Compromise reached in Volkswagen aid dispute

Date: 05/09/1996

By Chris Johnstone

GERMANY and the European Commission have defused - but not solved - a bitter dispute over aid to be paid to car giant Volkswagen to build two car plants in former East Germany.

In a face-saving move, the Commission yesterday (5 September) scrapped the launch of a fast-track court procedure to block 48 million ecu in contested subsidies from the Land of Saxony, in return for a German pledge to freeze an equivalent sum of federal aid to the car maker.

Competition Commissioner Karel Van Miert said this would neutralise the effect of the disputed funds while the European Court of Justice got to grips with whether the regional aid to Volkswagen was illegal.

The Commission is also studying a German document suggesting how to interpret a key clause in the EU treaty offering special treatment over subsidies to eastern Germany. This clause underpins Saxony's defence of its payments to Volkswagen (VW).

The Saxon stand over VW has been sparked by immediate worries that, without the full subsidies, the German car manufacturer might drop plans to build one of its two promised new plants at depressed Mosel and Chemnitz.

Car industry observers say VW, already in the middle of a cost-cutting drive, will have one too many plants if the two new factories go ahead.

Saxony is also looking to guarantee generous subsidies to seduce new industries and cut an unacceptably high unemployment rate. Such subsidies are, for example, widely recognised to have recently secured a promise by industrial giant Siemens to build a new semi-conductor plant at Dresden.

Most observers say the federal government's backing for Saxony's view that the EU should not interfere in east German funding is reluctant at best. But Bonn is frightened of the political backlash if it fails to support the new Länder.

On the other hand, west German Länder are already protesting about companies shutting down and setting up across the old Iron Curtain border because of attractive government grants. They would be the first to object if Brussels took no action to put a brake on new grants and subsidies.

The argument takes on something of an artificial air in view of the fact that a German government already faced with tight budgetary demands will not want to add much to the 73.6 billion ecu transferred annually from west to east Germany.

The VW case has focused attention on the need for Brussels and Bonn to agree a new framework for the award of subsidies to east Germany.

That debate had already been broached by German Economics Minister Guenter Rexrodt, Van Miert and Commission President Jacques Santer in May.

Saxony Premier Kurt Biedenkopf has suggested that east Germany should be given favourable treatment on subsidies until 2005.

As it stands, the Maastricht amendments to the EU treaty on subsidies for east Germany have an unlimited life with no date set for review.