The French government has made a U-turn on its proposed EUR6.5bn aid plan for Renault and Peugeot-Citroen, dropping its previous conditions relating to the factories’ locations and obliging manufacturers to favour French suppliers when making purchases.

The news came at the weekend just ahead of an EU summit on the recession.

The European Commissioner for Competition, Neelie Kroes, received a last minute letter from Luc Chatel, the French industry minister, in which he withdrew the protectionist proposals which had caused diplomatic uproar across the 27-nation bloc.

Declaring the package now legal under EU state aid rules, the Commissioner said: “I’m satisfied with the guarantees relating to the absence of protectionist measures in the French plan.”

The removal of its most controversial elements allowed EU leaders to swerve round a potentially damaging row about protectionism at the summit and allowed French President Nicolas Sarkozy to represent himself at the summit as a champion of competition rules rather than their opponent.

In Brussels, denying a protectionist tendency, the president said member countries within Eastern Europe had actually thanked his government for an offer of financial support to carmakers, given that French firms had extensive interests in the region.

Council officials told that premiers of car making countries had agreed that national aid to the industry was not in itself protectionist – providing it conforms to European Commission rules. They said it was “natural” for Germany to support Opel, Italy helps Fiat and Sweden, Saab , and so on.

After the meeting Sarkozy underlined this, saying: “If the head office doesn’t survive what will happen to the company’s plants in eastern Europe?”

He defended his original proposals, comparing Europe’s aid to the car industry with the US$18.5 billion emergency bailout for manufacturers in the USA.

The summit’s final communiqué told the European Commission to keep an eye on other EU country’s bailout plans to ensure they also complied with EU subsidy laws: “to ensure rapid and effective information on envisaged national measures and to closely monitor actions taken in third countries, as part of the European framework already outlined for the automotive industry.”

The Spanish and Italian governments have already outlined their national plans for carmakers, for instance and these are being assessed by the Commission.

But the European business group, Eurochambres , damned the three-hour lunch summit as “an unproductive political showpiece” which lacked any “tangible action.”

Be that as it may, EU officials reminded that another such summit – the regularly scheduled spring meeting – will take place in three weeks. They hinted that by then the EU might be in a position to take some robust decisions to meet the economic crisis with its own resources.

David Howarth

See also: FRANCE: Sarkozy’s ‘protectionist’ remarks spark diplomatic row