May 05, 2020
The big debate in Germany this morning is not about the constitutional court. That's only for monetary policy train-spotters. What occupies the German soul is the discussion on a cash-for-clunkers scheme: government subsidies for car buyers.
The only problem is, as Spiegel reports, that the car industry had a relatively good year in 2019 and wants to pay out dividends to its shareholders. Our take from the discussion is that pressure for subsidies is growing, especially from the big states with car plants, like Bavaria, Baden-Wuerttemberg and Lower Saxony. Angela Merkel is trying to kick that particular can down the road. Olaf Scholz is also sceptical. FAZ reports that their preference is another economy-wide stimulus in June. On this point, we agree. But we think some sort of a car scheme may still happen, given the German economy's dependence on this particular industry.
The discussions were originally only about electric cars. But the German government then realised that this would not be much of a subsidy for the domestic industry, which is struggling with this technology. The order of magnitude under discussion now is €4000 for electrical cars, and €3000 for fuel-driven ones. But the second-hand car market is already swamped with diesel cars, which look a lot more attractive now after the collapse in the oil price. The problem is that new fuel-powered cars lose value at a brisk rate these days. A price discount of €3000 would help, but experience shows that it will be partly offset by lower discounts from car makers. Spiegel reports this morning that Merkel's industry advisers, normally sympathetic to the car industry, are struggling to see a positive economic effect from the scheme.
We would add that a cash subsidy would make more sense at the EU level. But we too share the scepticism about the impact of a such a scheme at a time of fast technological change. A €4000 subsidy for a Tesla and a €3000 subsidy for a BMW might tilt demand in favour of the US car. A cash-for-clunkers scheme might thus end up distorting the German market in unintended ways.