EU warns France about auto rescue plan

On Monday, France announced a rescue plan for its struggling automotive industry. The plan totals €6.5 billion (US$8.5 billion). The European Commission, which enforces European Union legislation, said the conditions may break EU rules.

The plan calls for PSA Peugeot Citroën and Renault, the two largest French automakers, to receive a five-year loan of €3 billion at 6% interest, each. Meanwhile, Renault Trucks, which is owned by Volvo Group of Sweden, will receive a €500 million loan.

French President Nicolas Sarkozy said that the funds should be invested in environmental technology. Sarkozy added that "Renault and PSA have also committed to not to close any production sites for the duration of their loan and to do whatever they can to avoid layoffs."

"It's a commitment that I applaud because it ensures that this acute but temporary crisis will not destroy our industrial base and automotive know-how," the President concluded.

The European Commission is concerned about the implied obligation to not close production facilities, which would go against EU rules.

"There are indications that carmakers will be obliged to maintain their center of production in France as a condition for government support," said Jonathan Todd, a spokesman for the Commission on Tuesday in Brussels. "The Commission will not authorize aid that would tend to undermine the single market."

Conditions that violate these rules "would render the aid illegal and will not be tolerated by the commission," Todd said. "If there are measures that question the single market, the risk would be that the recession would be much worse, even becoming a depression as in the 1930s."

"Today the Commission has written to the French authorities to ask for clarification of the plan," Todd explained at a briefing. "We have not actually reached any conclusions as regards the French measures. We have a few concerns with what we saw in the press."

Slovakia has already said that it will appeal to the EC, if the loans amount to a distortion of competition law.

"The philosophy of the EU is a single market without any barriers to transfer products and services," Ján Počiatek, the finance minister of Slovakia said.

In Germany, Verband der Automobilindustrie executive director Klaus Braeunig said that the French plan is "a clear distortion of competition." He added, "We don’t want an international race in subsidies."