Germany is spending billions of euros on subsidies that will slash the price of electric cars as part of a huge economic stimulus package that could help automakers such as Volkswagen to sell vehicles that are better for the environment.
The German government will double existing subsidies to €6,000 ($6,720) on electric vehicles that cost up to €40,000 ($44,800), according to Chancellor Angela Merkel’s Christian Democratic Union party. The total incentive increases to as much as €9,000 ($10,080) when the existing contribution from manufacturers is included.
Potential car buyers will also benefit from a temporary reduction in the country’s sales tax to 16% from 19%.
The incentives are part of a sweeping €130 billion ($145 billion) package approved by the German government late on Wednesday.
It is designed to help Europe’s largest economy recover from the effects of the coronavirus pandemic. The subsidies for electric cars are expected to cost €2.2 billion ($2.5 billion), while carmakers and their suppliers will receive another €2 billion ($2.2 billion) to aid research and development.
Asked about the incentives on Thursday, German finance minister Olaf Scholz said they were part of a broader effort to help the climate. “This is about renewable energies. This is about all the climate activities which are necessary to get to a [carbon] neutral economy in 2050. We have to start now,” he told CNN.
The overall stimulus package amounts to 4% of the country’s annual economic output. When combined with previously announced spending and tax breaks, the total amount of emergency stimulus in Germany has now reached a whopping 14% of GDP.
The incentives could jumpstart efforts by German carmakers including Volkswagen to manufacture and sell more electric cars. Volkswagen, which also owns Audi, Porsche, SEAT and Skoda, plans to spend €33 billion ($37 billion) on electric development by 2024, expanding into new business areas including charging infrastructure and battery production.
Volkswagen is the world’s largest carmaker, and it plays an outsized role in the German economy. The company employs nearly 300,000 people in Germany, and operates 27 plants in the country, including the world’s largest, at Wolfsburg. BMW and Daimler, which owns Mercedes-Benz, are also among the auto brands and parts suppliers that help form the country’s industrial backbone.
The global auto industry had already suffered two years of declining sales before the coronavirus pandemic struck, forcing factories and dealerships around the world to close. Sales have dropped off a cliff this year, and there are few signs of a big rebound.
Volkswagen has reopened factories including its massive plant at Wolfsburg, but the industry outlook remains extremely grim. According to the latest survey from Germany’s Ifo Institute, car companies in the country assess their current business situation as worse than during the global financial crisis in 2009. Demand is lower than at any time since 1991.
“The industry is down in a dark cellar, and although it’s managed to climb back up a few steps, there’s still no sign of light,” says Klaus Wohlrabe, head of surveys at Ifo.
Still, electric cars could power the rebound. The European market for electric vehicles and plug-in hybrids grew by 72% in the first quarter of 2020, according to research firm Canalys. The two-vehicle categories now make up over 7% of all new cars delivered on the continent.
Chris Jones, chief analyst for the automotive sector at Canalys, said the “impressive” results for electric vehicles could have been even better if not for the disruption caused by the pandemic. Going forward, Germany’s new subsidies and the introduction of electric versions of already popular models should help the trend continue, according to Canalys.
Germany’s new stimulus package was larger than analysts had been expecting. In addition to electric car incentives, it includes money for green investments, tax breaks and relief for families with children.
“Following five years of fiscal surpluses and a decline in the German public debt ratio … the package shows once again that Germany is ready and able to spend when it matters,” said Holger Schmieding of Berenberg Bank.