VW raises risks to the diesel industry and the euro area economy

The VW scandal is raising fears over the outlook for the euro area economy, and Germany in particular. With the information available currently, the baseline remains that while substitution effects will arise, these will mainly benefit petrol driven cars and other brands in Europe and thus leave economic activity in the euro area relatively unchanged. However, the ongoing slowdown in demand in China remains a major challenge.

For Germany, the medium-term effects will likely mean even more rebalancing away from net exports, with short-term adverse effects to some extent being counterbalanced by increased service production (car recalls) and additional spending and consumption related to the refugee crisis.

"In the longer term, the scandal is likely to affect the diesel sector as a whole as regulators work to eliminate the discrepancy between official and real world emission results, but we would expect a gradual adjustment given the importance of other environmental targets (CO2) and the car sector in Europe",  says Societe Generale.

For Germany and the euro area car industry, the risk of consumers reassessing diesel technology should be a wake-up call for the industry and policymakers alike to renew policy reform and investment efforts.