The Car Industry Bloodbath in Europe Worsens

Ford (NYSE: F) recently said its losses in Europe last quarter will be three times expectations. The recession that has spread across Europe is that bad. General Motors (NYSE: GM) will post more losses at its Vauxhall and Opel units, which will extend its string of losses by over a decade. The world’s largest car company is locked in a battle with local unions and governments about large factory and personnel cuts. If any industry needs the stimulus dollars meant help throughout the region, it is auto manufacturing.

The signs of trouble for car manufacturers took an even stronger turn toward the worse as Peugeot announced it would close manufacturing facilities and fire 8,000 people. That brings total layoffs from recent downsizing to 14,000 people. The first plant closed will be near Paris, which is at the heart of Peugeot’s market geographically.

Peugeot’s sales have fallen more than most auto firms in Europe, but it is not alone. Even giant Volkswagen has suffered, as has global powerhouse Renault, which is run by Carlos Ghosn, the same man who runs Nissan.

No matter how each large car manufacturer in Europe has set its long-term plans there, on a short-term basis all will have to bring down costs to avoid what could be, in the case of the big companies, hundreds of millions of dollars in red ink. If Peugeot’s decision is any guide, total layoffs among all of the manufacturers will reach into the tens of thousands. National economies cannot afford to lose these jobs, on top of the record high unemployment in most EU countries.

The car company problem shows, once again, the troubling cycle of economic difficulties in most of the nations in the region. Sales drop, losses grow, expense are cut, jobs disappear. Government takes on more of a burden of social services as the tax base erodes. Among smaller industries, the signs may be less easy to follow. In an industry as large as auto manufacturing, though, the trail of layoffs that badly damage EU economies is easier to find.

The fact of the matter is that stimulus programs must attack economic problems in the biggest individual industries. It is accurate to say that money put into growth, which already has hit objections from some quarters, which include Germany, never works at the national level per se. It has to “trickle down” to the parts of the economy that create and preserve jobs. Some of this, economists claim, will come from loans to small business. But for every 10,000 workers cut from a major industry, a thousand new, small businesses would have to be created and survive.

Stimulus is fine in theory, but it only really works if it is targeted enough to reach far into national economies to help the industries where the jobs are now, and not so much where they might be in the future.

Douglas A. McIntyre