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May 05, 2020

Germany's cash-for-clunkers

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.

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May 05, 2020

What about the summer holidays?

The tourism sector is one of the hardest-hit by the pandemic. The European Commission estimates that it already lost half of its revenue. Will tourism return in the summer holidays? Or will the sector continue to bleed and require a Marshall plan of its own, as suggested by Thierry Breton?

This depends for one thing on whether and when cross-border travel will be possible. Germany just extended a travel warning until mid-June, while France has suspended non-essential travel until further notice. It is not clear that the EU will be ready for cross-border travel by the summer. Bilateral solutions are no way forward either. Germany just turned down an offer from Austria to allow German tourists back into the country. 

Some countries seem safer than others. The EU’s transport and tourism roadmap, picked up by the Guardian, suggests travel restrictions within the union could first be eased between areas with a comparably-low reported circulation of the virus. This prompted the Czech Republic, Slovakia and Croatia to propose corridors to the Adriatic coast. What about southern Europe? Greece and Portugal managed to keep mortality well below 1000. Yet, countrywide averages tell us little about hotspots. Some tourism areas in Italy or Spain avoided the virus. Could they be allowed to open early? Would tourists feel confident to travel to those places?

Greece and Cyprus are pushing for an EU-wide solution. Kyriakos Mitsotakis said the EU needs to agree on a health protocol that will allow tourists to travel again. This could involve people getting tested before they fly, and then being carefully monitored once they arrive, either with an antibody or a PCR test. There is talk about a Covid-19 passport testifying to the bearer’s health before travel, or through in-resort testing once they arrive. For Greece and Cyprus the tourism sector is the single biggest contributor for their economy. About one fifth of their workforce is working in tourism, almost double the EU average.

Greece hopes to open again for business as early as July. Much is at stake here.

Balancing the desire to jump-start the economy with the risks of a second epidemic wave will be the biggest challenge for EU governments in the coming weeks. With different recovery speeds and levels of risk aversion, we are not hopeful to see any EU solution any time soon. A framework that focuses on hotspots rather than countries could be be a starting point.

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