France to Lend $7.7 Billion to Bail Out Auto Industry

Companies must agree to stop French plant closures and job cuts and limit shareholder dividends and bonuses

Renault and Peugeot-Citroen will receive a six billion euros (US$7.7 billion) loan in exchange for a promise to halt job losses and rein in executive bonuses.

President Nicolas Sarkozy was to meet car manufacturers to discuss how to protect their key sector, which employs one French worker in ten, from the global economic storm. According the dailies Les Echos and Le Figaro, the president was to offer the firms three billion euros each if they agree to stop French plant closures and job cuts and limit shareholder dividends and bonuses.

Last month, Prime Minister Francois Fillon promised carmakers aid of five to six billion euros, and the amount could rise further if the state decides to help Renault Trucks, which is owned by AB Volvo of Sweden.

Sarkozy has made protecting France's iconic industries the central plank of his supply-led plan to ride out the global economic slowdown, but he will have to tread carefully to avoid triggering a row over protectionism. Already last week, he angered Eastern European governments by suggesting in a television interview that Peugeot should close a plant in the Czech Republic and bring production home to France, where many factories are under threat.

"I want us to stop out-sourcing and if possible in-source," Sarkozy said. "If we give money to the auto industry to restructure itself, it's not so we can hear about a new plant moving to the Czech Republic or wherever."

On Feb. 8, Czech Prime Minister Mirek Topolanek called Sarkozy's statement "incredible" and warned the anger it generated would undermine attempts to persuade Czech lawmakers to ratify the European Union's Lisbon Treaty.

Last week, France's junior industry minister Luc Chatel said Sarkozy would ask any car companies which receive state aid to "commit to making investments and locating production plants in France." This provoked a rebuke from EU Competition Commissioner Neelie Kroes, who warned Paris against protectionism, saying: "Raising barriers within Europe cannot be the way out of this crisis and we need to make that clear."

Other European countries are working on plans to support the manufacturing sector, but France is unusual in concentrating on measures to boost investment in firms rather then spending and credit for consumers.

France has unveiled a cash bonus to persuade motorists to trade in old car models for new, but the bulk of state aid to the sector will flow directly to the two main firms and their suppliers.

Sarkozy defended this stance in the same television interview last week, in the process also managing to offend Britain's Prime Minister Gordon Brown, who has chosen to cut sales taxes to seek a demand-led recovery. "If the British have done that it's because they have no more industry," Sarkozy said. "Gordon Brown can't do what I've done for the car industry ... because they haven't got one."

France has indeed maintained a stronger auto sector than Britain: the second largest in Europe, directly or indirectly employing 2.5 million people. Renault and Peugeot earned more than 100 billion euros in 2007.But that is not say that France is not in difficulty. Both Renault and Peugeot have slashed production and shuttered plants, sub-contractors have closed and hundreds of workers have accepted redundancy offers.

Copyright Agence France-Presse, 2009

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