VW affair raises 'German model' questions

Significance The financial implications of the VW scandal could threaten the operation of Germany's largest carmaker. The scandal is damaging the reputation of not only the car sector but also the country -- for good value, high standards in science, engineering and customer care, and potentially the probity of its economic and political culture. Given the weight of the sector in Germany's economic development, the scandal is heightening doubts about the nature and sustainability of the German politico-economic model, which has involved export-led growth rooted in the performance of a small number of national champions in engineering. Impacts The affair will slow German growth, certainly in the short term. China's slowdown will intensify concerns about the reliance of Germany and its car sector on exports there. Germany could see its claims to the 'moral high ground' and stress on rule-compliance weakened in its US and euro-area dealings. Its local auto sector impact means the scandal could up Central-Eastern European anti-German feeling, already raised by the refugee crisis. The Christian Democratic Union's auto sector closeness could raise doubts about -- but not block -- any future federal Green coalition.