They do that and they surrender the widebody commercial aircraft industry to Boeing for 20 years or more. Your talking about 1 to 2 trillion dollars in lost business and 100’s of billions in lost profits. Those widebody aircraft generate the big profit margins. While its the sensible thing to do given how badly they have screwed themselves by building the A380, Euro pride will never allow that.
Airbust has no choice but to build the A350, even if it doesn’t sell much. They will find back channel ways to fund the project via subsidies. Airbust is a european job creation program first, a commercial aircraft builder second. Its the way its always been.
You are assuming that they will make a profit on their widebodies. Certainly, they are unlikely to ever break even on the 380. As to the 350, current sales numbers suggest that they are unlikely to make a profit on that plane in the near future.
Remember, Lockheed screwed up on the initial Electra. By the time they got that right, they lost out on the first and second generation jets. They managed to come back with a solid design on the 1011 (although they almost bankrupted the company), but they were essentially out of the commercial aircraft market because they spent so much effort on the Electra. The 350, if pursued, may well do the same for Airbus -- by the time they get it right, they'll be too far behind the curve to compete for the 737/320 replacements.