Can Europe Shake The Subsidy Habit?

Europe has taken giant steps in recent years toward increasing efficiency, reducing regulation, and breaking down barriers between its national markets. The latest sign of progress: the impending merger between three of the top aerospace companies in France, Germany, and Spain to form a $22 billion giant called European Aeronautic Defense & Space Co. Overcoming political reluctance to give up these traditional symbols of national strength, shares in the new truly European corporation will go on sale to the public starting July 10. At the same time, Airbus Industrie, which is an awkward consortium mainly controlled by the same three aerospace companies, will be transformed into a single company that owns all of the assets it needs to manufacture airplanes. It will be owned 80% by EADS and 20% by Britain's BAE Systems.

If EADS and its Airbus subsidiary manage to act like a stand-alone corporation, it would be a powerful signal that the New Europe is here to stay. Unfortunately, there are troubling signs that the protectionist ways of the Old Europe have not yet died. European governments are asserting their right to provide up to one-third of the $12 billion that Airbus says it will need to build a giant new airliner, the A3XX. The airplane, which could carry 600 to 800 passengers, is intended to dethrone Boeing Co. as king of the jumbo jets. The Clinton Administration is arguing that although some subsidies for the development of aircraft are permitted under a 1992 bilateral agreement, the Europeans are violating the terms of that agreement as well as the rules of the World Trade Organization.

Europe's impulse to keep subsidizing Airbus raises concerns that EADS, too, will be treated as a favored child. That would be too bad, because the era of subsidized national champions is over--whether in computers, telecommunications, or aviation and defense. Let EADS and Airbus compete with their international rivals without the taxpayer's help, and ultimately everyone will benefit.

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