Volkswagen AG promises a “socially responsible settlement” with workers who will be displaced by the auto maker’s decision to halt production of its Golf small car in Brussels.

Designed to improve VW’s European capacity utilization by consolidating Golf production in two Germany plants, Mosel and Wolfsburg, the move stems from a company-wide restructuring plan that involves cutting its European capacity by 20%. The plan would also reduce the auto maker’s German workforce by 20,000.

“Other locations must now be incorporated into the restructuring program so as to ensure competitive production and capacity utilization at the Volkswagen plants in Western Europe as a whole,” VW says in a statement.

Media reports from Germany suggest as many as 4,500 of VW’s 4,900-member workforce in Brussels will be affected.

“Production capacity must be aligned with the current operating environment,” VW says, adding its plants in Western Europe are operating well below capacity.

Meanwhile, the European market is “saturated” with competition, the auto maker says. But increasing exports is not a viable option because of unfavorable exchange rates between the euro and the dollar.

VW also maintains its business is aggravated by prohibitve tariffs in developing markets. For this reason, the auto maker is expanding its manufacturing footprint in places such as Russia, where it has broken ground on a Moscow-area plant.

The decision to pull the Golf from Brussels flies in the face of the €377 million ($483 million) it has invested in the site since 2000. Just last year, the auto maker launched construction of a supplier park.

Also added to the site was a state-of-the-art logistics center that automates the parts-picking process for stocking assembly line stations.

Ironically, Belgium’s regional government of Flanders, in a bid to control labor costs, recently reduced payroll taxes. This, the government hoped, would encourage employers such as VW to maintain or even expand their operations in the country.

“Talks have begun with the employee representatives on a concept to structure capacity at the plant, and all economic alternatives will be reviewed so as to keep as many jobs as possible in Brussels,” VW says. But government officials are skeptical of VW’s motives. Media reports quote Belgian Prime Minister Guy Verhofstadt saying the Wolfsburg-based auto maker made its decision on “national interest.”

The same reports suggest General Motors Corp.’s plant in Antwerp is under scrutiny. But as the sole production site of the Astra Twin Top retractable hardtop, Antwerp is a key cog in the auto maker’s Opel brand strategy.

Belgium’s auto industry has seen its ups and downs in the last 10 years. About 3,100 workers were affected when Renault SA closed a Brussels-area assembly plant in 1997.

And in 2004, Ford of Europe ended production of its high-volume Transit van in Genk. Since then, however, Ford has chosen the site to launch production of its all-new S-Max people-mover, in addition to the Mondeo sedan and Galaxy minivan – both of which have been redesigned.

Meanwhile, Volvo Car Corp. is expanding its plant in Ghent to accommodate production of a small cross/utility vehicle known internally as the XC50. The plant also launched production of the all-new C30 small car in September.

VW says it will discuss separation agreements for affected workers with their union, IG Metall.

“The company is aware of its responsibility for all employees in Brussels and will develop a socially responsible settlement together with all stakeholders,” the auto maker says. Until last year, VW’s Brussels plant also built the VW Lupo minicar and the Audi A3 small car. Previously, its products included the VW Passat and Beetle. Through 2005, more than 6.5 million vehicle had been produced at the plant since it opened in 1949.

emayne@wardsauto.com