The German economy has been nothing if not impressive. In the face of ugly economic circumstances across Europe, this country held fast to fiscal discipline while staying on track with exports. Hence, Germany ran budget surpluses for the last three years and has a cost of capital so low that its bond yields rival that of Japan.
Then, out of nowhere, comes a claim of corporate cheating that rocked iconic Volkswagen, the “People's Car” company, maker of the famous Beetle.
It's too early to know the full extent of the fallout from the scandal, but contrary to the happy face their officials put on the state of their nation, the embarrassment from this episode is just the latest punch to land on Germany. Their economic engine is running out of fuel just as they need to provide more power.
500,000 Americans own VW's that are illegal to drive. These clean-burning diesels spew nitrogen oxides at up to 40 times the proscribed level under normal driving conditions.
VW admitted to installing software that instructs the vehicles to cheat whenever they encounter test conditions (no movement of the steering wheel, no speed registered while the engine revs, etc.). Now they face $18 billion in fines.
That's bad. But what's worse is the potential backlash against the company, which is synonymous with the country itself.
Volkswagen employs more than 270,000 people, which doesn't include all of the suppliers and ancillary support organizations. They own Audi and Porsche. Cars and auto parts represent 20% of all German exports. The company just announced it will stop selling diesel cars in the u.s. immediately.
This doesn't represent a big number of cars, but what if the negative effect on the brand dramatically reduces sales outside of Germany in the year ahead? That thought should send shivers down the spines of German leaders, particularly since their economic engine appears to be throttling back.
In August, a month before the VW scandal broke, exports fell 5.2%. This was the biggest drop since the financial crisis in 2009. Still, exports were up 5% over August of 2014, but the development has to give Germans a reason for apprehension.
