Maybe Kirch Deserves to Crash

One of the arguments for Europe's so-called social-market economy has been that close cooperation between government and business helps prevent big economic shocks. In theory, the Continent accepts less competition and slower economic growth in return for more stability. No sharp downturns, no Enrons. Europe, the argument goes, is a little poorer but a lot safer.

That argument is less convincing than ever as Munich-based Kirch Group teeters on the edge of bankruptcy. Far from preventing disaster, government-business collusion abetted media mogul Leo Kirch as he poured fruitless billions into pay television. Now, creditor banks face losses of hundreds of millions of dollars. And Kirch's 10,000 workers must worry about their jobs.

The scandal could even be the deciding factor in national elections scheduled for September. The conservative candidate for Chancellor, Bavarian Prime Minister Edmund Stoiber, stands to take much of the heat. He deserves it, too. There are clear indications that some of Stoiber's close aides applied political pressure to get banks to keep lending money to Kirch Group. In addition, Bayerische Landesbank, which is 50% owned by the state of Bavaria, helped lead commercial banks over a cliff by lending Kirch some $1.7 billion.

Commercial banks also messed up big. By last year, when Munich-based HVB Group finally refused to lend Kirch any more money, the company already had debts and obligations of well over $9 billion and was in critical condition. And it's not like this was a big secret. The German press had been warning about Kirch's financial problems at least since 1997.

Far from ensuring stability, government and the banks delayed the inevitable. Market forces would have punished Kirch for its poor management of the pay-TV business years ago, and perhaps another company could have made the business work. Instead, taxpayers and bank stockholders will probably wind up paying the tab.

Incredibly, Bavaria and the bankers are still talking about rescuing Kirch. Enough. It's time to break up Kirch Group and sell Kirch's television and other entertainment assets to the highest bidder. Most important, both commercial and state-backed banks should swear an oath to base their lending decisions on old-fashioned things like cash flow and collateral--not politics.

It is now clear that Germany's economy actually grew less than the U.S.'s in 2001. This was not supposed to happen. The tech bubble was expected to smash the American economy while Germany, and Europe in general, escaped the damage to grow faster. The euro and the social market were supposed to give Europe the edge in 2001. They didn't. Now the U.S. is expected to grow faster again in 2002. Witness the strength of the dollar vs. the euro. Flexible labor and capital markets, and a willingness to take risk, mark key differences across the Atlantic. Letting Kirch go down would be one indication that Germany is moving away from the social- market economy that is holding it back.

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