An important European industry risks being destroyed through government incompetence
Any corporation that managed a deal in which it lost E60bn might expect to find shareholders baying for its blood. Yet the German government, despite a stunning display of financial ineptitude, remains in power. Next year it might even get re-elected.
Chancellor Gerhard SchrÃ¶der and his colleagues should be thankful they have only the relatively simple task of running Germany and don't have to do anything complicated for a living, like running a bratwurst stand, a task that would doubtless stretch their fiscal abilities to the breaking point.
Initially, the German government no doubt thought it was being clever when it raised E40bn in last year's auction of third-generation (or 3G) mobile phone licenses. It appeared to forget it was the biggest shareholder in Deutsche Telekom, one of the main victims of the ruinously expensive auction process.
As any trainee financial analyst could have told them, the cost of the licenses has depressed the value of Telekom's shares.
Here are the figures. Germany raised E40bn from the auctions. The value of its 60% holding in the national phone company has dropped by E100bn. That means there is a net loss to the German government of E60bn.
The German government is not the only one feeling the pain. The Dutch government is looking just as foolish. It still owns 43% of Royal KPN. The value of that stake has fallen by E40bn thanks largely to the cost of its 3G licenses.
The French government still owns 54% of France Telecom. The value of that stake is down by roughly E50bn, even though the French stood down from holding a license auction.
Across Europe, governments have lost around E200bn from the value of their stakes in telecom companies. They raised E100bn from license auctions ' a reminder, should it have been needed, of why Adam Smith thought it was better for governments to keep their noses out of commercial matters.
There are two problems here, one big and one small. The small problem is that it is unfair. The French government has suffered huge losses on its France Telecom stake largely as a result of the extravagance of the British and German auctions. Though it may prompt some chuckles in London and Berlin, it remains a pointless redistribution of wealth among European finance ministries.
The big problem is that an important European industry is being destroyed. What precisely do the governments of Europe think they are achieving by bankrupting one of their biggest and most successful industries?
As we have seen, there is no great financial benefit. With the exception of the British government, which took the precaution of unloading its shares in British Telecommunications before selling the dud licenses, most of the European governments are among the greatest losers from the 3G fiasco.
There are few industrial benefits either. It is a truth universally acknowledged that 3G could become one of the great commercial fiascos of all time.
The stampede to buy licenses was part of the peculiar madness of last spring, a rare moment in history when just about everyone was caught up in the internet and telecoms bubble. Murderers and robbers are allowed to plead insanity. Why not chief executives?
Here is a modest proposal to get everyone out of this mess. Companies that bought 3G licenses should be offered the opportunity to hand them back and get a refund. (One condition might be attached to the refund, however. The board of the company that is asking for the refund should be required to stand down, and shouldn't receive any compensation. They were foolish, should have known better and deserve to pay for their mistakes with their jobs.)
Most European finance ministers, such as Gordon Brown, have firmly ruled that out. It is not the job of government to bail out companies that have made a mess of their business, they argue. It's a fair point.
But look at the flip side of the argument. Vast sums of money are now going to be spent building 3G networks which nobody particularly wants. There are better projects on which that money could be spent.
Worse, mobile telephony was one of the few growth industries in which Europe could genuinely claim global leadership.
It is not the role of government to bail out companies. But neither is the role of government to needlessly bankrupt industries with ruinous taxes. That is industrial masochism.
Sometimes it is better that mistakes are recognised, put right and everyone allowed to move on. In the European telecoms industry, that moment has arrived.
Three years at Wells Fargo
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