A row over subsidies to a steel maker sours Slovakia's relations with the EU

The European Commission head is in dispute with the Slovak government over 500 million dollars of subsidies to a U.S. Steel Corporation Plant - - it's a state aid row, which threatens to cast a shadow over the country's EU entry this May. In the EU, state aid to the steel sector is tightly controlled, and government bailouts must be linked to cuts in capacity - something it's says is NOT happening at Slovakia's Kosice plant which was bought by U.S. Steel in 2000.

In November 2000 when the Pittsburgh based US Steel took over the core business of VSZ, Eastern Europe's second largest steel mill located in Kosice in Eastern Slovakia, both economists and local politicians cheered with joy. The largest fully integrated steel producer in the United States offered to pay $60 million up front, assume debts of $325 million and invest double that sum over a ten-year period. The deal was a blessing for the Kosice region, which has one of the highest unemployment rates in the country, as Igor Holeczi a local journalist says.

"The factory is very important for the city. It still employs 50,000 people, which makes the US Steel the biggest company in the city and the region. It also means a lot for the community because it supports the local sport team, various culture events, sometime it helps also the city with various sort of investments."

Deeply grateful, the Slovak government offered generous tax holiday despite the fact that it was negotiating a chapter on competition with the European Union at the same time. Three years later, the European Commission is warning Slovakia that US Steel Kosice is breaking the EU law on competition because it receives state aid via tax holidays. Brussels is afraid that without the burden of paying taxes, the Eastern European companies produce cheaper steel that threatens the EU producers. Therefore it has asked the plant to reduce its production if it still wants to benefit from any tax holiday. If it doesn't reduce its production then it should pay $40 million for each of the last two years. Sustained and very secretive negotiations are underway with February as a deadline for an agreement. Jan Baca is the spokesman of US Steel Kosice.

"We don't want to make any comments on pending negotiations right now. All I can say it's that we operated our facilities in good faith based on the interpretations of the Slovak government regarding the language of the accession treaty."

The US Steel issue caught Slovakia again between its obligations as a future EU member and its intention to establish good relationship with the United States. Igor Holeczi.

"The problem is that if US Steel cannot sustain its actual output then it may lead to lay off some employees. To tell the truth I think these people don't really understand the background of the problem between the European Union and the US Steel Corporation. I think they more blame the Americans for the problems. They don't blame the European Union because they feel European. They try to find the mistake on the American side, which is not always the truth."

Sources close to the Slovak team of negotiators said off the record that in the end US Steel would have to obey the European Commission requirements. The only question is at what price for both the company and the town of Kosice.