VW upbeat over subsidy deal

Date: 27/03/1997

By Chris Johnstone

COMPETITION officials are examining an agreement between the German government and car giant Volkswagen aimed at burying the unprecedented row between Bonn and Brussels over subsidies to eastern plants.

Germany's economics ministry is confident that it has found a peace formula which will be acceptable to Competition Commissioner Karel van Miert.

But officials in Brussels are far more cautious and hint that it is very premature to claim that an end to hostilities is in sight.

Germany and the European Commission only averted a head-on clash last September through an agreement to freeze a contested 48 million ecu in aid for Volkswagen investments in former East Germany while a solution was being sought.

That solution now appears to centre on Volkswagen's promise to step up its investments at its plants in Kassel, Hesse.

The increased spending at its main transmission and gear box unit and spare parts centre could help to make the Saxony aid acceptable by diluting the strength of the overall subsidies received by Volkswagen. Regional government officials from Saxony confirm the scenario, although the federal government and Volkswagen are refusing to give details.

“There is a proposal the Commission is looking at,” said an economic ministry official. “Our minister says a solution could be found in a matter of days.”

This optimism is echoed at Volkswagen's headquarters in Wolfsburg. “We are confident we will get all the money,” said a spokesman.

The other solution being mulled over by Van Miert would have involved a cut in production capacity at one of Volkswagen's EU plants - an option which Saxony did not favour since it would have given the impression that it was unloading its problems elsewhere.

Bonn, Brussels and Volkswagen were originally supposed to hammer out a deal by the end of last year, but competition officials have not been pressing Germany since the disputed subsidies are still frozen.

The Commission will not be alone in vetting the subsidy solution once it has been revealed. Other EU carmakers will also be scrutinising it to see if it threatens to give Europe's biggest producer too many advantages.

Opel, the German subsidiary of US manufacturer General Motors, wrote to the Commission with its worries when the subsidy row blew up last September. Opel, like Volkswagen, produces cars in west Germany and the former German Democratic Republic.

“If the increase in investment takes place, I cannot see any grounds for other car manufacturers to complain,” said a Saxony source.

Bonn could congratulate itself on performing a minor miracle if it can square all-comers and leave them satisfied with the result. If not, then the same mixture of factors that made the September row so explosive is still in place.

Nothing in the European car industry has changed to dampen fears of unfair subsidies, with manufacturers currently in the middle of a fierce price war as newcomers from Japan and Korea add to severe over-capacity, especially in the middle-of-the-range car market.

Neither has the German political and economic cocktail, which made the Volkswagen issue so explosive, changed.

Bonn is still caught between its European commitments and the protests of western Länder at aid to former East Germany on the one hand and vociferous lobbying by Volkswagen and the regional government of Saxony on the other.

With German unemployment peaking at a postwar high, the Volkswagen aid to its Passat assembly lines at Mosel and engine assembly plant at Chemnitz is a sensitive test for the federal government's balancing act in curbing resentment in the west towards eastern aid while at the same time appearing to deal with the jobs haemorrhage in the eastern Länder. Both Mosel and Chemnitz are unemployment black spots, even by east German standards.

The federal government reluctantly fell into the slipstream of Saxony Premier Kurt Biedenkopf's attacks on Brussels last year when Volkswagen pumped up the pressure and warned it would pull the plug on 3,000 car plant jobs if the promised subsidies were not delivered.

One worrying phenomenon for Bonn was how easily the other eastern Länder joined in the attacks on the EU.