General Motor’s European division could be merged with Peugeot-Citroen, according to media reports emerging from France. The reports say that Vauxhall-Opel would be merged into a new joint venture company with Peugeot-Citroen. GM would own a 30 per cent stake in the joint venture and would inject £6.2 billion for future product development.

According to Automotive News Europe, this tentative plan is said to have been one of a number of ideas being considered by the management teams of PSA and GM, including selling Opel outright to PSA or GM buying PSA’s automotive division.

Neither GM or PSA would comment on the leaks.

At the moment, the alliance between GM Europe and PSA has centred on a range of future models, including replacements for the Insignia and C5/408, a rival for Renault’s budget Dacia line-up, a super-economy supermini and a range of compact SUVs.

Although some are speculating that the French Government might resist the idea of a PSA-GME joint-venture, a 70 per cent controlling stake for the French and the fact that this deal may be the only way of saving PSA from collapsing in the medium term could prove the decisive factors.

Both GM Europe and PSA are losing huge amounts of money in the face of the downturn in the European market, a situation driven by their under-utilised factories and the need to discount showroom prices. GM Europe is expected to lose nearly a £1bn in 2012, a situation which is affecting the health of GM globally. PSA is said to be burning £161 million in cash each month.

Merging the four mass-market brands would, eventually, pay dividends by allowing them to build much larger numbers of cars on each platform, saving significant money on product development costs and by running the JV factories at above 85 per cent capacity.

The downsides are that more than one factory in any PSA-GM alliance would have to close - a concern for the UK’s Ellesmere Port plant which recently got the contract to produce the 2015 Astra. Also, the merging of most models onto common platforms would take upwards of five years, time that PSA and GME might not have in the current market conditions.

Dividing up the engineering work between France and Germany could prove controversial, although GM’s Russelsheim Engineering HQ could be fully retained by GM because it carries out work on global basis.

At this stage, the merger proposal is still at an outline stage, but if it does clear potential hurdles, it is unlikely to get the green light before the end of the year.

The Peugeot family, founders of PSA Peugeot Citroen, could step back to let GM take over the ailing business. City sources have already warned that PSA could get close to not having enough free cash to run the business by the end of 2013.

A report from news agency Reuters suggests that if GM were to take control of PSA it would want to shut down factories and make redundancies in France and Germany, something the French government is unlikely to let Peugeot family do in its home market.

Peugeot is reported to have sought finance for the business elsewhere, but a lack of willing bidders has forced it to turn to GM, which owns seven per cent of the current business. The move was made with the support of current PSA Chief Executive Phiippe Varin, reports Reuters.

A similar bid to sell a substantial stake to a consortium led by Dongfeng Motor Group has already fallen through.

Overall the Peugeot family owns a 25.4 per cent stake in the company, but controls 38.1 per cent of the voting rights.

Speaking to Reuters, sources close to the ongoing discussions said: “The Peugeot family has now accepted that they'll lose control.

“PSA will need to present a new industrial plan for people to underwrite a capital increase, and the only hope is GM. They (GM) are ready to inject more money if they can control the business, integrate Peugeot and Opel and rationalize production.” Peugeot, which is heavily reliant on sales in its home territory, is fighting for survival according to the report.

GM bought 7 per cent of PSA in February 2012. Since then, the French Government stepped in with financial aid for Peugeot's own bank, ensuring it could still offer competitive finance to new car buyers.

The deal now hinges on GM. Sources say GM bosses need assurances that they would be able to cut plants and jobs “at reasonable cost.”

Widespread cuts in France, which would be almost certain under GM control, would be fiercely resisted by President Hollande's government. However, the French Government is said to understand that in order to return to profit Peugeot either needs to seek a larger tie-in with GM, or seek a similar deal with another industry partner. Peugeot, which employs 77,000 workers in France, has already mothballed its production plan in Aulnay and is scaling down production elsewhere.

Neither Peugeot nor GM has commented on the story.