French car maker Renault’s decision to repatriate production of one of its small cars to France from Slovenia has sparked widespread accusations of protectionism.

At a time when multinationals are relocating manufacturing operations to low-cost destinations, Renault’s decision to do the reverse is seen as a direct result of French government aid for its car industry.

The French government has committed to a $10.5bn car industry aid plan, which includes loans to Peugeot and Renault. France’s industry minister Luc Chatel said Renault’s assembly plant move to Flins, west of Paris, showed the aid package was “beginning to get results.”

Renault’s subsidiary in Slovenia, Revoz, has said production of the Clio 2 was being moved back to Flins because the plant at Novo Mesto, east of Ljubljana, is at full capacity and would now concentrate on making the Twingo, for which demand has surged.

Czech prime minister and current head of the EU’s rotating presidency Mirek Topolanek criticised France’s president Nicholas Sarkozy in February for suggesting in a television interview that French car makers should return operations to France from eastern and central Europe, demonstrating rising tensions between some older EU member states, mainly in western Europe, and some former communist countries in central and eastern Europe

Industry leaders are questioning whether various proposed European support packages for automakers are going to boost confidence in the sector and improve flagging sales or whether they will simply encourage economic protectionism.

Europe’s car market shrank 18% in February, showing its 10th monthly year-on-year decline. A total of 968,159 vehicles were registered across Europe in February, according to the Association of European Automobile Manufacturers (ACEA).

Based on trends seen in the final quarter of 2008 and into the first few months of 2009, ACEA says passenger car production could decline by a quarter and commercial vehicle production by at least 30% in 2009, reflecting a dramatic drop in orders from business customers.

France’s state aid package comes at a time when the European car industry is suffering a dramatic decline in investment. In March, US car maker Ford Motor announced production cutbacks at two of its European plants. In the same month German car parts maker Continental announce closure of two plants in Hanover, Germany, and Clairoix in France.