Economic Ignorance Wins the Day Again in France

France's minister of industrial insanity, Arnaud Montebourg (sometimes referred to as 'Mountebank' in these pages, for obvious reasons) once again proves that the leopard cannot change its spots. After wrangling incessantly with Arcelor-Mittal over its decision to close two long idled and evidently loss-making steel furnaces, he has now decided to openly declare war against the company.

Here is a brief summary of the economic facts of life for the hyperactive minister:

There is vast overcapacity for steel in the world. In China alone, some 200 million tons of production capacity appear to be the fruit of malinvested capital due to China's real estate and infrastructure bubble that has resulted from an unhealthy credit boom. This means that in China alone 200 million tons of production are likely loss making at present and will eventually have to be idled and/or liquidated.

 

It makes no sense to keep loss-making capacity going in Europe as well. That will only further misdirect scarce resources that are more urgently required elsewhere. What this 'elsewhere' is, we cannot say, but we don't need to know this anyway. The market will direct resources to fulfill the most urgent wants and needs through the price system. There is no need to second-guess it, nor is there a need to intervene. In fact, we would judge that the very last thing the market economy needs in order to function smoothly is a 'minister of industrial renewal' (Montebourg's official job description), or any other type of  'economy minister'. The very best thing such ministers could do to help the economy would be to resign immediately.

However, Montebourg has apparently decided that the flight forward is the best method of dealing with Arcelor-Mittal and therefore now resorts to outright blackmail:


“French Industrial Renewal Minister Arnaud Montebourg does not want steel giant Arcelor-Mittal in France anymore and is looking for an industrial partner with which to take the group's operations there over on a temporary basis, he said Monday in an interview.

"We do not want Mittal in France any longer because they do not respect France," Montebourg told the French financial daily Les Echos. "Mittal's lies since 2006 are damning,"the French minister said, adding that the company "has never honoured its commitments" to the country.


Arcelor-Mittal has shut down blast furnaces in Florange, eastern France, but wants to maintain its other activities there, in what has become a showdown with the new Socialist government in France.


Montebourg told Les Echos he was working on a "transitory nationalisation" project for the site. The newspaper said that "the idea would be to associate an industrial operator with a minority capital stake for as long as it takes to stabilise activity" at the plant.


On October 1, ArcelorMittal said it would shut down the furnaces for good and gave the French government two months to find a buyer. With the Saturday deadline approaching rapidly, tension between the steel giant and France has risen sharply because the government says it has two offers, but only for the entire site.


After Mittal refused to sell the entire operation, Montebourg raised the threat of a temporary nationalisation in a hearing before French senators last week.


That was followed by Mittal warning that a sale of the entire Florange site would threaten the viability of the rest of ArcelorMittal's activities in France, where the group says it employs 20,000 workers.

 

(emphasis added)

Presumably Montebourg thinks he will simply save the other 20,000 jobs he puts directly at risk via nationalization as well. No wonder enterprising Frenchmen have fled to London in droves.

 

Property Rights Thrown Under the Bus

Montebourg makes it sound as though Arcelor-Mittal, a private company, were deputized to the French government to help it fulfill whatever political aims it pursues – as though the government could simply draft private companies to aid it in attaining its socialist goals.

This case is going to have repercussions that go far beyond the fate of the loss-making furnaces and Mittal's continued presence in France. By threatening the company with nationalization if it doesn't comply with the government's wishes, Montebourg is signaling that his government has absolutely no respect for property rights.

It is, as we have argued before, instituting a 'Zwangswirtschaft', a coerced economy in which the private owners of the means of production remain their owners on paper, but can no longer dispose of their property as they see fit.

Such an economy, although actually closer to the fascist than the socialist model,  is no longer a free market economy, but becomes indistinguishable from a socialist command economy in its essential features (fascism and socialism are really only two faces of the same coin anyway).

Given that France still retains many of the characteristics of a market economy, albeit a severely hampered one in which institutional unemployment is soaring, this blackmail of Mittal is bound to introduce even more regime uncertainty than has reigned hitherto. Very few enterprises will be eager to commit to new capital investments in such an uncertain environment.  Why would anyone invest if property rights appear close to becoming extinct for all practical purposes? This holds especially for investment projects that require long lead times to come to fruition and are as a rule very capital intensive. Moreover, all marginally profitable branches of industry will become even more wary of investing their resources.

We understand that Montebourg wants to save the jobs of the steel workers at the two furnaces because his boss, president Hollande promised them this would happen before he was elected. We have already commented on the unfortunate tendency of Mr. Hollande to keep even his most absurd election promises. On the one hand, it is refreshingly honorable for a politician to stick to what he has promised. On the other hand his promises – which many once mistakenly thought were exaggerated for electioneering purposes – now threaten to sink the already wobbly French economy.

If Mittal closes the two furnaces (which as noted above have been idled for many months already), then the people employed there will lose their jobs which is of course unfortunate. However, this is a typical case of the road to hell being paved with good intentions: by threatening the expropriation of Mittal, Montebourg ultimately risks far more jobs than merely those at the two furnaces.

There is a lesson that Mr. Montebourg has yet to absorb: No government can dispense with the laws of economics by decree. It might as well attempt to order the sun not to shine or issue an edict that gravity be abolished.

 


 

Socialist industry minister Arnaud Montebourg, holding one of the many fruits of capitalism close to his ear.

(Photo via ghi.ch)

 


 
 

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