Commentary: Why a Few Enrons Would Do Europe Good

By sustaining brain-dead companies, the Continent only hurts itself

By John Rossant

The most terrifying aspect of the collapse of Enron Corp. (ENE ) was its swiftness. Just three months ago, this icon of American economic modernity was the country's seventh-largest corporation by revenues. By Dec. 2, close to $60 billion in market capitalization had gone up in smoke, and Enron lawyers were scurrying to file for bankruptcy. One week later, Citicorp (C ) and UBS Warburg (UBS ) put offers on the table to acquire pieces of the once-mighty Enron trading empire. In the wake of all this, 4,500 Enron employees have lost their jobs, and thousands more have seen their savings and pensions evaporate. This truly was warp-speed corporate destruction: merciless, devastating, and final.

Yet Enron's fall is a reminder of just why the American economy has been performing so much better than its European rivals over the past two decades--and why it will probably continue to do so despite the pain of the current recession. The speed at which Enron crashed is almost a textbook example of Austrian-born economist Joseph A. Schumpeter's celebrated description of "creative destruction" as the heart of vibrant capitalism. An industrial failure, wrote Schumpeter in a famous passage from the book Capitalism, Socialism and Democracy, "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

VAMPIRES. Compare and contrast that idea with the state of Europe's industrial undead. During the same November week that Enron was fessing up to what Chairman Kenneth L. Lay called some "very bad investments," French computer-services company Bull was cashing a $90 million check in emergency government aid. This was only the most recent handout from the state, which indirectly controls some 32% of the business. The government has poured almost $7 billion into Bull since the 1960s in an attempt to make France a player in the computer industry. Yet Bull has enjoyed exactly one year of profitability since 1988. This corporate vampire should have gotten a stake through the heart years ago.

It's the same story at France's Moulinex, the luckless manufacturer of kitchen appliances. The company has been through a series of government-sponsored industrial reorganizations since the mid-1980s. Some of the remaining 21,000 employees are adopting unusual methods to keep their jobs as Moulinex nears collapse. At about the same time that freshly laid-off Enron workers were scanning the help-wanted ads, Moulinex employees at a microwave factory in northern France threatened to detonate homemade bombs to destroy what was left of the plant. (Most of it had been set afire by workers the day before.) Union officials even kidnapped the government-appointed mediator to try and get a better deal on layoff packages. "I am somewhat detained, but it's not a real drama," was the message the nabbed mediator managed to phone in to the press.

SABOTAGE. Even the U.S. occasionally indulges in the preservation of historic industries: Current efforts to protect what's left of Big Steel smack of this. Europeans are the real masters, though. In Germany, Chancellor Gerhard Schroder assembled a $130 million package of state aid in late 1999 to keep afloat the huge Frankfurt construction group Philipp Holzmann. The move has essentially sabotaged Germany's construction industry, which is plagued by massive overcapacity. Former blue chip Holzmann should have been allowed to die, freeing up resources to flow into more productive areas of Germany's economy.

Some executives hope that hard times will finally force Europe's policymakers to renounce their urge to meddle. "Things will change because there is no other way to do it," predicts Leo Apotheker, board member in charge of Europe, the Middle East, and Africa at German software giant SAP (SAP ), one of the few truly new technology powerhouses in Europe. "European governments will run out of money otherwise." There's counterpressure, too: Already, national administrations are finding it hard to get Brussels' European Commission to sign off on state aid packages for distressed companies. And current Competition Commissioner Mario Monti is making a crusade out of fighting state aid. But governments keep trying. Every time they succeed, Europe's economy loses another chance for renewal.

Rossant covers economics and politics from Paris.

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