Business, Finance & Economics

Take my car, please

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Across Germany, car buyers are rushing to the nearest showroom. New-car registrations soared by almost 40 percent last month.

That surge comes just as Europe’s largest economy has been battered by the slide in global demand, with February industrial production falling 20 percent from a year ago, and unemployment on the rise. Germany's gross domestic product, meanwhile, is expected to shrink this year by 4.5 to 7 percent.

But even in a world economic crisis, this car-loving nation knows when to say yes to a government hand-out.

In January the German government launched a car scrapping bonus scheme, which encourages consumers to trade in cars nine years or older for a more energy efficient new vehicle by giving each buyer 2,500 euros ($3,200).

Initially the government allocated some $2 billion to the scrapping scheme but it was not prepared for the consumer’s response: By the beginning of April, 1.2 million Germany had applied for the bonus — twice as many as the government could pay for.

So bowing to pressure from carmakers and consumers, Berlin has more than tripled the size of the scheme to 5 billion euros ($6.5) until the end of this year, enough to cover up to 2 million new cars.

“The extra cash was Germany’s contribution to offset the fall in exports through more domestic demand,” says Karl-Theodor zu Guttenberg, Germany's economics minister. It’s also an unspoken admission by Berlin that its fiscal stimulus of $80 billion over two years might not be enough to stem the economic downturn.

So far the bonus has helped mainly the small car sector, especially Volkswagen, Opel (GM’s German subsidiary) Renault and Ford.

But luxury carmaker Audi has also profited. “We’ve sold 13,000 more cars so far because of the scrapping bonus,” said Audi spokesman Juergen de Graeve. "The scrapping bonus is like a vitamin boost for the whole industry."

With every seventh job in Germany linked to the automotive industry, the measure seems popular.

But not all in the industry love it.

Luxury carmakers BMW and Daimler have complained the scheme helps their mass market rivals. Dieter Zetsche, the chief executive of Daimler, maker of Mercedes Benz, has argued the scrapping bonus will only lead to a bigger sales slump down the road.

Some critics even see the scheme as a gift by German taxpayers to foreign automakers, or merely as an unfair subsidy that will only create new government debt. Used-car dealers outright hate the scheme.

And the country’s Green Party has called the scrapping plan environmentally unfriendly and economically nonsensical. It argues for stricter CO2 controls, not more cars.

But the scheme has become the single most popular initiative taken by Chancellor Angela Merkel’s government. Her coalition partner — the left leaning SPD (Social Democratic Party) — claims Foreign Minister Frank-Walter Steinmeier, the party’s candidate in this year’s general election, had the idea for the scrapping bonus in the first place. It hopes that come September, those two million car buyers will translate into two million votes.

For the moment the numbers tell the story according to the ACEA, the pan-European auto industry body. Germany is the only country in Western Europe to have seen growth in its car sales in the first quarter. France, Italy and Spain — which have more modest versions of car scrapping schemes — all saw their sales fall.

So heads up, Britain. Amid a drop of almost 30 percent in its first quarter car sales, the U.K. government is expected to reveal its own "cash for clunkers” program in its April 22 budget.

Karoline Durr is a writer based in New York and Berlin. She has covered European business and economics for CNN, CNN International and Bloomberg.