Europe's car industry is edging closer to making painful and costly production cuts that industry executives acknowledge are the only way of nursing loss-making businesses back to health.

When the industry hit crisis in 2009, European carmakers largely put off the pain with the help from scrappage schemes and government loans in the hope economic recovery would erase the need for cuts. The recovery came, but was short-lived and carmakers are again facing a downturn.

That is in stark contrast to their counterparts in the United States, who delivered major capacity cuts in exchange for government bailouts.

The slimmed-down U.S. industry shed a total of 1.5 million units capacity from 2007-12, including the so-called "transplants" of U.S-based foreign carmakers.

The number of factories fell to 54 from 64, sending capacity utilization shooting to an expected 82 percent in 2012 from 66 percent in 2008, according to figures from IHS Automotive. Detroit's Big Three automakers closed 13 plants during that time.

In Europe, with 241 plants in 27 countries, just three factories have closed, or are slated to, in the same period. This leaves capacity utilization at an expected sluggish 65 percent this year, according to figures from IMC-Auto.

Carmakers need to run plants at about 80 percent capacity to break even, said Calum Macrae, PwC's lead automotive analyst.

TIPPING POINT

The European industry seems to be reaching a tipping point. A grinding price war in a withering market, combined with high overheads from excess manufacturing capacity, has forced General Motors and Peugeot into an alliance to share production, development, and purchasing costs.

On Friday, Peugeot CEO Philippe Varin acknowledged for the first time that the alliance will affect production plans from 2016, when Peugeot and GM are planning to begin assembling some vehicles on shared production lines.

"Our factories already assemble Peugeot and Citroen cars on the same lines," Varin said. "In the future PSA factories may also assemble GM cars, and vice-versa."

The overcapacity problem in Europe is region-wide, but national governments shirk from job losses on their own turf, so end up offering a financial lifeline that does little to solve the underlying mismatch between supply and demand.