Saxony battles Brussels in VW subsidy row

The robots on the assembly line and their human assistants do not have much time to worry about Europe's future.

Every two minutes another Golf arrives on its spiralling journey around the hall of the cavernous Volkswagen factory, each completing the course in 20 hours.

The new plant at the edge of Zwickau is the pride of the company and the most potent symbol of eastern Germany's renaissance.

Its fame is spreading far and wide, but in the wake of fame has come envy, turning its vaunted efficiency into a source of embarrassment.

The European Commission has ruled that VW must return the subsidies it received from the region of Saxony and said the case may touch off a "subsidy war" if left unchallenged.

"We are confronted here with an illegal situation. If VW spends the money, we can only take this to the European Court of Justice," the Competition Commissioner, Karel van Miert, said.

But the Land Prime Minister, Kurt Biedenkopf, told Brussels to mind its own business. He has handed over part of the sum and is threatening to sue the Commission. Saxony's defiance has put Germany on a collision course with Europe.

If Europe holds firm, VW threatens to move farther east, to countries in Central Europe beyond the Commission's reach.

"I think that if the right decision is not given, Volkswagen must consider taking its production elsewhere," said the Zwickau plant's spokesman, Gunter Sandmann. He said it was not a bluff, in what has become a spectacular game of poker.

At stake are 3,000 jobs at Zwickau and Chemnitz near by and 10 times as many working for outside contractors, the suppliers that feed the assembly lines "just in time", and the service sector.

The plant's importance to the local economy is unquestionable. The rubble of the old Trabant factory has been cleared away but Zwickau's streets are still lined with derelict red-brick workshops and industrial monuments of a bygone era. A third of the pre-1990 population of 140,000 fled to wealthier parts in the west, yet unemployment still stands at 17 per cent, not counting those on temporary job-creation programmes.

"Volkswagen gave us the only great hope here after the changes," said Jens Rothe, a former Trabant worker and then fitter-turned-chairman of the works council at the new plant.

Mr Rothe, 26, recently attended his school's 10-year reunion. About 20 per cent of his former classmates have gone west and 15 to 20 per cent are on the dole.

The only other industrial employers in the former factory town are the brewery and a chemical plant that keeps shedding its work-force.

It sounds bleak but Zwickau is one of eastern Germany's success stories, and Saxony the main engine of the former German Democratic Republic's resurgence. Away from the warehouses, the spruced-up town centre oozes prosperity, shops, restaurants and hotels wallowing in money sucked in by the factory on its northern edge. A few Trabants discreetly parked in sidestreets are all that remind inhabitants of their inglorious tradition. In place of stores devoid of consumer goods, residents are spoilt by modern malls, showrooms for air conditioning systems and Mercedes dealerships. Six years after reunification, the town is in danger of yuppification. Prices are significantly lower than in the west, the service incomparably better.

The future of the region seems bright. Siemens is building a DM4bn (pounds 1.8bn) microchip factory in Dresden, the Saxon capital, while investment pouring into Leipzig is set to transform it into one of Europe's great trade centres. Motorways and high-speed rail networks are coming, the new telecommunications system is state of the art, and energy and water networks built to cope with soaring demand are nearly complete. Saxony's cultural scene, too, is throbbing with excitement. In short, it is not the sort of place, the EU argues, which needs vast amounts of taxpayers' money to stay afloat. Shortly after 1990 the Commission approved the full VW investment package, which the company then suspended during the slump in 1992-93.

Now VW wants to complete the project, to make the plant ready for production of the new Passat in autumn and the updated Golf model that will start rolling off next year.

The buildings already stand, but without new equipment they, and the rest of the plant, are useless. The sum in question is DM1bn, of which Saxony is prepared to pay DM780m. The Commission says that is DM240m too much.

The Saxons are adamant that the Commission is not fit to make such a decision. "If you are in Brussels, you can't tell if some region needs five million marks to help stop unemployment," argued Mr Biedenkopf, in the most forceful demonstration yet of what the Germans mean by the word "federalism".

DYNAMIC REGION THAT IS THE MAIN POWERHOUSE OF FORMER EAST GERMANY

Area: 7,110 square miles

Population: 4.6 million and falling

GDP per head: pounds 18,300

Main sources of income: cars, chemicals, porcelain, electronics, trade fairs, government subsidies

Contributions to world civilisation: Friedrich Nietzsche; the mouth organ.