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August 04, 2017

What the diesel saga tells us about the EU

Organisations evolve over time but never completely lose the ethos of their founding years. The European Economic Community was a corporatist construction designed to protect industries, seek access to German steel, and support farmers. The EU takes the interests of consumers more seriously today than it did in the 1950s and 1960s, but the interests of the corporate sector remain predominant.

The EU’s strategy on diesel was to be tough on regulation, but soft on supervision. The tests were a joke, and it is no surprise that the dieselgate affair was uncovered in the US. We would not go as far as to talk about a conspiracy. This is rather the result of old-fashioned interest peddling. The real victims of this are not only defrauded consumers, but a very large number people who suffered premature deaths as a result of urban pollution, for which car emissions are the main source. It is no surprise that polluted German cities like Stuttgart see no other way to meet their local emissions targets than to ban diesel cars that fall below an already out-of-date norm. Nor is it a surprise that the car industry chiefs meet with the German government to prevent this from happening. And it is even less of a surprise that the European Commission welcomes the result of Wednesday’s diesel summit as a first step. But this is a cartel that has undermined competition for two decades. If these were non-EU companies, we would treat them like criminal organisations. We would not hold summits with them.

The substantive issue is not whether diesel is doomed in the long run - even the German car industry accepts that - but how this should happen, and the time frame. The German car industry is not ready to supply the market with hybrid engines, let alone electric engines. Germany’s infrastructure is not suited to the electric car. Many people commute to work by car. Many companies and out-of-town industrial parks are not efficiently accessible by public transport. If your car industry operates like a cartel, the development of alternative technologies get suppressed. This works exceedingly well so long as you keep technological leadership. And it breaks down when the underlying technology changes or when there is a sudden shift in the structure of demand. This has many parallels to the iPhone vs Blackberry situation, with two exceptions. Nobody even tried to protect Blackberry. And the product cycles are longer.

What we do know is that the car of the future will have an electric engine, and lots of smart artificial intelligence. We don’t know yet whether Tesla is the new iPhone of the car industry, or just the useful idiot like the Sinclair computer. What we do know is that the German car industry is not at the forefront of either development. If diesel fines have one important commercial implication, it is to reduce the German car industry’s ability to corner the new market through a strategy of mergers and acquisitions. It is up against the likes of Google, and possibly Apple, whose market capitalisation is far too large.

The new competitors are not part of the cartel. They don’t hang out in auto shows. The developers have a different background than do the mechanical engineers of today's car industry today. So, there is no reason to believe that the German car industry will retain its fat profit margins. It will decline just like newspapers declined. It won’t disappear, but wither slowly. Diesel sales are falling fast, even in Germany. Salaries will eventually come under pressure, and the most talented engineers and scientists will seek alternatives. What we do know is that Germany is absolutely unprepared for this development. 

In this context, we noted a comment by Marcel Fratzscher, who argues that Germany is preaching free trade at G20 summits, but is practicing protectionism at home when it blocks foreign takeovers of companies that own certain key technologies. He says the veto right is ill-defined, and thus particularly potent because politicians use it at their discretion. Germany, and the EU as a whole, are prioritising protection over innovation.

We would like to add the following observation. One would have thought that a country with a current account surplus of over 8% would be more consistent in its attitudes but the surplus is to a large extent the result of various of industrial forms of protectionism and macroeconomic mercantilism, such as depressing wages relative to its trading partners. These policies work successfully until they don’t. Mercantilism is what links the troubles of the eurozone and those of the car industry. Neither is sustainable in the way it is currently managed.

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