Leading article: A tale of bad faith and bailouts in the car industry

General Motors' U-turn could create a political struggle over jobs

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One almost has to admire the chutzpah of General Motors. Earlier this year the hobbled US car manufacturer accepted a bridging loan from the German state on the understanding that it would sell off its European operation, which includes the Vauxhall and Opel marques.

But since then, the economic picture has brightened for GM, and this week it decided it would rather hold on to its European arm. The deal with Berlin has been unceremoniously ditched and, unsurprisingly, the German government is feeling aggrieved. Berlin assumed that the party paying the piper would call the tune. Not so, it seems.

To grasp the true nature of this squabble, some wider context is necessary. In the past year, motor firms from Detroit to Tokyo, like the banks, have been bailed out by governments. Soft loans and scrappage schemes have shielded car-makers from the harsh winds of recession. Yet this assistance has also stopped the industry from confronting its deep-set and long-standing problems. Even before the financial crisis broke, there was considerable overcapacity in global motor manufacturing. Too many cars were being made for too few customers. Of late, this oversupply has been disguised by the success of government trade-in schemes. But it still exists and it will become steadily more apparent as those schemes wind down.

This industry needs to restructure. Unproductive plants will need to shut and, regrettably, workers will need to be laid off. Yet, on account of their efforts to prop up the car industry over the past year, governments have become important players in this drama. The necessary process of shrinking capacity has thus taken on a political dimension.

The fallout from GM's reversal illustrates this well. The German manufacturing unions are up in arms about the collapse of the sale of GM Europe to the Canadian manufacturer Magna because they believed that deal would have been beneficial to them. Vauxhall workers in Britain, by contrast, are pleased because they feel their interests are better served by GM ownership. Rightly or wrongly, there was a general perception that the German government had done a deal with Magna that would see German jobs protected above others.

That deal might have been scuppered. But the political wrangling is not over. GM has plans of its own to shrink its European business. Some 10,000 jobs are to go, and national governments are coming under increasing pressure to use their political clout to protect employment in their own countries. With GM now majority-owned by US taxpayers, the White House will find itself lobbied on this. Important restructuring decisions in the global motor industry seem likely to be made for political, rather than economic, reasons. As history has shown, that is a recipe for inefficiency and long-term stagnation.

The scale of last year's panic was such that governments were justified in intervening aggressively in private markets. The meltdown of several giant car manufacturers could have helped to turn a severe global recession into a depression. Yet a new challenge is emerging for politicians; a challenge just as daunting as averting a slump. Having intervened in the private sector, they must now extricate themselves and let the market do its brutal, but necessary, work of clearing the road for sustainable growth – in the motor industry and beyond.

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