Britannia Radio

Merkel refused to put more money into the economy and now finds the 
government doing it anyway!

But the success of the scheme is having massive unintended side-
effects which are causing trouble.

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FINANCIAL TIMES 8.4.09
Berlin tackles cost of car incentive scheme
By Bertrand Benoit in Berlin

It was a mere footnote in the German government's latest ?50bn fiscal 
stimulus. But a scrapping bonus aimed at encouraging new car 
purchases has become such a success that it has left Berlin facing up 
to three times the measure's initial ?1.5bn price tag.

The popularity of the bonus is causing headaches for the government 
and raising questions about the merits of the state seeking to 
influence consumers' spending agendas.

When it meets today, the cabinet and Angela Merkel, the chancellor, 
will have to decide how to prevent the handout from blowing too big a 
hole in the state's finances without sparking a popular outrage.

The scheme's success has defied all expectations. Two months before 
it is due to expire, 1.2m consumers have applied for the ?2,500 
($3,321, £2,251) cash gift, twice the amount the government budgeted 
for. Economists expect more applicants to join the queue by May 31.

"In February and March, we made about three times the sales we had in 
the first quarter of last year," says Bernd-Uwe Prochnow, sales 
director at a Volkswagendealership in Frankfurt. "And the first 
quarter of last year wasn't bad at all."

Car sales nationwide rose 11.9 per cent in February, making Germany 
the world's only bright spot for the car industry. Gordon Brown, the 
British prime minister, was so impressed by the take-up that he asked 
Ms Merkel about the scheme when she visited London recently.

The enthusiasm for the bonus has been such that experts have begun to 
question whether Germans were acting rationally.
"You really must wonder whether people are making an economic 
decision," says Jürgen Michels, economist at Citigroup in London. "It 
seems that Germans are so obsessed by tax advantages that they are no 
longer acting entirely rationally here."

Several commentators suggest that only German consumers, who are as 
fascinated by cars as they are dedicated to sniffing out the best 
Schnäppchen , or good deals, could have made the Abwrackprämie into 
such a hit.

That said, the German scrapping bonus, available to anyone who swaps 
a car older than nine years for a new model, is particularly 
generous. In France, only cars older than 10 years qualify for the 
prime à la casse , which, at ?1,000, is worth less than half its 
German equivalent.

But there are also problems in Germany. Retailers, for instance, say 
the bonus is shifting spending patterns rather than creating demand. 
Higher February car sales coincided with falling turnover at consumer 
electronics stores. Stefan Genth, managing director of the HDE 
retailers' federation, slammed the bonus last week, saying it was 
"sucking out spending" from the retail sector.

Such transfers have been visible even within the car market, with 
demand for used cars falling almost as steeply as new car sales were 
rocketing. "The classic used car market, with cars older than one 
year, is pretty much dead," says Mr Prochnow.

The bonus has proved a boon for German and foreign carmakers alike, 
yet it is also creating new bottlenecks for dealers, following a 
sharp drop in car production earlier this year.

Withdrawing the only genuinely popular part of its fiscal stimulus is 
not an option for the government, especially not six months before a 
general election. Yet the coalition is growing concerned about the 
costs to the taxpayer.

When it meets today, the cabinet will almost certainly extend the 
availability of the bonus beyond May 31, but may make the scheme less 
generous. Various options are on the table ranging from a cut in the 
size of the bonus to the capping of the scheme's budget.