31 March, 2009

Scrap the Scrapping Bonus!

Unfortunately, the most successful means in the German economic stimulus package is going to have the worst consequences: the Abwrackprämie or scrapping bonus. Pretty much everybody knows it but this does not prevent the nonsense.

I already mentioned it in another post: Owners of cars that are older than 9 years can scrap their car, buy a new one (or a Jahreswagen: usually former company cars, less than 1 year old) and get a refund of €2,500. By today, only 2 months after announcing the program more than 585,000 applications (German, March 31, 2009) have been made. Originally the program was limited to €1,5 billions or 600,000 applications, so it has pretty much been used up. Now German government wants to extend the program until the end of the year - and waste even more money!

First point of criticism is that it hardly helps German car industry: only 36.7% of the new cars are from manufacturers producing in Germany - a rather short-sighted protective thought. In a globalized economy Germany would not only profit from car sales but also for example from machines used to build cars. Germany is still the world's biggest exporter (soon to be passed by China though). With Europe the connections are even closer, so it's really in Germany's interest to help other economies a well.

Second point is the official name Umweltprämie or environmental bonus. The only problem: There is NO environmental incentive to it, nothing about consumption, nothing about emissions and nothing about the size of the cars. Only hope is reduced consumption of newer cars. Neither in media nor by politicians it's called Umweltprämie anymore.

Third and most important point is the economical nonsense. In times of the worst crisis since WWII small car sales are at record levels. Opel - the nearly bankrupt subsidiary of GM - sold 60% more cars (German) in the first 3 quarters than in the same term of last year. Not only common sense but also historical examples show that the great success is only early demand, yet another bubble - cars that are bought now will obviously not be bought in 9 months. The sharper the plunge will be by then. The car industry needs to reduce its overcapacity (German) nevertheless.

But that's not the only distortion in the market: Now there is obviously an oversupply of scrap metal (German) while the market of cheap used cars is wiped out to a large extent. People having bought a car can't spend the money on other things anymore, let's say furniture, so other industries are compromised as well.

Remaining question is why the absurd show has to go on. I have only one explanation, the upcoming elections in September:
Chancellor Merkel is likely to renew the indirect subsidy program -- which is as popular as it is imperfect -- out of fears of a voter revolt.

Just to be exact it's not Merkel, but the whole government with both major parties CDU/CSU and SPD in the Grand coalition.

There must be at least 2 major changes to the program: Scrap the scrapping part and pay the bonus only as tax reduction for environmentally friendly cars with a CO2 output of 140mg/km or even lower. Then it would at least deserve its name Umweltprämie. This could simply have been done as part of the vehicle tax reform.

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