EU probes aid to BMW

BMW could make the 3-series cheaper abroad

The European Commission has launched an investigation into Germany's plans to grant state aid to a new BMW car factory in Leipzig.

"The investigation aims at establishing whether the planned aid meets the requirements of the state aid rules for the automobile sector," a Commission statement said.

Germany could be forced to withdraw or reduce the planned aid package if the Commission rules that it is in breach of its rules.

At worst, this could put the viability of the project at risk as the car maker's plans to invest 1.2bn euros ($1.06bn; £740m) in the factory hinges on an additional aid injection worth 418.6m euros.

Angry chancellor

The threat has angered the German Chancellor Gerhard Schroeder who has attacked what he sees as anti-German bias by the Commission.

Mr Schroeder, who is fighting a tough re-election battle ahead of Germany's September poll, has gone head-to-head with the Commission over several issues in recent weeks.

These include the Commission's proposal to reform the way cars are distributed within the European Union.

Mr Schroeder has opposed the planned reforms in a bid to assist the struggling German automotive sector.

Cost disadvantage

The planned aid to BMW would be paid to compensate for the additional cost of building a new factory in Germany rather than in the neighbouring Czech Republic where costs are lower.

And although the Commission has acknowledged that it would be cheaper to build the factory across the border, it is not ready to accept the way BMW and Germany have calculated the costs.

The Commission has set out to establish whether the cost differential between the two potential sites are in fact smaller than currently estimated by BMW and the German government.

"The main doubts... concern the level of the aid and the question of whether the amount proposed does not exceed the 'regional handicap' of the Leipzig site compared to BMW's alternative location in the Czech Republic," the Commission statement said.

Election year

The Leipzig factory, which is set to produce the BMW 3-series, would bring 10,000 new jobs to the employment-starved region.

This would be a boost for the German Chancellor Gerhard Schroeder who is facing a tough fight for re-election in September.

And although the Commission is unlikely to reach a decision ahead of the election, the looming threat of an intervention by Brussels could damage Mr Schroeder's chances.

As such, the Commission's probe could pose a greater threat to Mr Schroeder than it does to BMW, which remains confident that the aid will be approved in the end.

"This does not surprise us. It is within the framework of the process we expected," said a BMW spokesman.

"We assume we will receive the full grant of 35% [of the costs of building the Leipzig factory] as planned."