Germany’s Traffic Light Coalition Unexpectedly Turns Red For EV Incentives
Germany’s traffic light coalition has abruptly given a red light to all remaining EV incentives, a year in advance of what had previously been promised, due to the country’s economic woes.
The eco-bonus (“Umweltbonus”) incentive had been intended to continue throughout 2024, and was only to be cancelled outright from January 2025.
Instead, it was cancelled with immediate effect on 17th December 2023.
The German Economics Minister Robert Habeck had initially said on Wednesday 13th December that “We will phase out the environmental bonus, i.e. the subsidy for EVs — sooner.” He did not specify when that “sooner” would be, and many assumed that he meant that the taper down across 2024 would be steeper than previously announced.
Then, on Saturday the 16th, it was abruptly announced that the very next day, Sunday the 17th, would be the final deadline for the government to consider any applications for the eco-bonus incentive.
The German auto industry association responded in uproar, saying: “This is an incredibly big breach of trust for tens of thousands of customers who ordered their electric vehicles on the condition that the funding would be paid,” (Arne Joswig, President of the ZDK, machine translation).
“The minimum would be to let the environmental bonus run until the end of the year and at the same time, in coordination with states and municipalities, ensure that registration offices remain open until December 31, 2023 in order to be able to carry out registrations,” Joswig added.
In a later statement, Joswig said: “Trust in the federal government’s comprehensible and rational policy to promote electromobility has been massively damaged. You can’t deal with industry or small and medium-sized businesses like that.” (ZKD, machine translation)
However, the government’s immediate cutoff was calculated and deliberate, as they precisely wanted to avoid the budgetary costs associated with a last-minute pull-forward rush of applications getting in ahead of any specified cut-off date. Doing it on a Sunday was an additional low blow.
Stuck at red lights. Image courtesy of DALL-E, via Bing Chat
The so-called “traffic light coalition” government in Germany, under the leadership of Chancellor Olaf Scholtz, is now historically unpopular, with only 17% of Germans supporting the premiership of Scholtz, according to a recent INSA poll. More people would currently vote for Friedrich Merz as leader, the chairman of one of the main opposition parties, the CDU (Angela Merkel’s party).
Germany’s Economic Woes
The traffic light coalition of Scholtz’ SPD (with their red logo), the FDP (yellow logo), and the Alliance 90/Greens (green logo) has presided over a significant economic downturn.
2023 has seen Germany enter a de facto recession, with Q1 being 0.1% down YoY, Q2 being 0.1% up, and Q3 being 0.4% down. This downturn comes whilst large European neighbours France and the UK have managed to stay mildly in the black (1.0% and 0.5%, respectively).
Germany’s key industrial sector (including auto manufacturing) has suffered a downturn due to record energy prices. The elevated prices came after the German government implemented a policy of reducing and ceasing natural gas imports from Russia, as part of Europe-wide economic sanctions. The sanctions were designed, in coordination with the US, to put pressure on the Russian economy in retaliation for Russia’s military invasion of Ukraine.
Unfortunately, the sanctions have not had their desired effect so far, and if anything have had the opposite effect. The IMF calculates that Russia’s economy has grown 2.2% in 2023, whilst Germany’s has shrunk by 0.5% and is seen as “the worst-performing major developed economy”. More broadly, the combined euro (€) area economies (20 countries) saw 0% YoY growth in Q3 2023.
Why the Abrupt EV Incentive Cuts Right Now?
To try to stave off Germany’s recessionary pressures, Scholz’s coalition government — with some internal disagreements between the coalition parties — had tried to use €60 billion in emergency borrowing from the COVID era to prop up their current budgetary struggles. However, in mid November, the country’s highest court, the Federal Constitutionalism Court, ruled that this was illegal under German constitutional law, which puts tight restraints on the country’s debt-to-GDP ratio of borrowing, except in times of natural disasters.
This ruling, and the blame game stemming from it, has created more infighting between the coalition partners, all whilst the economy continues to fall into recession. The economic and political woes, and the lack of strong leadership, are much of the basis for the unpopularity of the coalition government in the recent opinion polling mentioned above.
The cuts to the EV subsidies came as a direct reaction to this Federal Court ruling, and the mandated budget tightening, which the Coalition government had not previously planned for.
The eco-bonus purchase incentive for plugins had been introduced in 2016, initially at the level of up to €4,000 for BEVs and €3,000 for PHEVs (with a vehicle retail price cap of €60,000). This increased to as much as €9,000 for BEVs during the COVID period, but by 2022 had reduced down to a maximum of €6,000 for BEVs, and maximum €4,500 for PHEVs.
The tapering down of the eco-bonus took a significant step from January 1st, 2023, reducing to a €4,500 maximum for BEVs and being entirely cancelled for PHEVs. This change, however, was planned and announced well in advance, as such policy changes usually are. The planned change led to a pull-forward of plugin registrations (especially PHEVs) in November and December 2022, ahead of the January cuts.
From September 1st, 2023, the remaining incentives for businesses, fleets, or other organisations were entirely cut — only private consumers were eligible after this (€4,500 max, for BEVs only). Again, this was a planned and long pre-announced policy change.
Before the recent chaos, the plan had been to further taper down the BEV incentive, from January 1st, 2024. The amount would be reduced to a maximum of €3,000, with a price ceiling of €45,000. We summarised these planned changes as recently as two weeks ago, in the November market report for Germany.
Now this has all been suddenly changed, the entire eco-bonus scheme has been unceremoniously dropped — there is no more purchase incentive in Germany. If you are a car dealer or consumer who had planned an imminent transaction around the formerly announced rules, well … tough luck!
Some manufacturers have said they will make a good-will scheme to make up some of the funding difference for consumers caught out by the unplanned change, though the exact details and timings of this may vary between brands.
Unfortunately, actions like the poor handling and abrupt cutting of EV subsidies are not going to make the current government any more popular with consumers, the automakers, or the small and medium businesses affected by these sudden cuts.
The industry association, the ZDK, is so affronted by the government handling of the matter that they are now calling on dealers to contact their Bundestag parliament representatives to push back on the government’s recent announcement, and to request a more orderly transition. They are providing dealers with a letter to sign and send on to their politicians:
“The letter points out that reliability and predictability are essential for such a far-reaching decision as purchasing an electric vehicle, which represents a major investment for customers. That is why MPs are asked to advocate for a goodwill regulation until at least the end of 2023 or even until the end of January 2024,” the ZDK announcement said (machine translation).
“Some members of the Bundestag have already spoken in our opinion,” (machine translation) said Arne Joswig, ZDK President.
We will have to wait and see what happens. Certainly, these abrupt changes will lead to more spikes and troughs in the German auto market in the coming months, which I will cover in my regular monthly reports.
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