Volkswagen Scandal Sparks New U.S., European Investigations

The American inquiry into Volkswagen’s diesel cars widened Tuesday, with the German company admitting that software allowing them to cheat on U.S. emissions tests has been installed in as many as 11 million vehicles around the world. This is bad news for the German economy, which powers Europe’s financial engine largely through its automotive sector. And it comes as European officials push for a broad EU-wide investigation into the company’s emissions scam.

As dominoes continue to fall — Germany, France, the United Kingdom, South Korea and Italy are calling for queries into Volkswagen — the damage to the iconic German company became more clear Tuesday. Volkswagen CEO Martin Winterkorn has apologized and is fighting to keep his job, denying reports in German media that he would be replaced by Matthias Müller, the chairman of VW’s sister company Porsche. Volkswagen’s stock dropped nearly 20 percent Tuesday, a repeat of Monday’s slide. Qatar, the oil rich nation that is one of the Volkswagen’s largest shareholders, has already lost $5 billion on its investment.

“I am endlessly sorry that we betrayed the trust” of millions of people, Winterkorn said in a video posted on Volkswagen’s website, adding that “swift and comprehensive clarification has now utmost priority.”

But the broader pain might be to Germany’s manufacturing reputation as a whole. German companies, including carmakers BMW and Daimler, have long prided themselves for the precision of their engineering; “Made in Germany” has long been synonymous with quality. On Tuesday, Euro Intelligence, an economic news service, wrote, “The criminal investigation into a manipulation of a diesel emissions test in the U.S. by VW has the potential to sink large parts of the car industry.” In a tweet, Euro Intelligence President Wolfgang Munchau said he expects the scandal to get bigger because the software is used in other diesel cars.

Volkswagen has said it would cooperate with all inquires into its emissions scheme. The Justice Department did not return a request for confirmation of reports that it is opening the criminal probe. The House Energy and Commerce Committee plans to hold a hearing on the Volkswagen recall. U.S. state attorneys general are also preparing to investigate, a spokesman for New York Attorney General Eric Schneiderman said.

There is now growing momentum to allow the EU to lead Europe’s investigation into Volkswagen’s scheme, rather than on a piecemeal country-by-country capacity. French Finance Minister Michel Sapin said Tuesday, “We need to do it at the European level.” This sentiment was echoed by U.K. Transport Minister Patrick McLoughlin, who said in a statement, “It’s vital that the public has confidence in vehicle emissions tests and I am calling for the European Commission to investigate this issue as a matter of urgency.”

Germany’s transport ministry is sending its own investigative team to Volkswagen’s headquarters in Wolfsburg, Lower Saxony, a state located in the country’s northwest. German Chancellor Angela Merkel has called for “complete transparency” during the investigation.

Past EU probes into alleged malfeasance by private companies have teeth. It’s currently involved in a legal fight with Google, which the EU accuses of being a trust. In August, the online search giant refused a demand to change how it combs the web, setting up the possibility of a drawn-out legal fight. The EU has also taken on Microsoft, fining it $732 million in 2013 for failing to respect an antitrust settlement with European regulators.

German automakers are a key component of the country’s economy. According to the German government, they employ around 775,000 people; every seventh German job is linked to the car industry. Its industry association, the Verband der Automobilindustrie, said German carmakers accounted for 384 billion euros, or $428 billion, in revenues in 2014, or around 20 percent of total German industry revenue. A lot of this money is generated by German car companies working abroad. The European Automobile Manufacturers’ Association said Germany accounted for 5.6 million of the cars produced in Europe in 2014, or over 30 percent of all passenger vehicles manufactured there.

In other words, the recall affects nearly double the amount of cars Germany produced last year.

Germans take great pride in their manufacturing acumen, and the processes they have developed to become one of the world’s most respected brands. Audi’s slogan, Vorsprung durch Technik, or Advancing Through Technology, has become part of Germany’s common parlance. Audi is a subsidiary of Volkswagen. 

The fact that one of their most respected companies has admitted to cheating to beat emissions tests could undermine this belief. The German publication Handelsblatt ran a story under the that called the recall, “A disaster for the entire German car industry.” An article in Die Welt newspaper said the scandal threatens the very existence of the company.

“It will be tough on Volkswagen,” Scott Miller, a senior adviser at the Center for Strategic and International Studies, told Foreign Policy. “It’s a vital company in the German economy. The government of Lower Saxony still owns 20 percent of it.”

Concerns about the fallout from the growing number of inquiries was on full display in Europe today. The DAX, the German stock index, fell nearly 4 percent, while the FTSE 100 in London dropped nearly 3 percent.

China was already putting significant downward pressure on German carmakers. Due to Beijing’s economic slowdown, demand for German cars from the world’s second largest economy have pushed stock prices for BMW and Volkswagen down more than 30 percent over the summer.

Volkswagen has set aside $7.3 billion to “cover the necessary service measures and other efforts to win back the trust of our customers.” The EPA, which initiated the investigation,  said, in theory, it could levy $18 billion in penalties against the company.

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