The VW Scandal: A Challenge to Germany

The disclosure of Volkswagen’s (VW) practice of concealing its real emissions data has become one of the most popular recent news headlines. Phrases like VW’s manipulation of emissions tests or pollution cheating scandal reflect a harsh media tone towards the incident. There is a lot of discussion going on about its impact on Germany’s economy and its reputation as a reliable producer.

In The Irish Times, Wolfgang Münchau predicts that the total cost of the penalties and damages caused by the VW scandal could exceed over €100 billion and reach even a few times higher figure in the context of the German economy. If this happens, the financial burden on the country can be much bigger than what a Grexit could have been. He also points out that the scandal can severely affect the German economic model as it is heavily dependant on the car industry. According to him, its impact on the German economy can be even stronger than what official statistics show because they do not reflect the industrial interdependence.

To give a broader context, he refers to some data from a study by the University of Mannheim (2008): In 2004, the car industry constituted 7.7% of German gross-value added (GVA). It was the best result in the world. South Korea took the 2nd position with a 5% rate. The European average rate was 2–4%. Münchau concludes that the VW scandal can have severe consequences for the global economy, the eurozone in particular.

On Business Insider, Mathilde Richter gives more precise data on the importance of the car industry for the German economy. She mentions that last year its sales reached €385 billion. It made up 14% of Germany’s GDP and 18% of its exports, and employed about 770,000 Germans. To better illustrate what the employment figure actually means, she refers to the statement once made by Chancellor Angela Merkel: every seventh job in the country is “directly or indirectly” linked to the car industry. This explains why many Germans are worried that the VW scandal “will have a domino effect on their businesses”.  

On CNBC, Catherine Boyle draws attention to the fact that the VW case could severely damage Germany’s international reputation because VW is one of the best known national brands. Brand consultancy Interbrand has estimated the value of the VW brand at €10 billion. It ranks 5th in the top 50 German brands ranking. In total, they are worth over €170 billion.

Boyle also sees another problem: if it is found out that emissions control devices in diesel cars of other brands are also faulty, the damage to the whole European car industry can be tremendous. The biggest diesel car producers are based in Germany (BMW, Daimler) and France (PSA Peugeot Citroën), the countries which are at the core of the EU leadership and its budget. If they also face charges of manipulation of emissions data, the consequences for the whole EU economy can be very serious. In the case of Germany, the economic value of the car sector is reflected by the fact that 3 other German car producers also appear at the top of the 50 best German brands ranking: Mercedes-Benz (1st position), BMW (2nd) and Audi (6th).

In general, evaluations of the VW scandal are negative. Prof. Ferdinand Dudenhöffer, Director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, thinks that the ‘Made in Germany’ brand has always been associated with quality and trust, and that the VW case has significantly challenged that trust. Martin Schulz, President of the European Parliament (EP), has defined the scandal as a ‘heavy blow’ to the German economy. Chancellor Angela Merkel has described it as a ‘dramatic event’, but has no doubt that it will not damage Germany’s reputation. She has also called for transparency in clearing up the scandal.  

References:  [1] Wolfgang Münchau, The Irish Times / [2] Mathilde Richter, Business Insider / [3] Madeline Chambers, Reuters / [4] Catherine Boyle, CNBC / [5] Reuters via The Guardian / [6] BBC