Here’s why Europe should be very worried about the Volkswagen scandal

October 14, 2015, 11:00 AM UTC
Watching Developments At Volkswagen AG's Headquarters As New Chief Executive Officer Expected To Be Named
Matthias Mueller, the new chief executive officer of Volkswagen AG (VW), looks on during a news conference in Wolfsburg, Germany, on Friday, Sept. 25, 2015. The 62-year-old former Porsche chief is taking charge as Volkswagen seeks to regain the trust of consumers and regulators after admitting to rigging diesel engines to circumvent pollution controls in the U.S. Photographer: Krisztian Bocsi/Bloomberg via Getty Images
Photograph by Krisztian Bocsi — Bloomberg via Getty Images


Volkswagen is Germany’s biggest private employer and Europe’s biggest carmaker, with about 300,000 workers across the country and 600,000 worldwide. There is no question that the crisis engulfing the automaker is rocking Germany. The only question is how much economic damage will there be — and when.

It will be “a heavy blow for the German economy as a whole,” said Martin Schulz, a member of the country’s Social Democrats and head of the European parliament, though he said he believes VW is a strong company and will survive the crisis.

And damage to the Germany economy would quickly impact a European Union that is heavily reliant on German leadership.

Why layoffs are inevitable

So far no one has discussed layoffs, but they seem inevitable, as VW is facing investor lawsuits, recalls of nearly 500,000 diesel cars in the U.S., with as many as 11 million worldwide affected. Wolfsburg, the company town picked for Volkswagen AG by Adolf Hitler in 1938 because it is in the center of the country, employs more than 60,000 workers at its main factory complex. The company, with 600,000 workers overall, has roughly double the labor force of Toyota Motor Corp.’s 340,000, though each company builds the same number of vehicles, about ten million.

Roughly 20% of VW is owned by the government of Lower Saxony, the region where Wolfsburg is located. VW’s operations have been designed to ensure as much work as possible for as many as possible. VW employees make auto parts, operate cafeterias, run a luxury hotel and other services. Even a slaughterhouse, where wurst sold to workers at lunchtime is processed, is owned and operated by VW.

VfL Wolfsburg, a professional soccer team and the 2015 German Cup winner, is owned by VW. For years, it commanded the personal attention of VW CEO Martin Winterkorn, who resigned in disgrace. With Winterkorn gone and VW scrambling to raise cash to pay damages and retrofit cars, it is no longer unfathomable that the team could be sold at some point.

In 2008, the University of Mannheim published a study showing that the German car industry accounted for a disproportionate 7.7% of gross value added in that country, the highest percentage for any country in the world. Most other European countries were in the range of 2 to 4%. With so much of the country’s economy tied up in automaking, the possible crippling of its biggest carmaker could be deeply injurious to gross domestic product.

Cutbacks in spending

On Tuesday, VW announced that it was cutting $1.1 billion from investment spending and switching to a different type of diesel technology from the one that was used in the emission cheating scandal. The specter of job loss looms large. In a meeting of 20,000 workers led by Matthias Mueller, VW’s new chief executive officer said that painful changes are looming in order to pay multi-billion dollar costs for fines, litigation and sanctions.

Klaus Mohrs, the city’s mayor, already has warned that corporate tax revenue, which is based on a firm’s financial performance, would fall as a result of the VW cheating emissions scandal. He announced a freeze on hiring and a stop to any new projects – a portent of harsher measures that are sure to follow and the first sign that what is hitting Wolfsburg likely will spread to the region and the nation.

Bernd Osterloh, the ranking labor representative on VW’s supervisory board, told workers that company will have to put all investments and projects “under review.” He warned workers that their bonus payments could be affected.