Question on the government’s car industry initiative (updated again)

We had a comment from Alex on our Facebook group last week, he asked

If the government were to bring in a car loan guarantee scheme how would it work, I mean how much potentially would it cost? And would they have the say over what was a risky debt?

It’d certainly help a big industtry and secure jobs but are we not just re-establishing the problem we had in the first place…the potential for unsustainable debt?

Owen replies “Desperate times call for desperate measures, Alex, and I think that is what this one is. If you look at the major car manufacturers in the US – Ford, Chrysler and GM – they are all saddled with an unsustainable cost base and working practices which so heavily protect the employees that the businesses are simply uncompetitive in a global economy.

Car manufacturing in the UK does not have quite this problem, but even so, these are all businesses which have to radically change if they are to survive in the long term. A bit of short term Government aid, whether £2bn or $20bn, will not solve those underlying problems. To your question, there is not much detail on Mr Mandelson’s scheme yet, but most of the car industry think that it will make little or no difference to anything I’m afraid.”

The debate continued over the Facebook Wall. Ian Wilson added his question

I don’t suppose there’s any reason you’d know but exactly how hamstrung are they by european rules when coming up with these bailouts?

The banks seemed to get aid no problems but the car industry bailout seems to be bound up with red tape.

and Owen responds “You raise a really interesting point which I think we will hear a lot more about over the coming months. The fact is that the problems with banks have been so serious and, crucially, so enormous in terms of their potential impact on the world economy, that the usual rules for governing state protectionism have been temporarily thrown out of the window.

The problems in the car industry, to be blunt, will not have the same impact as the banks so the potential for bending the rules is less. Having said that, I think the “red tape” you talk about is more to do with the fact that this is a scheme which even its designers are not quite convinced about yet.”

Ask Owen is about providing impartial financial advice for those concerned about managing their money. The country is suffering a serious economic decline and with people concerned about increasing costs of living and fuel bills, teamed with worries about job losses and house repossessions, it is a daunting time; so if you have a question to Owen fill in the comment box below and he will answer.