Germany To Face Tough EU Scrutiny Over Opel Financing-Lawyers

The German government's plan to subsidize the purchase of General Motor Corp's (GM) European operations with government funding is likely to receive tough scrutiny in Brussels, say Brussels-based lawyers.

One of the main objectives of the rescue effort is to safeguard German jobs in an already fragile economy, and ahead of general elections. Still, if the survival of Opel-Vauxhall is guaranteed with public financing the commission will be forced to ask for some difficult cuts in return, lawyers say.

"The problem is that state intervention distorts competition," says Michael Schuette, a Brussels-based state aid specialist who has previously worked with the automotive industry.

According to the EU Commission's rules on state subsidies, "you can only provide support to a failing company if there is a restructuring plan, which includes capacity reductions," Schuette said.

The European automotive sector is especially vulnerable, as the car makers have only recently found their feet again, and countries have an interest in protecting their manufacturing base.

If the funding is used to artificially keep the car maker producing cars for which there are no customers, other European car manufacturers such as Volkswagen AG (VOW.XE), or French automakers Renault SA (RNO.FR) and PSA Peugeot-Citroen (12150.FR), would suffer.

Before you knew it "there would be a subsidies race, to ensure that the French car makers, for example, could compete with Opel," said another Lawyer closely following the current negotiations.

Another problem is that if the deal goes ahead with the state funding, it would not be out of the question for the commission to ask to up to 30% of capacity reduction at Opel factories, said one lawyer.

While the bloc's executive commission has been sensitive about cutting jobs in the real economy, "it is likely it will insist on closing factories, the question is how many and where," said Till Mueller-Ibold, a Partner at law firm Cleary Gottlieb.

The Opel-Vauxhall, provides about 50 000 jobs in Europe, half of which are in Germany. Other European governments with a stake in the future of Opel include Belgium, Spain, U.K., Poland and Sweden. Many are worried that the capacity reductions required by the commission might fall outside of Germany's borders due to the Governments heavy involvement.

"It is unlikely that factories will be closed only outside of Germany, but it is logical to see why the Belgian and U.K. governments are concerned about the current negotiations," Mueller-Ibold added.

Many of Europe's industry ministers are meeting in Brussels Friday to voice their concerns over the rescue of Opel, and to make sure that any subsequent deal will be fair to all European countries where GM has operations.

The German government is meanwhile struggling to reach a deal with GM, due to a lack of transparency over Opel's finances. It is widely accepted that the unit is too big for its operational base and needs to go through hefty restructuring to become profitable.

Earlier this week GM requested an extra EUR300 million from the German government, in bridge financing, on top of the EUR1.5 billion, which the government has already agreed to.

The financing would be mainly intended towards running costs of the car maker, as it is hemorrhaging money.

And therein lies the problem. The more government financing expected from Germany to facilitate the deal, the unhappier the European Commission is likely to be with the final outcome.

-By Peppi Kiviniemi, Dow Jones Newswires; [phone]; [e-mail]