If only France could file for Chapter 11
The Economist has a nice article on the Delphi bankruptcy. For those who don’t follow such things, Delphi is the largest car parts manufacturer in the country and it has just gone into Chapter 11. In doing so, it has availed itself of a process that would do much to help France out of its current economic malaise. Delphi in up against pension obligations entered into with union negotiators long ago. It thus has essentially the same problem as France — back in the day it promised more than it could realistically deliver. The difference is that ultimately Chapter 11 gives Delphi a way of rewriting its contracts in an orderly fashion. France has no such luxury.
When Delphi negotiated the contracts with its unions promising high-paying, low-skilled jobs with tenure and generous pensions, the union bosses were able to declare victory and management was able to purchase labor peace. It was a win-win situation that would have made the architects of the New Deal proud. I suspect, however, that both the bosses and the managers had some inkling that what they were offering was too generous to last. On the other hand, neither of them would be left holding the bag when the contracts came due. That honor was left to the workers and the shareholders. Similarly, in creating its vaunted alternative to the heartless Anglo-American model of capitalism, France’s politicians promised its people (and not insignificantly its labor unions) all that the Delphi workers were promised: high wages, job security, generous benefits, limited hours. It is a noble and appealing vision to be sure. The problem is that like the Delphi contracts, it was ultimately too good to be true, as attested to daily by the chronically unemployed in France.
The great advantage of Chapter 11 is that it provides an orderly process for restructuring all of these agreements. No one is going to like it, and it will be painful. On the other hand, all parties are guaranteed at least as much as they would get in a total implosion of the company, and with luck what emerges on the other side of Chapter 11 will have some economic life in it, although the days of high-pay, low-skill job security are almost certainly at an end. In this sense, Delphi has an advantage that France does not. Ultimately, French politicians have no cram-down provision to which they can resort in order to change the deal. (Although Maastricht and monetary union moved in this direction.) Instead, French politicians are stuck with a unanimity rule: nothing changes unless the effected parities (French voters in this case) agree. Yet in a situation where there is ultimately no economic there there, this may be a recipe for the long, slow bleed toward insolvency or — more optimistically — to some intermediate point where the economic incoherence becomes obvious even to French labor unions.
Of course, trying to figure out how to create a code to deal with political bankruptcy is no mean task. Still, it is something that a few of the over-promised social democracies of the world might want to look into.