VW talks move into top gear

Date: 12/12/1996

By Chris Johnstone

THE subsidy battle involving car giant Volkswagen, the German government and the European Commission is threatening to erupt again as time runs out for a deal to defuse this year's most bitter aid dispute.

Germany averted a head-on clash with the Commission in September by sealing a deal with Volkswagen to freeze 48 million ecu in subsidies destined for Europe's biggest car company.

This neutralised the effect of disputed aid already paid to two plants in Saxony, in former East Germany, and momentarily buried what Competition Commissioner Karel van Miert described as the biggest challenge ever to its state aid rules.

But that deal expires at the end of the year, leaving the German government facing the awkward prospect of court action by Volkswagen to unblock its promised aid.

“Talks are going on at almost the highest level,” said a federal government official. “Volkswagen is keeping very quiet on its intentions.”

The Commission is currently in the comfortable position of watching from the sidelines as the German government tries to broker a deal with Volkswagen which will not pitch it into a fresh battle with Brussels.

“They know what is required by us. They must reduce the investment in Saxony or elsewhere. Otherwise there is no deal,” said a spokesman for Van Miert. “If the contested money is paid, we will immediately seek a court injunction.”

Volkswagen refuses to make any comment which could endanger its negotiations with the government, with a spokesman at the car manufacturer's Wolfsburg headquarters stating simply: “We hope for a deal by the end of the year.”

One scenario still being discussed is the possibility of Volkswagen cutting production capacity elsewhere in German plants so that it can claim full support for its Saxony units. “That is one possibility, but there are others,” said a source.

Since September, the German government's negotiating position has strengthened slightly, as the car giant's warning that it would close one of its Saxony plants appears a little less credible three months down the line.

Volkswagen's threat to drop plans for investment at the Passat assembly in Mosel and an engine assembly plant at Chemnitz is less convincing now that its programmed funding has almost been completed. The two plants employ a total of 3,000 workers in one of Germany's employment black spots.

Car industry experts warn that Volkswagen is in the middle of a cost-cutting drive and the firm still has excess capacity amounting to one or two car plants.

However, Bonn has not come up with a promised memorandum suggesting changes to the way the Commission treats subsidy cases in former East Germany.

“Lawyers are looking at it, but there is nothing precise,” said an official. Detailed suggestions on how to interpret a key clause in the EU treaty offering the former East Germany special treatment might never surface, said sources.

It was this clause which underpinned Saxony's defence of its VW payments and its attempts to use generous aid incentives to tempt other multinationals to the region.

Saxony Premier Kurt Biedenkopf has suggested that former East Germany should be given a favourable framework for subsidies until 2005. As it stands, the Maastricht Treaty provisions on subsidies for the region have an unlimited life, with no date set for review.

At the same time, Bonn has angered the western Länder with its decision to boost aid to West Berlin by redefining it as officially part of former East Germany for regional aid purposes.

Following a recent struggle with the Commission, aid coverage in the western Länder was cut from 22&percent; to 20.8&percent; of the population eligible for government subsidies. Protests had already been made there about companies shutting down and setting up on the other side of the old Iron Curtain because of attractive government grants.

They would be the first to howl if there was no prospect of a Brussels brake on new grants and subsidies to the east.