Volkswagen’s DieselGate poses wider threat to German economy

Volkswagen’s DieselGate poses wider threat to German economy

The VW scandal discredits the European auto industry and could pose a threat to the wider transportation and logistics sector. 

A tinkered algorithm in the central unit of an engine threatens to become an existential threat to Europe’s largest automaker. A mere series of software coding could in fact trigger the biggest lawsuit in history. VW Shares plummeted from $165 to $92 USD in less than two weeks time.  

VW’s diesel emissions-cheating scandal is poised to be one of the largest industrial frauds in recent history, and will widely surpass Toyota’s sudden-acceleration probe in the US, which settled for $1.2 billion USD.

It will also probably equal or exceed the $53 bn USD settlement that BP had to pay to compensate for the environmental damages of the Deepwater Horizon oil spill in the Gulf of Mexico.

The United States Energy and Pollution Agency (EPA) found that VW series with 1.6 and 2.0 liter four-cylinders mills (EA 189 model) expelled 10 to 40 times more Nitrogen Oxides (NOx) out of their tailpipes than declared by the manufacturer and permitted by law.

More alarmingly, the CPU had software altering the combustion mixture when testing devices were detected, thus rendering lower emission levels. The EPA charged VW with “installing defeat devices” to dodge the US emission testings and violating the Clean Air Act.

The US Justice Department and the Federal Bureau of Investigations (FBI) could press criminal charges due alleged fraud.

“We’ve totally screwed up” were the words of Michael Horn, head of VW America, when enquired by the press after the scandal emerged. Merkel commented on the case as well, calling it a ‘dramatic event’.

UK investigations have recently shown that Ford, Mazda, Mercedes and BMW have also failed their emissions tests, registering between 5.3 and 6.8 times higher than Euro 6 standard permits.


Some 11 million diesel vehicles have been later recognized by VW to be fitted with defeat devices to cheat pollution tests and render lower emissions than real; half a million of these are located in the US, and over ten million are in Europe.

Market impact and beyond

VW shares fell by 40% since the case erupted, prompting the forced capitulation of Martin Winterkorn as CEO and shredding the company’s value by $34 billion USD, obliterating trust in the firm.

S&P, Moody’s, and Fitch immediately placed negative outlooks to VW credit ratings, with looming downgrades. The sheer magnitude of the scandal will inevitably dethrone VW from its position as the world’s top automaker, and may shave-off over a decade of profits.

Chart source: Bloomberg

The economic damages of the scandal are simply mind boggling, without mentioning the environmental and human ones. The US Justice Department could levy fines of up to $18 billion USD, as the Clean Air Act demands up to $37,500 USD in fines per vehicle that violates the pollution regulations.

VW has set aside some $7.3 billion to cover the costs of the scandal, a figure that seems rather small when taking into account the wider implications of the event.

Should VW attempt to recall and retrofit its vehicles to make them comply with the law, it would demand some $2,000 per unit. US and UK owners of affected vehicles (2008-2015 models with 1.6 and 2.0 TDI engines) are joining the collective actions and demand compensations.

But the governments of Italy, South Korea, UK, Norway, France, and Spain are to launch their own probes, looking to assess the damage dealt to their economies.

Penalties, recalls, and settlement costs are estimated to amount to a number between $24 and $86 billion USD (Credit Suisse estimates), potentially making it the biggest settlement in history.

VW-designated Chairman Hans Dieter Poetsch has warned that the issue is an “existence-threatening crisis for the company.” VW produces approximately ten million cars per year, employing nearly 600,000 people worldwide.

Of these, 265,000 are in Germany, representing one third of the whole auto industry of the nation.

In fact, the problem could even extend beyond the private sphere and affect states alike. The State of Lower Saxony holds 12.5% of the shares and 20% of the voting rights in the company, while 17% of VW AG Group is owned by the Qatari Investment Authority, a sovereign wealth fund from the Gulf nation.

More critically, VW represents 2.7% of Germany’s GDP, making it the biggest single company in the German economy.

Expecting a fall in its sales added to the plunging share prices and negative outlook.

Following the scandal, VW will find it extremely hard to access credits at low rates. Sanitizing its accounts to cope with the upcoming fines and settlements, the German company will be forced to undertake serious restructuration that could lead to a reduction of its workforce and output volume.

However, given the overall strength of its manufacturing sector and financial institutions, Germany will survive the storm.

About Author

Martin De Angelis

Martin F. De Angelis is a political and security risks analyst with a focus on Latin America. He has lived and worked in the US, UK and Cuba. He is a former US DoS Fulbright Scholar and UK FCO Chevening Fellow. Martin has been broadcast by BBC, AlJazeera, SkyNewsHD, Euronews and other media. He holds a Licentiate degree in Political Science from the University of Buenos Aires, an MA in Strategy and Geopolitics from the Army War College of Argentina and an MSc in International Relations Theory by the London School of Economics [LSE] with Merits.