What's driving the car wars?

Sergio Marchionne, Fiat’s chief executive, takes the honours for making last week’s most incisive comment on the German government-sponsored deal to sell Opel to a Canadian-Russian consortium. Referring to the slump in the car industry, he said disapprovingly: “In Europe, as a result of this crisis, there’s not a single plant that has shut down.”

He was speaking, appropriately, on the eve of the biennial Frankfurt Motor Show, an event at which some industry executives predicted gloomily that Europe’s car industry might not return to full health until 2015. As their remarks made clear, the controversy over the sale of the European arm of General Motors is industrial as much as political.

From an industrial viewpoint it is about how to restructure a sector that is the backbone of European manufacturing, supporting 12m jobs, but in which production overcapacity, according to some experts, may be as high as 30 per cent for passenger cars. From a political viewpoint, it is about how to uphold European rules on fair competition and state aid at a time when the recession is driving up unemployment and Germany, home to four Opel plants, faces a general election next Sunday.

A third and especially intriguing feature of the deal, combining both politics and industry, is the Russian connection. A sizeable chunk of the €4.5bn ($6.6bn, £4bn) in subsidies Berlin is offering to smooth Opel’s sale to Canada’s Magna International and Russia’s state-controlled Sberbank appears destined to modernise the Russian car industry. German Gref, Sberbank’s chief executive and a former government minister of ethnic German origin, hopes to use the deal to bring new technology to Russia’s auto sector and to produce low-priced cars at GM’s St Petersburg plant.

The fundamental criticism of the Opel deal is, however, not that it will benefit Russian motorists but that it drives a cart and horse – so to speak – through European Union rules on state aid to business. Belgian, British and Spanish politicians complain that Berlin offered the subsidies so that, when the time comes for Magna to reduce capacity, job cuts and even plant closures will hit their countries rather than Germany.

Naturally, the German government rejects allegations of wrongdoing. “We don’t rescue companies, we are simply giving them a chance to survive the financial crisis,” Angela Merkel, the chancellor, told the Süddeutsche Zeitung newspaper last weekend.

Visiting the Frankfurt Motor Show on Thursday, however, she went further, promising that, if her centre-right Christian Democrats are re-elected, she will help the domestic industry develop promising technologies. “It might seem like quasi-protectionism. But I think we would be well advised to see how Germany can pool its potential as a 21st century car nation as best as possible,” she said.

It was telling, though, that Dirk Pfeil, a member of the Opel trust, set up by the government to handle the company’s affairs after GM filed for bankruptcy protection in June, criticised the subsidies. Politics not economics, he implied, had driven the deal. “The sale to Magna is exactly the sort of aggressive industrial policy that Germany is always being criticised for – and rightly so,” he told Bild newspaper. “The job cuts planned by Magna favour Germany, and the other European countries with GM plants aren’t going to let that just happen.”

Similar views are held by Karl-Theodor zu Guttenberg, Germany’s independent-minded economy minister. But perhaps the most devastating attack came from Jürgen Thumann, the newly appointed president of BusinessEurope, the Continent’s top business lobby. A former head of the German industrialists’ federation, he told the Financial Times this week that he was “totally against” the Merkel government’s deal.

Echoing Mr Marchionne’s scathing analysis of Europe’s unwillingness to scale down capacity in its car industry, Mr Thumann said: “If you believe in the social market economy and competition, you have to accept that the weakest will leave the market they’re serving and the strongest will survive. If governments try to influence this process, it starts getting very dangerous.”

There are, however, no easy answers. When the steel industry was in crisis in the 1970s, the European Commission had the authority, under the 1951 European Coal and Steel Community pact, to declare a “manifest crisis” and order compulsory curbs on production. Today’s European car industry may require similar restructuring but the Commission lacks the legal powers to impose it.

More than a few analysts see the Opel controversy as symptomatic of an outbreak of malignant economic nationalism that has infected the European body politic since the western world’s financial system came close to collapse last year.

“The credit crunch and world recession have blown apart EU finance rules,” says Denis MacShane, a former UK European affairs minister. “States have done their own thing and boasted of national protection for threatened industries or workers.”

It started in the financial sector in September and October 2008, when one government after another announced emergency measures to prop up banks and protect depositors without consulting fellow EU member states.

Scrambling to contain the damage, EU finance ministers set out a list of principles for bank rescues, stating inter alia that governments must respect state aid rules to ensure a level playing field; and that one country’s actions must not have negative spillover effects on others.

However, the contagion soon spread to the auto industry, when Nicolas Sarkozy, the French president, offered domestic carmakers billions of euros in state aid on the proviso that they kept jobs and production in France rather than moving elsewhere in the EU. Sensing danger, the Commission forced the withdrawal of this condition but approved the aid nonetheless. Meanwhile, Paris made clear it was relying on the carmakers’ sense of “moral obligation” to prevent job losses and plant closures in France – and the car manufacturers appear to have got the message loud and clear.

For Brussels the lesson is obvious. Few tasks are more fundamental to the EU’s success as a multinational, rules-based entity than the defence of the single market and the enforcement of state aid law. “If we can get through the next five years with the single market fully intact, we can congratulate ourselves on a job well done,” says one high-ranking Commission official. “Quite simply, it’s the most important challenge we face.”

The Commission’s credibility is at stake. Over the past 15 years, the institution that is the guardian of the EU’s rulebook has turned itself into one of the world’s most powerful and energetic regulators, investigating suspected cartels, intervening in takeover cases and opening up once protected national industries to competition. As corporate giants such as Boeing and Microsoft can testify, no company is too big to be taken on.

Under José Manuel Barroso, who on Wednesday won a second five-year term as Commission president, EU regulators have been especially aggressive in levying fines for infringements of competition rules. Since it assumed office in 2004, the Barroso Commission has imposed fines totalling almost €10bn; between 1990-94, when data were first collected, it was a mere €567m.

This relentless pursuit of malefactors would be wide open to attack if the impression were to gain ground that the Commission was bending the EU’s state aid rules to favour particular companies under pressure from national governments. But the implications of the proliferating challenges to the single market go further still.

European monetary union itself depends to no small degree on the integrity of the single market. During the euro’s 10-year lifespan, the EU has defied gravity by operating a single currency without a common fiscal policy, common government bonds or common eurozone representation in global financial institutions.

But without the single market the euro’s future would be precarious in the extreme, as governments sharing one currency watched each other take measures deliberately intended to gain a competitive advantage over their nominal partners.

Small wonder, then, that Mr Barroso says he will make a priority of defending the single market in his second term. “The recent crisis showed that there remains a strong short-term temptation to roll back the single market when times are hard,” he said in a set of policy guidelines for the next Commission published before his reappointment this week. “The Commission will remain an implacable defender of the single market. ”

One can only hope that he is as good as his word.