FOR THE FIRST time in seven years, a Wall Street bond-rating firm, Fitch, has declared Ford Motor Co.’s debt “investment grade.” It’s the latest achievement for the only U.S. automaker to need no federal bailout, and there’s a lesson in it — for Europe.
How so? Thus far, the continent’s response to its financial woes has been a frontal attack on budget deficits, not only in deeply troubled countries such as Italy and Spain but also in financially sound ones, such as Germany. Indeed, Berlin is pushing a balanced-budget treaty on every member of the European common currency. As recent events in France and the Netherlands demonstrate, a backlash against this approach is hurting incumbent governments even in countries with strong credit ratings. The bond markets are souring on austerity as well.
Obviously, there’s no precise analogy between companies and countries. Broadly, though, Ford teaches that debt per se is not the issue. What matters is how you spend what you borrow. In 2006,new chief executive Alan Mulally mortgaged Ford’s worldwide assets — right down to the blue oval trademark — for $23.5 billion. Mr. Mulally used the cash to overhaul Ford’s product line and streamline redundant global operations. The company lost money initially, but today it’s profitable and creditworthy.
Note that Ford’s experience does not validate those in Europe, such as the Socialist favorite in Sunday’s French presidential election, Francois Hollande, who seem to think government spending is inherently pro-growth. Nor does it support the false hope that European countries can maintain generous early-retirement packages and bloated public payrolls, paid for with taxes on the rich and European Central Bank (ECB) money-printing. That sort of thinking would lead down the path to bankruptcy as taken by General Motors, which also raised cash in 2006 but spent it propping up superfluous brands.
But the Ford story also undercuts Germany’s narrow focus on short-term budget deficits. Blunt fiscal tightening accounts for most of the policy changes enacted by Italy and Spain. Unless accompanied by productivity- and growth-enhancing structural reforms, however, tax increases and spending cuts mean endless recession. This much-needed overhaul of rigid labor and product markets has yet to materialize, in part because such reforms are even more politically difficult to enact — and leaders can offer voters no plausible short- or medium-term “upside.”
Germany cannot just bail out its neighbors unconditionally; its insistence on fiscal discipline is understandable and, to some extent, necessary. But credit markets and electorates are signaling that the strategy is yielding diminishing returns. Berlin must develop a more nuanced program, allowing flexibility on deficits to those who carry out structural reform.
Indeed, this is a lesson that Germany and the Netherlands should take to heart themselves; it makes little sense for these highly competitive countries to hold the line on wages or to tighten their budgets at a time when the euro zone’s periphery could benefit from extra demand in the center for their products. For all its export-led success, Germany needs to liberalize its internal product and service markets.
ECB President Mario Draghi has called for a “growth compact” in Europe. German Chancellor Angela Merkel quickly added that she agreed on the need for growth “in the form of structural reforms.” They weren’t more specific than that. But if Mr. Draghi and Ms. Merkel want advice, they might place a call to Alan Mulally.