A program to boost new car sales by paying people to turn in older ones is so successful that Chancellor Merkel is extending it. Critics think that's a mistake
Who would have thought that the wrecking yard would become a symbol of successful governance? Germany's so-called "scrapping bonus" for new automobile purchases, launched in January, has become the single most popular initiative taken by Chancellor Angela Merkel's strange-bedfellows coalition of the conservative Christian Democrats (CDU) and the left-leaning Social Democrats (SPD). For weeks, the atmosphere at German car dealers has been like a county fair. Smaller cars like the Fiat ( FIA.MI ) Panda and the VW ( VOWG.DE ) Polo are hard to come by and in February, the number of new cars registered was 21.5 percent higher than the previous month.
The car bonanza was supposed to stop soon. The government had allotted €1.5 billion ($2.03 billion) for the stimulus program—enough to provide €2,500 bonus payments for around 600,000 trade-ins. Hundreds of thousands have already applied and the funds were only expected to last several more weeks at best. On Wednesday, though, Merkel and her vice chancellor, Frank-Walter Steinmeier (SPD), agreed to extend the program so that the boom can continue.
Only a few days ago, the German Economics Ministry, which is led by the Christian Social Union, the Bavarian sister party to Merkel's Christian Democrats that is also part of the government, had denied the program would continue. That has changed, though. "The scrapping bonus is a huge success that has pleased us and we should expand it," party boss Horst Seehofer said Wednesday.
But there are numerous reasons not to extend the program. Economists see it as a mistake. "It's a subsidy that won't help the economy and will only create new government debt," said Joachim Scheide of the respected Kiel Institute for the World Economy (IfW).
An Unfair Subsidy?
Lobbyists in other sectors have complained that the automobile industry is the only one that has received massive government support. And environmentalists have been angered that the subsidy, which has officially been named an "environmental" bonus, has nothing to do with ecology at all. Even Germans who fork out money for a gas-guzzling Porsche ( PSHG_P.DE ) Cayenne SUV are eligible for the bonus. Billions of euros in taxpayer money are being pumped into a sector "that in recent years has done too little to make its car fleets more fuel-efficient and environmentally friendly," said Michael Gehrmann of the VCD, a group that lobbies for more sustainable forms of transportation.
"The scrapping bonus is environmentally unfriendly and, economically, it's nonsense," Fritz Kuhn, who heads the Green Party's parliamentary group, told the Hannover Neue Presse newspaper. He said the state money might spur people to buy cars right now, but that it might lead to a sales slump later on.
The German Federal Environment Agency (UBA) has also called on the government to take steps to make the scrapping bonus more environmentally friendly. The head of the agency's transportation division, Christoph Erdmenger, told the radio station Saarländischen Rundfunk on Wednesday that there was still time to negotiate improvements in an extension of the scrapping bonus by, for example, including provisions to promote premiums for cars that emit less than 140 grams of carbon dioxide per kilometer—in other words, more fuel-efficient models. He said the scrapping bonus should also only be given when the new vehicle purchased adheres to the EU's stricter Euro-5 emissions standard, which will become the legal norm as of September 2009.
Customers Prefer Small Asian Cars
Some in the automobile sector have also criticized the bonus, saying buyers are showing a prejudice towards smaller cars. In addition, in the land of the luxury-sedan company, many shoppers are turning—God forbid—to foreign models. "Anything that costs less than €10,000 is in demand," said Alfred Schmitt, head of the Heidelberg market research group Impulse.
Schmitt carried out an analysis of the cars that have been selling best since January 2009. Leading the pack is Daihatsu (where sales have increased by 230.5 percent), followed by Hyundai (an increase of 198.8 percent) and Lada (sales are up by 175.8 percent). The first German company to even appear on the list of top sellers is General Motors (GM) subsidiary Opel, which comes in at eighth place. It's hardly surprising, then, that Daimler (DAI) chief Dieter Zetsche is rejecting calls to extend the scrapping bonus. It's difficult for him to look on as the German government provides what he describes as financial aid to his Asian competitors.
But that worries Merkel and Steinmeier very little—anything that can please voters in the run-up to the national election this fall is a welcome development. Nobody knows when demand will slump on car sales, so the government sees the extension of the premium as inevitable. After all, voters who haven't taken advantage of the bonus yet might be angered if Berlin stopped it.
Many applications for the first round of scrapping bonuses also remain unprocessed. On Monday, the government will accept online applications for the bonus for the first time. The system will allow consumers to process applications for new purchases as well as to reserve the bonus for a later date.
The German auto industry weekly Automobilwoche reports that as many as 570,000 cars have already been purchased this year in the country by people who intend to apply for the bonus. Some dealers believe the online application system will lead to a flood of people seeking the bonus.
The head of one major German auto dealership in Mainz near Frankfurt believes there are still hundreds of thousands of applications that haven't been submitted yet. If every applicant put their request online at the same time, he warns "many customers will end up empty-handed despite having taken every precaution. We're expecting a surge of angry customers at our dealership."
And angry customers would be angry voters. But if Merkel agrees to an additional billion, she will likely quiet free-spending citizens. It's still unclear exactly how much money will go towards extending the stimulus program. The best solution for the government would be to continue with the artificial bubble of new car purchases through the end of September—in other words, until after the election.