GM Backs Out of Magna Deal: It's Each Nation to Itself

I have been reading press accounts of the GM decision to back out of the Opel/Vauxhall sale to the Magna (MGA)/Sberbank consortium from various countries. There are a lot of different perspectives on this event in the U.S., Belgium, Spain, Germany, Russia, the U.K and elsewhere, because a lot of players are involved.

The conclusion I come to is that economic nationalism is the driving motivator behind much of what you read. To the degree we continue to experience a soft global economy, this should be seen as a warning of how individual actors will respond in the future.

Easy decision to keep Opel

GM’s decision to keep GM Europe is fairly straightforward in my view. The cars and technology in GM Europe is something General Motors never wanted to part with. They only did so because of the need to raise cash in a weak economic environment. Now, things at GM (and Ford (F)) are looking much better and GM has exited bankruptcy. There is no desperate need to sell.

Moreover, the EU was asking GM a lot of questions about the subsidy deal they struck with the German government in order to effect the sale of Opel. Other European nations, Spain and the U.K. in particular, were livid because they suspected an unfair subsidy of German jobs over Spanish or British jobs. But, it goes far beyond those two nations as GM Europe employs 55,000 people in places like Sweden, Poland and Belgium.

We saw what happened to ING, RBS and Lloyds (LYG) due to the EU’s rules on competition. One could reasonably expect a similar crack down in the auto sector. Details will emerge at some juncture, but one could conclude that GM did a cost-benefit analysis in which the wrangling with the EU weighed heavily on their decision to back out of the Magna deal.

And, in the end, should we expect the restructuring GM performs to be qualitatively any different than what Magna’s consortium would have done? They too have announced 10,000 job cuts, a figure in line with what was expected under Magna’s control. So, on the surface, this looks like a net benefit for GM, a net loss for the Magna-led group, and a wash for workers and politicians.

Enter economic nationalism

But, unfortunately, that’s not how it is likely to be seen. Let’s look at it from a German perspective. Germany’s Chancellor Angela Merkel went to bat for the Magna deal, winning what was widely seen as a measure of security for German workers at a critical time during economic weakness. This bolstered her election chances. As a result, the center-left SPD has now been replaced by the Libertarian-minded FDP in a coalition reminiscent of the Helmut Kohl days. Consider this a move to the right in Germany.

Nevertheless, Merkel has stuck with her allegiance to Barack Obama. In fact, as a result of this relationship, she was the first German Chancellor in 50-odd years to deliver an address before Congress just two hours before she learned of GM’s backing out. What’s more is the U.S. Government is the majority owner of General Motors. One would think the Obama Administration had some insight into the decision-making at GM. Either the Administration didn’t know and is being recklessly hands-off in an enterprise where it has sunk tens of billions or it did know and did Angela Merkel a disservice by not informing her of what was to come well before her speech to Congress.

So, you have an American company owned by the American government backing out of a signed agreement and potentially thousands of jobs at risk. Talk of plant closures at Eisenach, Bochum (and Antwerp in Belgium) and the loss of jobs is rampant in the German press. GM Europe’s head John Smith says, "if they like the Magna plan, they will also like the GM plan." That is not an argument likely to gain sway in a period of economic uncertainty.

The Germans are livid. German workers have gone on strike. Meanwhile, you have the UK Business Secretary Lord Mandelson warning that the division of job cuts must be ‘fair.’ And the Spanish Opel workers had just OK’ed the Magna plans two weeks ago. This is a bit of a zoo, isn’t it?

It is every nation for itself – precisely what one would expect with a shrinking economic pie and a deep downturn.

Going forward

GM has mishandled this affair quite badly I believe. At least with the Magna deal, the Germans were in the driver’s seat. Now, all of the individual European nations are angling for their say in this matter. Yes, GM had little choice given the likely scrutiny it was under via Neelie Kroes, but it certainly could have handled the political aspects of this much better.

However, now that this situation is out, it gives us a bird’s eye view into how nations respond when a division of the spoils becomes an issue. And what we have seen does not give confidence that a coordinated approach will prevail. I take this affair as a clear indication that economic nationalism is alive and well and very much a threat to our collective well-being.

Comments

[Bryanb:]

Isn't this self-interest by countries the way it has always been? The only difference is that now face has been lost and the gloves have come off.

Otherwise interesting article.

Leonahope and Beverly: you don't have to agree with the writer. That is what SA is all about - various opinions by various commentators, so we as intelligent people can make our own decisions.

Nov 06 05:12 AM

[Davewmart:]

I am not too sure that it is economic nationalism that is the chief threat to our wellbeing.
Internationalism has largely operated as a cover for the most powerful nations to grab as much as they can, and has provided the cover for the decimation of working people's livelihoods, the creation of an underclass in the West, and the eventual impoverishment of everyone, as most people in the current recession simply have not got the income or surety of income to drag us out of recession.
This seems to have been the practical result of outsourcing, one manifestation of internationalism.
The results in the Third World have been even worse, with the classic example of crazed ideologes from the IMF demanding that The Haitian people remain responsible for loans taken out by dictators, granted by greedy bankers and used largely to finance excessive consumption by the dictator and the military means needed to maintain the oppression.
The IMF demanded that support for agriculture be eliminated, in the interest of the 'free' market, which lsimply meant that peasant farmers were destroyed by hugely subsidised US and European food.
The result has been a population living on mud biscuits.
The same band of happy and righteous intenationalists and 'free' marketeers have now reduced America to a position where 50% of it's children will be on food stamps at some time.
Not that their free market principles have stopped them socialising the losses of the connected oligarchs.

So forgive me if I can't see internationalism and the free market as the shining city on a hill.

At least nationalists are assuming some responsibility to look after their own.
That responsibility is sacrificed by the internationalists in service to an abstaction.

Nov 06 06:04 AM

[Leftfield:]

Davewmart: So true.
Whatever the posturing, as the article says, Magna may have likely been just as bad for the workers as GM. Now, lots of politicians can huff over their turf in a combination of offended ego and vying for support from their marks, I mean, supporters.
Germans have plenty of ammunition as one of their banks was stiffed about 1/2 $billion on an overnight loan as Lehman went under. That used to sound like real money, remember? How could Obama throw Merkel into such a humiliating situation?
More layers of politicians, such as the EU probably is even more idiotic and wasteful than the League of Nations that did so much to prevent WWII.

Nov 06 08:40 AM

[User 461029:]

thanks again, edward, for widening my vistas. it's always a pleasure!

Nov 06 03:55 PM

[Old Trader:]

Edward,

Just yesterday, I was reading an article about this that pointed out that among the government's representatives on GM's board are PE/HF/IB types who are entirely comfortable with playing "hardball", aren't necessarily long on diplomacy, and aren't likely to shy away from defending what they perceive as their best interests.

Nov 06 11:09 PM