Monti Seen Compromising over Subsidies

Chancellor Schröder and Germany’s car industry have been among the most vocal opponents to plans by the EU Competition Commissioner to impose a drastic cut in the permitted levels of public subsidies to big industrial projects.

Now Mario Monti has signalled that he may be willing to compromise.

According to EU insiders, the Commissioner’s plans to impose a general reduction of 75% on public subsidies to all projects requiring investments of 100 million euros or more met with such strong protests from member-states and industry associations that they have had to be modified.

The competition authority is now set to present a new draft directive setting out a multi-sector framework for subsidies in January.

The proposals it contains are, in the view of competition experts, more moderate than those originally planned.

Germany was one of a number of member-states that voiced opposition to any cut in the maximum level of subsidy permitted from the current 35% of the total sum invested.

Chancellor Gerhard Schröder last week argued in Brussels that there should be no change in the current regulations when these come up for review at the end of 2002.

But reports suggest that Schröder’s position was not adopted by German Finance Minister Hans Eichel in negotiations on this issue with EU Competition Commissioner Mario Monti.

According to Finance Ministry insiders, Eichel told Monti that the government would be prepared to accept a reduction of up to 50%, to be implemented in two stages, in permitted subsidy levels for all projects requiring investments of 50 million euros or more.

But Eichel is also reported to have argued the case for allowing exceptions to the subsidy-capping in the case of projects with potential knock-on effects for a structurally weak region. For Germany, this means eastern German projects such as the construction of Volkswagen AG’s "glass factory" in Dresden or BMW’s plant in Leipzig.

Under the Eichel proposals, such projects would be allowed to receive investment subsidies in excess of the maximum permitted level.

In fact, the automobiles industry is one of four "sensitive" industry sectors for which special subsidy conditions are available at present.

But under the Monti plans, these special conditions would be withdrawn and the four sectors would be brought within the general subsidy framework.

Not surprisingly, then, Germany’s automobile industry has been a further source of opposition to any attempts at a degressive erosion of subsidy levels.

With the exception of Porsche chief Wendelin Wiedeking, all the chiefs of the major car producers backed VDA industry association in sending a letter to the Commission threatening to favor non-EU countries as the targets of any future investment projects if the subsidy conditions were made any less advantageous.