German Cash or Clunkers Program in Need of Additional Funding

Adding fuel to criticism that the federal government’s Car Allowance Rebate System (C.A.R.S.) will do little to revitalize the U.S. auto industry, Germany has announced that funding for its version of the ‘cash for clunkers’ program is on the verge of running out of funds.

The program was launched last January and funded by the German government to the tune of EUR5 billion (the equivalent of $2.1 billion). It has been wildly popular among consumers but has not had the intended impact on Germany’s struggling domestic auto industry.

As with the U.S. C.A.R.S. version, Germany’s program offers a financial incentive in the form of a EUR2,500 ($3,500) discount to consumers who trade in their old, gas-guzzling, high emissions vehicles for newer, more fuel efficient, low emissions models.

Applications for the government subsidies are pouring in at a rate of approximately 8,000 requests per day, and on Tuesday the German Federal Office of Economic and Export Control announced that it has only enough funds to honor 283,000 of those requests. Berlin has indicated that the program will receive additional funding equaling $5 billion and will be extended until the end of the year.

Although it has been a windfall for the over 1 million German consumers who have taken advantage of it, as of the end of this past March, only 24% of the funds have made it into the coffers of German automakers. Instead, consumers are spending their tax-funded vouchers on foreign imports by a margin of over three to one.

Due to a phenomena economists call ‘leakage’, which occurs when government attempts to stimulate domestic demand inadvertently benefits foreign manufacturers, Czech automaker Skoda has seen their sales increase dramatically. Skoda spokesman, Jaroslav Cerny, asserts that, ‘Since the end of March, we are in full production, five days a week, on three shifts."

According to professor of political economy at the Hertie School of Governance, Henrik Enderlein, ‘Whatever type of fiscal stimulus package you adopt; you will always have these leakage effects.’

Although it’s too early to tell if the U.S. C.A.R.S. program will result in similar ‘leakage’, many critics predict that it will.

Professor Ferdinand Dudenhoeffer of the Center for Automotive Research asserts that another unintended consequence of the program has been decreased business for small, independent auto repair shops.  He added that the program has also ‘destroyed’ Germany’s used car market.

Another fear is that such programs simply create an artificial bottom for markets. Dudenhoeffer speculates that, although auto sales in Germany may reach 3.6 million units in 2009 in part due to the Cash for Clunkers program in 2010 ‘we will fall into a very, very deep hole.

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