Europe Still Doesn't Get It

Even as sell-offs speed up, governments keep coddling monopolies

On paper, it looks as if governments in Continental Europe are doing the right thing. With much fanfare, they are selling off their crown jewels, from state-owned phone companies to national airlines. Over the next five years, Europeans will privatize as much as $300 billion worth of assets, 70% more than the total during the last decade. The theory is that subjecting these unwieldy state monopolies to free-market forces will make them more efficient and give a much-needed shot in the arm to Europe's economic growth and global competitiveness.

In reality, much of the Continent's great state sell-off isn't working. True, privatization around Europe has raised nearly $180 billion so far to help plug the gaping holes in government budgets. But privatization's other intent--to create more dynamic, profitable companies and sow the seeds of shareholder value--is being blunted by state intervention. Governments continue to protect their former holdings and to favor companies they plan to spin off. Although they claim to be shielding workers, their reluctance to allow real competition means Europe's economies are sacrificing growth and jobs.

"MISGUIDED." Of course, governments must calculate the effects of social unrest resulting from layoffs at busted monopolies, especially with unemployment rates in Germany and elsewhere at record levels. But in addition, policymakers still seem unwilling to give up using monopolies to preserve economic control. Says Ian Senior of London's National Economic Research Associates: "There is a misguided feeling that natural monopolies and public service should prevail."

Take France Telecom. Although the French government is set to privatize the phone monopoly this year, France was the first European country to slap a 20% value-added-tax on U.S. providers of low-cost international callback services, which let French residents make long-distance calls using a U.S. dial tone. Paris is also defending France Telecom against domestic rivalry, requiring would-be competitors to pay France Telecom for the right to provide "universal" services such as directories. Residential service in France "will remain a monopoly," says Thierry Mielo, vice-president for strategy at regional carrier Bouygues Telecom.

The example has parallels across the Continent. In Italy, the government followed orders from the European Commission to open up its cellular telephone market in 1994. But Rome still makes life difficult for newcomers. Omnitel, owned by Olivetti, Bell Atlantic, and other U.S. companies, got Italian courts to overturn roadblocks put up by Telecom Italia. Yet it is still obliged to pay the state operator bloated rates for interconnection fees and leased lines, amounting to a huge 40% of Omnitel's $600 million revenue this year. That compares with the 4% of revenue that British cellular phone providers pay in interconnect fees.

Or take reform of Europe's airline industry. The final stages of airline deregulation will kick in just a couple of weeks from now. Yet Rome approved a proposal to double a one-time government capital infusion for Alitalia, to $2 billion. An addendum to the plan will give Alitalia $150 million more to help it comply with new international regulations to modify navigation equipment on McDonnell-Douglas Corp. MD80 jets. How much goes to privately owned, Florence-based Meridiana, another airline with a fleet of MD80s? Not a single lira.

That makes observers skeptical about the efficacy of the EU's broad deregulation push. "The legal mechanisms have been put in place to deregulate the airline sector this year," says Randy Tritell of law firm Weil, Gotshal & Manges in Brussels. "But the jury is still out on whether it will work in practice."

Even free marketeers stumble when it comes to state-owned properties. The year-old government of Spanish Prime Minister Jose Maria Aznar Lopez has put in place a privatization program that includes selling its 25% stake in utility Empresa Nacional de Electricidad later this year. But the reform urge didn't stop Aznar from recently restricting broadcasts of major sports events by digital TV programmers. That gives a big advantage to privatized telecom giant Telefonica de Espana and the state television station RTVE.

In some cases, governments have even permitted monopolies to broaden their reach. United Parcel Service, which holds a significant share in parcel delivery in Germany, filed a complaint against Deutsche Post arguing that the state post office, which charges the second-highest postal rates in the world after Japan, used its monopoly position to pump $2.7 billion into building 33 supermodern parcel-sorting centers. In late January the European Commission sent a warning letter to Deutsche Post, and it may impose a fine.

To be sure, the recent upheaval over French auto maker Renault shows what government officials and corporate chieftains are up against when they plunge their monopolies into the cold bath of competition. By reducing its Renault stake to 47% last year, the French government forced management to restructure and boost profitability for its shareholders. Helmut Werner, former head of Mercedes-Benz, praised Renault Chief Executive Louis Schweitzer for having the "courage" to bite the bullet on costs and make Renault "stronger for the future."

WALKOUT. But on Mar. 8, Renault workers coordinated a walkout at the carmaker's plants in France, Spain, and Belgium to protest Schweitzer's decision to shut down a 3,100-worker plant near Brussels and cut 2,700 additional workers in France. Each day, Renault's restructuring move sparks additional criticism from official Europe, including the French government and the European Commission. Even the King of Belgium has weighed in. So far the company is sticking to its plan.

Right across the English Channel is an example of the rewards when government-owned monopolies are truly broken up. Britain's $62 billion in state sell-offs that began in the early 1980s have lowered prices, improved services to consumers, boosted safety standards for workers, and made an ongoing contribution to government coffers. Industrial gas prices have fallen by nearly 50% since privatization, and telecommunications prices have tumbled by 40%. That's an impressive message for Continental Europe. But unless policymakers start to realize that companies like Renault are taking tough but necessary action, that message--and the competitive gain Europe seeks--won't be delivered.

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