BERLIN (Reuters) - German Chancellor Angela Merkel criticised U.S. subsidies to its auto industry on Tuesday, saying the aid threatened to distort competition and was not a long-term solution to the struggling sector's problems.
"Europe cannot just look on if someone offers subsidies and market forces are dispensed with," said Merkel in an interview on ARD public television hours before Barack Obama is due to be inaugurated as U.S. president.
"The future of the auto industry cannot, in the long run, rely on a state subsidy," she added.
With a deep recession looming, the outlook for the global auto industry is bleak and manufacturers have been forced to cut production due to a slump in demand.
The U.S. government has made billions of dollars available for its auto industry, including loans to General Motors, which has said its U.S. auto sales will this year sink to a 27-year low.
It has also pledged loans to automakers' financial arms.
European governments are worried the heavy U.S. subsidies would put their own industry at a disadvantage.
Earlier, Eurogroup Chairman and Luxembourg Prime Minister Jean-Claude Juncker also said he was worried about U.S. aid to its carmakers, and warned against "one-sided protectionism."
"It cannot be the case that U.S. carmakers are offered subsidies in the long term while that is not happening in Europe," he told German radio Deutschlandfunk.
EU Industry Commissioner Guenter Verheugen told a meeting in Paris on Tuesday that the EU would watch Obama's plans for the car industry closely and said the bloc would talk with Washington to ensure its measures were compatible with world trade rules.
The German auto branch accounts for around one in five jobs in Europe's biggest economy and has significant political clout.
"I am not against American companies surviving," said Merkel. "But it cannot be the case that subsidies which distort competition are paid over the long term."
She said there were clear World Trade Organisation rules on the issue.
EU governments last week agreed to boost help for their carmakers but called for a coordinated response to avoid a race for subsidies.
Details of European support have not yet been agreed but are likely to include tax incentives to buy new, fuel-efficient vehicles, subsidies to scrap old cars and more loans for manufacturers.
French Prime Minister Francois Fillon said on Tuesday Paris would announce measures for its car industry in the coming days in a package worth 5-6 billion euros.
(Reporting by Madeline Chambers)
