International Issues

Auto Subsidies Backfire in Europe

European leaders are reportedly rethinking the wisdom of subsidizing auto manufacturing as the supply of cars exceeds demand there. Officials have proposed changes that would generally make aid more difficult to obtain, starting early in 1998.

  • Between 1989 and 1996, the European Union's executive body, the European Commission, approved the equivalent of $6.07 billion in subsidies to the auto industry there.

  • As a result, the continent faces an oversupply of auto-making capacity.

  • Although the subsidies were supposed to create jobs in depressed areas, the glut of cars has forced manufacturers to slash prices and lay off workers.

  • Some 300,000 jobs in Western European automotive manufacturing were lost between 1990 and 1996 -- a 16 percent decline.

While U.S. automakers were busy closing more than 30 assembly plants and parts factories over the past 15 years, "European governments were still trying very hard to keep companies that were no longer commercially viable alive with generous gulps of taxpayers' money," says Vic Heylen, a consultant who recently produced a study on the European auto industry.

As the subsidies were doled out, companies have won aid even if a project contributed to over-capacity.

Analysts say the situation is certain to worsen as exports to developing countries stall and production in Eastern Europe and Turkey -- part of it designed for showrooms in Western Europe -- increases.

Most economists see the situation as a classic example of the destructive impact of government subsidies to businesses.

Source: Brandon Mitchener, "Europe Looks Askance at Auto Subsidies as Overproduction Looms as Problem," Wall Street Journal, November 3, 1997.

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