European Central Bank Criticises Car Scrappage Schemes

The European Central Bank (ECB) has included a section in its October monthly update that is highly critical of various attempts by European governments to launch scrapping schemes to act a short-term stimulus to the automotive market. Eleven European countries have so far implemented schemes, with the first launched by France in December 2008 and scheduled in a few cases to run until September 2010. The ECB includes some interesting data in its update, including the fact that the combined cost of the schemes is relatively nominal in budgetary terms, estimating that the cost of the schemes is likely to amount of the equivalent of 0.1% of GDP in the Eurozone as a whole in 2009/10. However, while the financial cost of the scheme may be relatively small, the ECB has still found grounds for criticism. The ECB concedes that the measure has been successful in supporting short-term demand for new passenger cars during the first eight months of the year, with particular success recorded by the schemes in Germany, Austria and Slovakia, which in turn reflected the strong incentive schemes being offered in these countries.

There is also some evidence, according to the ECB, that the scrappage schemes have resulted in some positive impact on private consumption and the overall effect on GDP growth in the European economic zone in the first half of 2009 is likely to have been positive, albeit relatively small. However, the ECB was critical of the effect that scrappage schemes have had on other economic sectors, with evidence of big-ticket purchases being deferred in order to finance new car purchases, with ECB citing furniture and somewhat ironically, car repairs, as sectors that appear to have suffered as a result of car scrapping schemes. According to the ECB's data it appears that in the first six months of 2009, the positive contribution derived from car sales was counterbalanced by a corresponding reduction in private consumption and retail sales.

The ECB also added to other critical voices of scrapping schemes which have criticised the schemes for "frontloading" or pulling forward passenger car sales that would have occurred without the scrappage schemes in place. In its report the ECB said, "The car scrapping schemes lower the price of current as opposed to future car purchases and thereby lead to a frontloading of private car purchases. The more car purchases have been brought forward into 2009 as a result of the measures, the stronger this unwinding will be." The ECB also cited surveys in Germany in which around half the respondents reported that they had brought forward car purchases into 2009 as a result of the generous German scrapping scheme which offered 2,500 euro towards the cost of purchasing a new passenger car (see Germany: January 14 2009: German Government Announces Auto Industry Financial Support Package) when a car of at least nine years old was scrapped. As a result the ECB claims that a substantial weakening of demand can be expected in the early months of 2010. In addition, the ECB forecasts that many private household will have increased borrowing to finance car purchases and this will have a negative impact on future overall private consumption growth.

Outlook and Implications

The ECB makes some insightful points about the various government scrapping schemes that have been introduced by the major European economies since the beginning of 2009. There is little doubt that the stimulus of short-term demand is simply a case of deferring sales volume declines. Taking Germany as an example, the scheme there has seen an enormous boost to sales with the year-to-date (YTD) sales in the market rising by 26.1% y/y to the end of September to 2.99 million units. This in itself has added around 630,000 units to the German market and to the overall European YTD sales total, which has stopped the European market's overall 6.6% y/y decline becoming an even more marked double-digit one (see Europe: 15 October 2009: European Passenger Car Sales Rise 6.3% in September, According to ACEA). This in itself is evidence of the marked short-term impact that scrappage schemes have had on the European market, although the scale of the impact that the German scheme has had is likely to be limited as a result of the conditions specific to Europe's largest passenger car market, such as comparatively low rates of personal debt and high savings rate which allowed a rapid and full take-up of the scheme.