European Central Bank criticizes car scrapping schemes
By Andrew C., 30 Aug, 2010. 0 Comments
Car scrapping schemes have been lauded for having kept the auto industry afloat but the European Central Bank is saying that it actually has little benefit for the economy as a whole. In an article in its latest monthly bulletin, the ECB warned that these programs created a temporary boost for automakers at the expense of other sectors and has the effect of delaying much needed consolidation.
There were 11 euro zone countries that gave incentives for car owners to replace their old cars with new more fuel-efficient ones. The list includes Germany, Italy, France and Spain. The governments in those countries say that the schemes boosted sales at this critical time. In fact, European new car sales rose 6.3% month-on-month in September. However, the ECB did not mince words in criticizing the car scrapping schemes. Continued after the jump!
It said that these government measurers were driving consumers away from other major purchases. The ECB asserted that vehicle scrapping schemes will have some immediate and future adverse effects on activity. ECB relates that while the first half of 2009 certainly had a positive contribution from car sales, a corresponding negative contribution was recorded from other purchases. The result is that other major purchases slowed down. It also predicts that sales will fall as soon as governments halted the incentives. This may artificially delay much needed structural changes in the car industry.
The resulting sudden drop in the demand for new cars “may hamper the efficiency of the functioning of a free market economy and may delay necessary structural change, thereby undermining overall income and employment prospects in the longer term." This isn’t the first time that ECB policymakers have expressed their misgivings with incentive schemes. Last Wednesday, Lorenzo Bini Smaghi, one of the ECB's six-member Executive Board, suggested that governments keep incentive schemes in place in order to sustain economic growth beyond an initial expected rebound.
[via reuters]
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