Contagion risks from VW scandal..

Many fear significant and widespread costs to the euro area auto sector from VW's admission of systematic cheating on emissions. While it is not yet possible to determine the full extent of costs due to uncertainty about whether there will be any more revelations and about legal settlements and the reaction from regulators, the costs can be put to VW at €32bn over the coming two years.

This includes recall costs, vehicle buy-backs, fines and class action settlements. According to Societe Generale, for the broader macroeconomic effects, several channels of contagion are seen

Beyond VW, other carmakers have not acknowledged any wrongdoing (although there are also large emission result discrepancies for other brands). The scandal will not spread beyond VW, but changes in regulations are likely to add costs also to other diesel car manufacturers.

Demand for VW diesel cars is likely to see a significant dip in the short term, but where consumers will turn instead remains unclear. The demand mix will probably be structurally changed in favour of petrol cars vs. diesel (53% of EU sales in 2014), but we assume that that the substitution effects will be slow and that it will not lead to bottleneck effects medium term. 

It can also be assumed that substitution into non-EU car brands will be relatively small. While demand in the EU and US should hold up relatively well, a potentially bigger risk to the car industry in Europe is the slowdown in demand in China.