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French car aid at risk of breaching EU rules

  France’s plan to aid its two carmakers risks breaching EU rules and getting a thumbs down from Brussels unless it can enlist political support from other European countries with major auto industries.

France pledged on Monday to lend €6 billion to Renault and Peugeot-Citroen over five years in return for a pledge not to close sites in France during the duration of the loan. It said the car loans would strictly respect European Union conditions.

The plan has angered the Czech Republic, the current EU president, and Slovakia and raised concerns in Germany -- all countries with large automotive manufacturing industries. The European Commission on Tuesday expressed its legal concerns and said it wanted more details before deciding whether to grant approval.

“The first impression one gets is that the aid is clearly incompatible with EU rules, as it involves discrimination based on nationality,” said lawyer George Metaxas at Oswell & Vahida. EU single market rules guarantee companies the right to set up and do business wherever they want in the 27-member bloc. “There is an inherent discrimination here. If the car companies are not allowed to fire people in France, they will fire elsewhere in the EU,” Metaxas said.

Since the global financial crisis began, Brussels has approved 39 national schemes to recapitalize banks and guarantee lending. Most of the bank measures were approved without change and within a few days. “What we are seeing is that state aid is now moving down from the banks to the real economy, with the car industry as the next big beneficiary,” Metaxas said.

Still, selling the benefits of an auto bailout would be extremely difficult, he said. “Rightly or wrongly, the banking system is considered a public good that cannot be allowed to collapse. The car industry is less of a ‘public good’ -- even if it’s key to some economies,” he said. “If car companies collapse, the effect on consumers would not be the same as with banks.”


EU countries need to come up with a pan-European solution to help ailing industries said Agnes Benassy-Quere, director of French economic think tank CEPII. “It would have been better to work out criteria at the European level for aiding certain sectors which are particularly hard hit by the crisis and are particularly important for employment,” she said.

France might be able to overcome regulatory hurdles if it gets backing from other EU countries with car industries, said Till Mueller-Ibold at law firm Cleary Gottlieb Steen & Hamilton. “The French initiative will increase pressure on Germany, Italy, Spain and the UK to support their auto industries, though it is too early to say how that will be done,” he said.

The $17.4 billion US bailout of General Motors and Chrysler in December could strengthen France’s arguments, he said. “There is a realistic chance that the Commission will approve (a somewhat modified) plan, in light of the US element,” Mueller-Ibold said. (Reuters)