In the United States, local state governments engage in 'anything goes' bidding wars to attract new assembly plants. But the European Commission is working hard to discourage similar contests in Western Europe. In June, the commission agreed to a one-year extension on its strict limits on subsidies for automakers. Those limits were to expire Dec. 31.
The commission wants to minimize competitive distortions that occur when governments subsidize automakers. The Commission first set limits on such subsidies in 1989. The agency took action in response to the excesses of the 1970s, when several European countries lavished huge subsidies on the auto industry.
The risk of 'undue distortion of competition' is particularly high in the automotive sector, said Michael Tscherny, a spokesman for the European Union's competition commission. That is because new assembly plants worsen the threat of excess production capacity. In turn, automakers engage in fierce price competition, which hurts profit margins. As a result, big subsidies to an automaker in one region can unfairly hurt rival carmakers elsewhere, Tscherny said.
Automakers are allowed to obtain regional subsidies if they build new plants in areas designated by the European Union. The organization determines whether the investment will promote regional development. But the commission also measures unfavorable consequences, such as the threat of excess production capacity. The Commission analyzes these factors:
Necessity of the aid: The automaker must prove that it has a viable alternative location for its assembly plant. If there is no other candidate site, the subsidy is vetoed.
Site handicaps. The commission compares the project costs of the site with that of competing locations. If the site in question is more expensive, the local government may offer a subsidy large enough to cancel out the added cost.
Effect on the industry. The Commission measures a project's impact on the industry's production capacity. If capacity in a particular product segment is increased, the subsidy is reduced.
Bailouts. Local governments are allowed to support a failing automaker or plant. But the automaker is not allowed to use the money to boost production capacity.