The Telecom Disaster: Now It's Getting Political

Government rescues could set off a firestorm in the EU

As Europeans brushed the last sand from their hair and returned to work in September, it was clear that the telecom industry had become a business disaster. Now, it's growing into a political crisis involving the Germans, the French, and the European Union. Even the normally even-keeled Dutch and Finns are in a lather. If the furor keeps building, it could derail any coordinated effort to save Europe's telcos.

Start with the Germans. On Sept. 15, running hard for reelection, Chancellor Gerhard Schröder crafted a $391 million rescue package to save 5,500 jobs at troubled cell-phone operator MobilCom. Schröder was irked that Paris allowed state-controlled France Télécom, which owns 28.5% of MobilCom, to stop investing in the company a week before Germany's national elections. Determined to fight back, Schröder's ministers said they would provide MobilCom legal help in its bid to obtain the $17.5 billion it says France Télécom promised to invest. The center-right French government, meanwhile, was busy working out its own rescue package for France Télécom after pushing out CEO and Chairman Michel Bon. And up in Finland, Prime Minister Paavo Lipponen, may be ousted over the huge losses wracked up in bad 3G investments by state-controlled carrier Sonera. "The whole sector has become highly politicized," says Michael Bartholomew, executive director of the European Telecommunications Network Operators Assn. in Brussels.

Lots of turmoil, for sure, but where's the harm? Well, for starters, as telecom losses mount and the political costs add up, other European governments may be tempted to try maneuvers that preserve jobs and national pride. That drags Brussels into the act, since regulators must decide if these moves violate European rules against state aid to companies.

For now, France says a likely $14.5 billion rights offering to bail out France Télécom is legitimate because the state's 55% stake won't increase. The Germans swear their loans to MobilCom are temporary and at market rates. But the actions by Europe's biggest governments signal their growing panic over the fallout from boom-era acquisitions and 3G wireless auctions. French Finance Minister Francis Mer lashed out at Brussels on Sept. 16 for lacking "the courage or audacity to propose intelligent solutions" to the telecom mess. European competition czar Mario Monti responded curtly the next day that he won't hesitate to disallow any government actions that break the rules. And the CEO of Dutch telco Royal KPN, which owns struggling German wireless upstart E-Plus, has publicly complained that Schröder's government is doling out aid to one company while neglecting others. KPN may even sue.

The uproar makes it even harder to tackle the politically unpalatable job of permanently fixing the industry, especially since that could involve the breakup of dominant carriers into separate network and service companies. "Governments never really detached themselves from the telecom market," says E. Carlo Alberto Carnevale-Maffè, a professor of strategic management at Milan's Bocconi University. "Now they are openly back in the driver's seat."

The crisis could tank the privatization market. Paris wants to sell down stakes in Air France and giant utilities. But mindful of the share collapses at France Télécom, Alcatel, and Suez, the National Association of French Shareholders is warning that investors "are tired of being duped." Finance Minister Mer says the plans are still on track. But, he conceded, "I'm not going to tell you that [the France Télécom debacle] makes our job easier." When telcos and politics mix, nothing is easy.

By Andy Reinhardt in Paris, with Gail Edmondson in Rome and Jack Ewing in Frankfurt

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