reaction. They met at the Paris motor show last Friday to formulate their public argument that tight credit markets and slumping sales meant they couldn’t raise the funds to invest in the new cars and tech they need to meet the EU’s likely 130g/km average emissions rule in 2012.

But in private, they were doubtless hoping to grab a slice of the public cash going into corporate bail-outs for themselves, and were perhaps hoping to capitalise on an EU desire to respond to the huge bail-out package for US car makers signed into law by President Bush last week.

The American bail-out package

The US deal has been a little lost in the coverage of the current banking crisis, but it gives the struggling Big Three $25bn (£14bn) in low-cost loans – at around a third of the interest rate they’d have to pay otherwise – to retool plants to build more economical new cars.

Officially, the loans help them hit the US government’s tough-ish new average fuel economy regs. In reality, it means the imperilled US car makers can afford to develop the smaller cars US buyers now want, and maybe rescue their nose-diving sales and avoid going bankrupt.

One key detail is that the loans can only be used on plants over 20 years old, thus limiting the benefit almost exclusively to the Big Three, and not foreign-owned car makers building in the US, such as Honda and Toyota.

How the American deal happened

The bosses of GM, Ford and Chrysler who lobbied for the American bail-out were way smarter than their European counterparts. They’re in much worse shape financially, but asked for a more reasonable sum to support the hundreds of thousands of workers they employ in key swing states like Michigan and Ohio.

Oh, and did you notice that there’s an election coming up? And that Obama and McCain both thought this was a great idea? It’s the smartest thing the US car makers have done for some time; way smarter than the Europeans sticking their hands out and making a hopelessly over-optimistic demand for cash.

Maybe we could trade some of our smart small cars for some of their political nous.

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By Ben Oliver

Contributing editor, watch connoisseur, purveyor of fine features