Public Support for the European Car Industry: An Integrated Analysis

As a response to the recent economic and financial crisis the European Commission, at the end of 2008, adopted the "Temporary Framework for State aid measures" to tackle the effects of the credit squeeze on the real economy. This Framework introduced new instruments for State aid and simplified legal procedures for granting State aid. In parallel to those temporary instruments, traditional public support instruments (e.g. scrapping schemes, loans of the European Investment Bank) were used to support the European economy to overcome the crisis. The European car industry appears to be one of the major beneficiaries of that overall public support and especially under the Temporary Framework. However, although public support measures can help address the short-term challenges the car industry faces, they may undermine its long-term competitiveness, e.g. by postponing the settlement of structural problems (such as overcapacity).

In this paper we provide an overview of public support for the European car industry during the past decade. First, we identify the most relevant instruments of public support, and review their economic assessment. The European Commission increasingly recognizes the role of economic analysis in controlling public aid to the car industry. However, the degree of economic assessment varies across different instruments of public support and individual state aid cases. Moreover, the state aid legislative framework is open to derogations and interpretations. In particular, the "Temporary Framework for State aid measures" de facto implied a relaxation of the state aid rules and foresaw no formal control of individual state aids.

Second, we estimate the amount of public support for European car manufacturers. Three factors complicate the overall quantification of public support for each instrument: (i) the Commission does not scrutinize, and hence does not quantify all public support measures; (ii) the available information depends on whether the state aid is granted to individual companies or in the form of general schemes; and (iii) the available information depends on whether the aid is granted in the form of a grant, soft loan or guarantee. Our lower bound estimate of state aid suggests that the aid declined over the pre-crisis period, but peaked to €1.2 billion as a response to the financial and economic crisis in 2009. Perhaps even more strikingly, this state aid was combined with an unprecedented amount of public support granted through scrapping schemes of at least €4.0 billion, and loans of the European Investment Bank of €2.8 billion, or an equivalent of €400 million of "aid element".

In conclusion, the existence of multiple public support instruments at different levels may create coordination problems and a lack of transparency, in spite of the Commission's efforts. The lack of transparency in turn poses a challenge for the quantification of state aid and non-state aid support to any industry or sector. This paper provides a first step towards informing the policy debate about the effects of public support to the car sector, and also stimulates the academic interest in the subject of state aid, and - more generally - public transfers to companies.

Grigolon, Laura, Nina Leheyda and Frank Verboven (2012), Public Support for the European Car Industry: An Integrated Analysis, ZEW Discussion Paper No. 12-077, Mannheim.