Germany and France moved to scrap the EU's 2035 climate-neutral goal for new cars and pivot to a more industry-friendly track. "We reached an agreement between Germany and France on future policy toward the automotive industry," German Chancellor Friedrich Merz said in Brussels. "With this, the combustion engine ban is history."
Their joint approach aims for a 90% cut in auto emissions by 2035, with no obligation to offset the remaining 10% using green steel or renewable fuels. Earlier this year, the European Commission put forward an offsets-centered overhaul that would lift the de facto prohibition on combustion engines in new vehicles by 2035. Under the Franco-German blueprint, clean fuel technologies would count toward the 90% goal.
The deal blends Germany's push for looser CO2 rules with France's demand for a strict "Made in Europe" definition, and together they plan to press for a major dilution of a core part of the EU's 2050 net zero program.
The shift offers more time and flexibility for Volkswagen, Stellantis and Renault, and for suppliers like Valeo, which provides parts for models including the top-selling Renault 5. Valeo CEO Christophe Perillat called the agreement "fantastic news," saying the sector is working "in a coordinated manner to defend the European industry."
Industry groups had argued that the earlier framework, which effectively stopped sales of new combustion cars in 2035, put Europe's automakers and their workforce at risk. In 2024, autos represented over 10% of manufacturing employment in the EU; this week, Renault's Francois Provost said production across the region would have to be cut if the policy stayed unchanged. On the other side, T&E's Anna Krajinska said "Germany and France are making a historic mistake," arguing the political move could ultimately harm Europe's auto sector.
CLEPA, the Brussels lobby for roughly 3,000 European car-parts suppliers, said the "Made in Europe" threshold in the deal is lower than it sought and cautioned that 150,000 high-skilled supplier jobs could be jeopardized.
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France and Germany say they want to reshape the industry while keeping production in Europe. "We have a clear ambition: to successfully transform our automotive industry, whilst maintaining our climate targets and our production in Europe," French President Emmanuel Macron posted on X after the Brussels summit. Lars Klingbeil, Germany's foreign minister, said the decisions were right for "hundreds of thousands of employees" and urged automakers to invest in German plants and secure jobs.
Markets reacted quickly. Volkswagen shares climbed as much as 4.1% before pulling back. At 1745 p.m. in Paris, Stellantis traded 2.8% higher.
The timing matters. Chinese rivals such as BYD and SAIC's MG are gaining ground as EV demand jumps alongside record fuel prices linked to the war in Iran. Separately, the EU and China recently reached an understanding to cap China-made hybrid imports at 350,000 vehicles in 2027, versus about 800,000 expected this year. Shipments jumped in part because hybrids fell outside the EU's 2024 duties on Chinese battery-electric vehicles.
There is also a UK dimension. Paris and Berlin signaled that Britain could access European subsidies under "Made in Europe" rules in the Industrial Accelerator Act, long a UK priority. Eligibility would require the UK to bring its rules into line with the EU's approach to foreign direct investment and trade defense, mirroring steps the bloc has applied to China.
Nothing is final until the EU signs off. Member states and the European Parliament must still sign off on revisions to car-emissions rules and the Industrial Accelerator Act, and the Irish EU presidency is targeting year-end to wrap up the car negotiations. EU leaders also met in Brussels to discuss ways to boost industrial competitiveness.
For your portfolio, the immediate takeaways are clearer targets and more time for combustion technology, which lifts incumbents and their suppliers, as seen in VW and Stellantis's moves. The sector remains central to Europe's jobs base, with autos making up more than a tenth of manufacturing roles in 2024 and suppliers warning about 150,000 high-skilled positions tied to how "Made in Europe" is set. The bottom line: watch the final EU language, China hybrid caps, and fuel-price-driven EV demand, because together they will shape the next leg of Europe's auto earnings.
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