Amid Crisis, Cars Start to Drive Europe Apart

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An employee on the assembly line of the French car maker group PSA Peugeot Citroen, on November 5, 2008 at the Sochaux factory, central France.

When carmakers outsource most of their components, assemble their products in different countries around the globe, are majority-owned by foreign shareholders and sell mainly overseas, does it still make sense to promote them as national champions?

Nicolas Sarkozy thinks so, albeit with some controversial conditions. Just before unveiling an $8 billion loan for French carmakers Renault and PSA Peugeot Citroen last week, the French President suggested the aid should be conditional on them packing up their plants elsewhere in the E.U. and returning all production to their homeland. "If we are to give financial assistance to the auto industry, we don't want to see another factory being moved to the Czech Republic," he said, referring to Peugeot Citroen's seven-year old Czech plant. (See pictures of Sarkozy in the U.K.)

Such talk of repatriation is supposed to be anathema in the European Union, where the internal market is a core, treaty-enshrined ideal. But Sarkozy's protectionist language ripped off the veneer of European unity over the economic crisis. "The French have signaled that they are willing to do things they know are illegal under E.U. law," says Katinka Barysch, Deputy Director at the London-based Centre for European Reform (CER). "But if one E.U. country goes down this route, others will feel they have to follow."

It is no surprise that the row revolves around cars, an industry badly hit by the downturn. Sarkozy's loan package was announced the day Peugeot Citroen revealed 11,000 job cuts worldwide. Sales at German firms such as VW, Europe's biggest carmaker, dropped 16% in January, BMW, the world leader in luxury autos, was down 22% and Daimler AG's Mercedes unit fell 35%. No surprise that European carmakers are pleading for an immediate $19 billion cash injection from the E.U.

Auto manufacturing is Europe's biggest industry, employing some 2.2 million people directly, while another 10 million are indirectly involved through a long supply chain. Car manufacturers' association ACEA says passenger sales in Europe fell 7.8% in 2008 and are expected to drop a further 15%. (January's figures are already down by 27% on a year ago). ACEA has called for an additional $51 billion in soft loans to help the industry invest in the cleaner cars needed to hit E.U. climate change goals, and to hold onto highly skilled workers. (See pictures of car art.)

Last December, E.U. leaders agreed on a joint $250 billion economic stimulus plan for the region's economy. But since then, many governments have announced their own national measures aimed at supporting their own banks or economic growth. And now individual sectors are beginning to line up for handouts.

Sarkozy is not alone in responding to cries for help from the car sector. The U.K. has set out a $3.4bn rescue package for its beleaguered car industry, even though it is mostly foreign-owned; Spain has stumped up $5.1 billion in public cash to bail-out car firms; and Germany has set aside $1.9 billion to pay owners to junk their old cars and buy something new. At the same time, the U.S. government has handed $17.4 billion to GM and Chrysler, a move that European carmakers say leaves them at a competitive disadvantage. (See pictures of the remains of Detroit.)

The proliferation of national measures has alarmed the European Commission, which fears that France and others will use the downturn to undermine market and competition law. Commission President José Manuel Barroso pledged to scrutinize the French plan to make sure it worked "with the grain" of E.U. rules and maintained the integrity of the single market. "Some think that retrenching within their own group, their own region, their own country is the right response," he said. "But this carries the risk of unilateral reactions leading to a vicious downward spiral."

Slovak Prime Minister Robert Fico said his country, which also hosts a plant owned by PSA Peugeot Citroen, could launch retaliatory measures against Paris. "Calls for such brutal protectionism are not helping anyone," he said. "If one country starts behaving like this, for example France, then we will send Gaz de France home."

The Czechs, who currently hold the E.U.'s presidency, are seething at Sarkozy's threats. Czech Prime Minister Mirek Topolanek has announced a special E.U. summit in Brussels for March 1 devoted to protectionism, and another in Prague in May to examine jobs and unemployment.

Some interpret Sarkozy's comments as sniping that the Czechs are not up to the task of running the E.U., a task they took over from Sarkozy himself at the start of the year. There is also whiff of 'Old Europe' sneering at the E.U.'s newer eastern European members. But Hans Martens, chief executive of the European Policy Centre (EPC), says it is more a reflection of a Gallic instinct to intervene.

"Sarkozy's just had a major strike, and he hopes this will keep a lot of people from demonstrating and improve his ratings," he says. "That is combined with the gut reaction of the French to protect, to be interventionist, to centralize. But more importantly, his talk about repatriation undermines the concept of the E.U.'s single market. And when it gets to this level, there is good reason to be afraid."

See the 50 worst cars of all time.

See pictures of car art.