EU Probes German Aid to DaimlerChrysler

A European Union investigation into state subsidies is set to cause further friction between the Commission and the German government, which has repeatedly accused Brussels of damaging the country's industry.

The EU said on Wednesday it would look into the German government's plans to grant 52 million euro ($51 million) in aid to the country’s second biggest car manufacturer, DaimlerChrysler, to help with the expansion of its Berlin-Marienfelde plant, the company's oldest production site.

Government grant part of expansion plan

DaimlerChrysler's plans to invest about 200 million euro ($196 million) in the Marienfelde engine plant in south Berlin have come under scrutiny due to European concerns that the government contribution to the investment could violate EU fair competition rules.

The Commission’s probe will focus on DaimlerChrysler's plans to upgrade the factory in order to build a new high-performance diesel engine for its luxury cars.

DaimlerChrysler says the investment in the flagship Berlin plant will create 729 jobs in the production of the new 6-cylinder engine and camshafts for the Smart car and the luxury Maybach.

EU says German co-operation has been 'insufficient'

The Commission claimed that cooperation from the German government had been insufficient and that evidence provided failed to prove that the aid in agreement with the EU's competition guidelines.

Berlin notified the Commission in March that it intended to grant regional aid to the plant. Now with the investigation likely to begin next week, the German authorities have one month to provide regulators with additional information that justifies the grant and proves its legitimacy.

The Commission's department for monitoring industry competition, however, is not convinced that DaimlerChrysler adequately explored all alternative options before deciding to expand the plant in Berlin.

State Aid must not exceed money saved by moving sites

Under EU guidelines, state aid for business projects must not exceed the amount of money the company could save by moving a project outside the country. DaimlerChrysler said it considered moving production to plants in Hungary and in the Romanian city of Cugir, but the Commission has admitted doubts about whether these considerations were ever seriously discussed.

A spokesperson for DaimlerChrysler told Reuters that any issues held by the EU surrounding possible expansion could be resolved. "We are confident that we can answer any of the questions that remain."

The company also mentioned expanding their sites in the German state of Brandenburg, but then decided that this was not financially viable enough to warrant a move away from Marienfelde.

Subsidies must go over 18 per cent of total investment

The EU regulations also state that government funded subsidies to companies in the Berlin district cannot exceed 18 percent of the total value of the company's investment. At the moment, the state aid to DaimlerChrysler appears to supercede that level, accounting for almost 25 percent of the company’s total cost.

Competition experts said the probe, which could last up to 18 months, could be used to persuade the German government to cut the amount of planned state aid or force DaimlerChrysler to reduce its plans for expansion.

DaimlerChrysler declined to confirm its plans for the Marienfelde plant but said it was always considering possibilities regarding expansion of its production sites.