PSA Peugeot Citroen (UG.FR) is working on plans to deal with its chronic over capacity in Europe but the alliance with General Motors Co. (GM) announced last week doesn't offer any short-term solution to the problem that's undermining their profitability in the region, says a senior member of the Peugeot family.

"It's true, we're dragging a huge ball and chain," Robert Peugeot told Dow Jones in a recent interview. "We're well aware of the problem and we're working on it. But I can't tell you anything today."

Peugeot heads Societe Fonciere, Financiere et de Participations (FFP.FR), a Peugeot-family investment vehicle that owns 22.8% of the capital and 32.24% of the voting rights of Europe's second largest automotive group after Volkswagen AG (VOW.XE). The Peugeot family also controls another 8.17% of the auto maker's capital and 12.38% of the voting rights through another holding company.

Like other car makers, Peugeot's assembly plants in France and elsewhere are working well below their potential because of weak demand. Company officials have estimated the level of over capacity at 20% overall and much more in some facilities, while fixed costs are difficult to compress.

Industry analysts say Peugeot Citroen needs to shut down at least one of its production plants, but is prevented from doing so by political pressures. There has been recurrent speculation that the company wants to shutter a plant at Aulnay, north of Paris, where the small Citroen C3 is made, after 2014.

"We're seeing a structural decline of the European market and I don't see the end of it, at least in the coming months," Peugeot said in the interview at the French car maker's head office in Paris.

Peugeot, who also heads the auto manufacturer's strategy committee, noted that the Spanish automobile market this year is expected to be about 55% below the pre-crisis level of 2007, and he doesn't see it recovering in 2013.

Peugeot has an assembly plant in Spain, and it's widely considered that it would be easier for non-resident auto makers present in Spain to shutter plants there than in their home countries.

Asked if Peugeot is contemplating such a move, Peugeot replied: "I'm not going to answer that. The kind of studies that we're doing are difficult for all manufacturers, so I can't spread rumors about this or that site or country."

The news of Peugeot Citroen's alliance with GM on Feb. 29 has met with some skepticism by industry analysts who have pointed out it includes no near-term restructuring plans to address the problem of over capacity.

Under the plan, the two companies are aiming for $2 billion of synergies annually by pooling their purchasing, and will collaborate closely on developing new common components and platforms on which future models will be based. As part of the alliance, GM is taking a 7% stake in the cash-strapped French company whose automotive division lost EUR497 million in the second half of 2011. The French company is planning to raise EUR1 billion through a rights issue to bolster its finances.

Still, the two companies remain competitors, with their Peugeot, Citroen, Opel and Vauxhall brands competing head on in Europe.

"Restructuring remains the key issue, but is not addressed," Kristina Church and Michael Tyndall, analysts at Barclays Capital, said in a research note Friday.

The analysts said "the alliance to us seems more like an outline of a structure, rather than something more structured and well planned."

But trade union officials in Germany and France are worried that job cuts and possibly factory closures are coming particularly as the companies have not ruled them out in the future.

Peugeot and GM "are happy to tell us that [they] will do things together that they were doing apart until now," French trade union Confederation Generale du Travail said in the latest newsletter for members at Peugeot's Sochaux factory in eastern France. "The hunt for overlaps is therefore underway. With the consequences for jobs we can only imagine," the CGT said.

Peugeot acknowledges that it's not easy to explain the long-term logic of the alliance. "You're forced to believe us, because we can't show you our production plan, and the first products won't appear before 2015 or 2016."

He also admits that, initially, there may be initial inter-corporate frictions. "There will inevitably be a bit of "not invented here" on each side," he said.

GM isn't Peugeot Citroen's first dalliance with a U.S. partner. In the late 1970s, when the then Chrysler Corp was struggling to survive, Peugeot took over Chrysler's European production and distribution assets, in exchange for which it took a 15% stake in the French company. Peugeot was forced to dump its expensively acquired assets that were later found to be sub-par, a situation that Peugeot described as buying "a pig in a poke."

Peugeot started selling its cars in the U.S. in 1958 - the beat-up wreck driven by Lt. Columbo in the detective series is a Peugeot 403 convertible - but stopped in the 1970s as its cars weren't adapted to American tastes.

Peugeot Citroen might consider one day piggybacking on GM to relaunch into the U.S. market, Peugeot said. "We could do that, but not right now. We still have so much to do elsewhere. We have to reinforce our development in Latin America before opening a new front in the North American market.

Peugeot said he was impressed by the GM executives in the negotiations leading up to last week's deal.

"My impression is that they mean business. (GM Chief Executive) Dan Akerson is from the Middle West, he's a straight talker," Peugeot said.

-By David Pearson, Dow Jones Newswires; +33610157319, david.pearson@dowjones.com