French carmaker PSA Peugeot Citroen shocked France on Thursday with an announcement that it will cut 8000 jobs, sparking union anger and underlining the country's competitiveness problems.
Unions slammed the news as a "declaration of war" and an "earthquake," with the hardline stance certain to add to the problems facing the new Socialist government as it deals with France's flagging economy.
President Francois Hollande was elected in May on a promise to put the economy back on track, focusing on growth rather than austerity measures adopted elsewhere in Europe in the face of the eurozone debt crisis.
Hollande has expressed his "deep concern" over the cuts to the government, a source in the Elysee Palace told AFP, and has told officials "to do everything possible to limit the social consequences of this plan."
Prime Minister Jean-Marc Ayrault said the layoffs were "a real shock" and announced that the government would present its rescue plan for the struggling auto industry on 25 July.
Peugeot shares initially jumped on news of the layoffs, but then tumbled to their lowest level in more than 20 years after Minister of Industrial Renewal Arnaud Montebourg said the government did not accept the plan.
"We do not accept the plan in its current state," Montebourg told the Senate, without saying what pressure the government could bring to bear on the company.
"There is, I think, a duty by Peugeot vis-a-vis the nation of France," Montebourg later said to French television.
Global Equities trader Xavier de Villepion said: "The fact that the government is opposed to this plan is a bad sign. The group will have to make very high payouts, apparently more than planned, and that's creating a lot of uncertainty, leading investors to sell PSA shares."
The stock recovered slightly before trading closed but still ended the day down 1.74 percent to 7.02 euros.
Montebourg said he had named an expert, Emmanuel Sartorius, to look at the company's finances and decide whether the layoffs are "necessary and proportionate". Sartorius is to present his conclusions by the end of July.
The auto industry is strongly unionised and a major employer, with job losses there having a knock-on effect on the wider economy.
PSA, France's biggest carmaker and second in Europe to Germany's Volkswagen, said it expected the European market to shrink eight percent this year and had to adjust its business.
For 2007-12, the market is down 23 percent, it said, compounding problems which left its plants operating at just 76 percent of capacity in the first half of this year.
As a result, the auto division is expected to report an operating loss of some €700-million (860-million) for the first of half of 2012, producing overall a net loss for the period.
PSA said it would cease production at its historic Aulnay site north of Paris which employs 3000 people, with 1400 jobs also going at its Rennes plant in Brittany.
Some 3600 jobs are to be cut across the corporate structure.
The company employed 100 000 people in France at the end of 2011.
The Aulnay closure is the first of a car factory in France since Renault's iconic plant at Boulogne-Billancourt closed 20 years ago.
Peugeot boss Philippe Varin told French television the decisons "were very serious, very painful to take," but "they had to be taken."
Earlier he vowed that "nobody would be left by the wayside".
"The depth and persistence of the crisis impacting our business in Europe have now made this reorganisation project essential in order to align our production capacity with foreseeable market trends," Varin said.
Varin said Peugeot would present further ideas, including plans to "adjust investments" and a "muscular effort" to cut costs, on 25 July when it announces quarterly results.
PSA, trying to cut overcapacity, announced earlier this year a tie-up with US giant General Motors to cut costs.
Previously released figures showed PSA first half European sales down 18 percent to 980,000 cars and commercial vehicles, with its market share falling to 12.9 percent from 13.9 percent.
"As soon as Peugeot announces the loss of 8000 to 10000 jobs, you have to multiply by three or even four to measure the impact in terms of jobs for the entire country," CGT union Bernard Thibault said, vowing that his union would "react".
Outside the plant, angry employees said they would fight the layoffs.
"We are a social and political bomb," said CGT delegate Jean-Pierre Mercier. "I don't know to what extent we can make them back down, but we will cost them very dearly."
Ayrault this week said the government would make legislative changes next year to reform France's system of using payroll charges to fund social welfare programmes, to lower labour costs and boost competitiveness.
France's trade deficit remains high and ministers in Hollande's new government have raised concerns that low competitiveness is stifling the economy and hampering job creation.