German 'cash for clunkers' shows free market perils

By Erik Kirschbaum

BERLIN (Reuters) - The "invisible hand" of the free market has been replaced by a "heavy hand" of state intervention in Germany, which is spending a small fortune to stimulate growth but creating winners and losers throughout the economy.

The government's "cash-for-clunkers" programme that offers anyone who scraps an old car 2,500 euros (2,269 pounds) towards the purchase of a new one has sparked an unprecedented surge in demand, giving struggling carmakers a welcome crisis-defying boost.

But the incentive, which at 1.5 billion euros represents only a small slice of its 81-billion euro stimulus efforts, has inadvertently hit retailers, car repair shops, used-car dealers and sent scrap metal prices into a free fall.

Amid an unprecedented consumer feeding frenzy to secure their 2,500 euros before the 1.5-billion euro programme is exhausted, about a million car owners have applied for the incentive towards the cost of a new, fuel-efficient car.

The government promised to extend the programme that led to a 40-percent jump in new car sales in March. But it has not yet agreed on details. Some conservative politicians oppose extending the funding, complaining about its costs and expressing fears it will only worsen the hangover afterwards.

"When the state steps in to replace demand there is going to be a certain amount of 'collateral damage'," said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.

But Norbert Walter, chief economist at Deutsche Bank, said the negative "side effects" were a small price to pay in light of the enormous economic perils Germany and the world are facing.

"The car incentives are working quickly and effectively," Walter said. "If it were up to me, I'd have extended the incentives to other durable goods such as refrigerators, ovens and boilers that could be replaced with new, efficient models."