Stimulus Program Success: 'Scrapping Bonus' Injects Life into German Car Sales

A new measure to pay owners of old cars €2,500 to junk their wrecks and buy something new has proven popular in Germany. In fact the idea is so popular that money for the program may be running short -- even before the measure has passed.

It's almost a sport in Germany these days to criticize Berlin for its erratic attempts to confront the worsening economic effects of the ongoing financial crisis. Chancellor Angela Merkel isn't doing enough, her critics say. The country's two stimulus programs amount to a random collection of spending plans, say some observers, not a strategic approach to the economic storm.

Car owners in Germany are excited about the new "scrapping bonus."
AP

Car owners in Germany are excited about the new "scrapping bonus."

But one aspect of the second stimulus package, which has not yet been passed into law, looks like a rousing success. The package foresees granting €2,500 ($3,250) to people who elect to junk their current automobile, provided it's at least nine years old, and buy a new (or slightly used) car. Interest has been intense.

As many as 1.2 million people may advantage of the offer should it become law, according to the market research institute Puls. The government office that will oversee the plan -- the Federal Office of Economics and Export Control (BAFA) -- has been overwhelmed by requests for information. Some 270,000 people called the agency's hotline on Monday; on Tuesday the number was 150,000.

Interest has been so great, in fact, that the €1.5 billion set aside for the so-called "scrapping bonus" may now be too limited. The budget could pay for the scrapping of 600,000 cars -- meaning that car owners who wait too long may miss out on the bonus.

Stimulus for the Car Industry

The aim of the program is to boost sagging automobile sales in Germany. A number of factories, including Ford and Audi on Friday, have announced that they are slowing production due to slow demand. Car sales in Germany in 2008 hit a 17 year low, primarily because of a miserable fourth quarter.

Recent declines in sales of German automobiles.
DER SPIEGEL

Recent declines in sales of German automobiles.

That trend may turn around because of the scrapping bonus. According to the industry association ZDK, car dealerships in the country have reported a sharp uptick in the number of potential buyers in recent weeks. The Süddeutsche Zeitung reported on Friday that some dealerships have seen new car sales increase by a factor of 10 since Merkel's government agreed to the measure in mid-January. The measure would cover car sales from Jan. 14 to Dec. 31 this year.

The scrapping bonus belongs to a €50 billion economic stimulus plan that Merkel's government hopes to see passed by German parliament in early February. The package calls for billions of euros to improve Germany's roads, rail network, schools and universities. The tax threshold was also raised slightly and employee health insurance contributions were lowered. The package comes on top of a much-criticized program passed last November.

Originally, the plan to promote the junking of old cars was advertised as one that could not only improve car sales, but would also help the environment. Rules governing greenhouse gas emissions have strengthened in recent years, meaning that replacing older cars with newer ones, so goes the logic, would help the environment. Critics, though, say the environmental effects will be minimal at best -- and suggest that a bonus should be also given to those who decide to junk their car and switch to public transportation.

It isn't clear yet how much the German economy might benefit from the junking-bonus incentive. According to a study by Puls, 7.9 percent of all those who own cars nine years old or older are considering taking advantage of the scrapping bonus. Of those, 17.2 percent have considered buying a Volkswagen. But the next three carmakers on the list -- Dacia, Ford and Fiat -- are all foreign brands.

cgh -- with wire reports

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