How to save the planet, one old car at a time: Kohler

Want to end a recession and save the planet? It’s easy: just pay a bonus for buying a new car. It’s the one item everyone is looking for an excuse to buy, so it doesn’t take much.

Europe and America’s “car scrappage” schemes have helped to end their recessions. We learned this morning that the French and German economies have, remarkably, grown 0.3% in the June quarter and lifted Europe generally to near break-even (minus 0.1%) – thanks, in part, to a 40% increase in German car registrations in the quarter.

The schemes have been so successful for so little money that the Australian Government should think about adding “cash for clunkers” to its menu of stimulus (in Australia it would have to be “cash for bombs”, which would be misunderstood in Europe and America, or “cash for lemons” which would no doubt result in a mountain of citrus fruit on the steps of Parliament House).

Australia has concentrated on a first home buyers bonus, which has produced a construction boom while the car industry continues to struggle. Australia’s only car scheme – OzCar – was designed to provide finance to car dealers because GE and GMAC were pulling out of Australia, but it seems to have mainly succeeded in rescuing the business of political journalism while sending one of its Treasury supervisors – Godwin Grech – around the bend.

We don’t need it to avoid recession, since we’re not having one, but the effect on employment in the car industry – and manufacturing more generally – would be dramatic and perhaps curtail further rises in the unemployment rate, if the experience in Europe and the US is any guide.

It is now very likely that both Europe and the US are out of recession and will not record another negative quarter.

The inventory cycle has been turbo-charged by the car scrapping schemes. Exports have rebounded, purchasing managers indices are V-shaped, and consumer and business confidence are both on the rise.

I’m not suggesting this is all due to bonus-induced car buying, but it has certainly helped. And there are still negatives: governments all over the western world are now deeply indebted and labour markets remain weak, so there will be no quick rebound in income tax revenue to bail them out. Also the boost from the car scrapping scheme will be temporary.

But this morning’s news that France and Germany are out of recession after four quarters of contraction is great news. Italy, Netherlands and Spain are still contracting but France and Germany will lead them out.

Actually it’s mainly Germany: its car scrapping bonus is €2,500, more generous than France’s €1,000. But half of Germany’s 40% increase in car registrations in the June quarter was imported, mostly from France, but also Italy and Spain.

The sudden and unexpected exit of Germany and France from recession has sent economists across Europe scurrying back to their spreadsheet models, and suggests that even the European Central Bank was too pessimistic with its prognosis for no recovery until 2010.

Already there is talk this morning of how soon the ECB will hike interest rates. Europe largely escaped the housing/debt imbalances that built up in the US because of the ridiculous mortgage sector excesses there, so there is less risk of a W-shaped double-dip recession in Europe and a greater likelihood that the ECB will act well before the Fed.

Remember the ECB hiked in July last year, a decision that was way of out of step with the deep cuts that had been taking place in the US. Given that the official European rate was then rapidly cut from 4.25% to 1%, that turned out to be a mistake, but ECB President Jean-Claude Trichet is an unapologetic tough guy.

At this month’s press conference he said: “Let me remind you that we did not hesitate to increase rates when the situation was not that easy…”

In fact, it’s probably now a race between the ECB and the Australian Reserve Bank to see who hikes first: Trichet is hairier than Glenn Stevens, but the Australian economy is in better shape than Europe’s.

This article first appeared on Business Spectator.