A couple of weeks ago, a story broke late on a Friday evening that ailing Vauxhall/Opel could end up merging with the even more ailing PSA Peugeot-Citroën.

The two companies had already started talks on platform sharing and a component buying scheme that would have made useful, but in the circumstances, relatively marginal efficiency gains. The leak suggested that GM’s European arm would be merged into a joint venture that would be substantially controlled by the French.

Industry analysts suggested that GM was keen to do the deal because its European arm has been losing huge sums for years (it could lose £1bn this year alone) and can probably never get back into profit because it both competes in the cut-throat mass-market segment and makes cars in high-cost western European countries. Vauxhall/Opel is a serious drag on the rest of GM’s global operations and GM bosses and shareholders – not least the US government – are not impressed.

The US government has $25bn (£15.7bn) invested in General Motors as a result of the post-crunch bailout – and the GM share price is currently running around $25. It’s suggested that GM shares need to double in value if the government is going to get its money back. Getting Vauxhall/Opel off the books would go a long way to pushing up the value of the company.

The plan to fold Vauxhall/Opel into a French-led joint venture would have got the European brands off GM’s books and would have given PSA a chance of building a bigger, more efficient mass-market business. So keen was GM to do the deal that industry sources claimed it was willing to hand over a £3.2bn cheque to the French to pay for future factory closures and cover a few years’ losses.

Now, it seems, the plan has been brought to a shuddering halt. According to a Reuters report, the JV plan has been put on ice until at least 2014 because PSA has accepted a huge, £14.8bn refinancing deal, backed by the French government. PSA is in such a perilous condition (it is said to be burning £128m a month) that it could not borrow money for its finance arm at competitive rates. And without the ability to offer competitive loans to car buyers, it will sell even fewer cars.

The downside of the bailout, however, is that the French government is now likely to try to stop PSA’s planned 10,000 jobs cuts and the closure of a factory. French industry minister Arnaud Montebourg also says he wants to see representatives of both the workers and the government on the PSA board.

Which is why GM’s grand merger plan has been shelved for now. Turning Vauxhall/Opel and PSA into a viable mega-company would have required job cuts and factory closures in both Germany and France. With the French government involved, that looks impossible. So the only real long-term solution for PSA’s woes has been blocked.

The French government has, of course, stuck its collective tête in the sand. The 2008 auto bailout in the US did prop up GM and Chrysler with big loans, but the government did not prevent the companies from slashing jobs and downsizing their operations. The proof of that enlightened view is shown in the current health of those US car makers.

French president François Hollande’s administration needs to careful. In this country, we all know what happened when a government decided to prop up a tottering automotive giant, in the face of all economic common sense. Do they really want to create Le Français Leyland?