SPECIAL REPORT: 'Made in Germany' Label Could Take A Hit - Volkswagen Could Pose Bigger Threat To German Economy Than Greek Crisis

Editor’s Note: Last week the United States Environmental Protection Agency (EPA) reported that Volkswagen (VW) vehicles contained software that turns off emissions controls when driving normally and turns them on when the car is undergoing an emissions test. According to data from EPA, the device allowed VW vehicles to pollute 10 to 40 times over the legal limit. It turns out that as the  German auto maker has now admitted that 11 million vehicles worldwide were fitted with pollution control cheating software. Now German prosecutors are conducting a preliminary investigation into the manipulation of vehicle emission test results at Volkswagen, with US authorities also planning a criminal investigation. Other countries have announced plans to probe, more would follow. This VW's pollution scandal is growing into the biggest in the company’s 78-year history.

The Volkswagen emissions scandal has rocked Germany's business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe's largest economy.

Volkswagen is the biggest of Germany's car makers and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.

Volkswagen Chief Executive Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned on Wednesday and economists are now assessing its impact on a previously healthy economy.

"All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis," ING chief economist Carsten Brzeski told Reuters.

"If Volkswagen's sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole," he added.

Volkswagen sold nearly 600,000 cars in the United States last year, around 6 percent of its 9.5 million global sales.

The U.S. Environmental Protection Agency said the company could face penalties of up to US$18 billion, more than its entire operating profit for last year.

Although such a fine would be more than covered by the 21 billion euros (US$24 billion) the company now holds in cash, the scandal has raised fears of major job cuts.

The broader concern for the German government is that other car makers such as Daimler and BMW could suffer fallout from the Volkswagen disaster. There is no indication of wrongdoing on the part of either company and some analysts said the wider impact would be limited.

The German government said on Wednesday that the auto industry would remain an "important pillar" for the economy despite the deepening crisis surrounding Volkswagen.

"It is a highly innovative and very successful industry for Germany, with lots of jobs," a spokeswoman for the economy ministry said.

But analysts warn that it is exactly this dependency on the automobile sector that could become a threat to an economy forecast to grow at 1.8 percent this year. Germany is already having to face up to the slowdown in the Chinese economy.

"Should automobile sales go down, this could also hit suppliers and with them the whole economy," industry expert Martin Gornig from the Berlin-based DIW think tank told Reuters.

In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly two percent of the whole workforce.

In addition, automobiles and car parts are Germany's most successful export -- the sector sold goods worth more than 200 billion euros (US$225 billion) to customers abroad in 2014, accounting for nearly a fifth of total German exports.

"That's why this scandal is not a trifle. The German economy has been hit at its core," said Michael Huether, head of Germany's IW economic institute.

"MADE IN GERMANY"

There are also voices, however, that say the impact on the economy as a whole should not be exaggerated.

"I don't think that the German automobile industry will be lumped altogether," Commerzbank chief economist Joerg Kraemer told Reuters.

"There won't be a recession just because of a single company," Kraemer added.

The German BGA trade association also tried to calm the public by saying there were no signs that customers abroad were starting to doubt quality and reliability of German companies.

"There isn't a general suspicion against goods labelled 'Made in Germany'," BGA managing director Andre Schwarz told Reuters.

But he acknowledges there is a degree of concern among German companies that the scandal over cheating on U.S. diesel emission could have a domino effect on their businesses, eroding the cherished 'Made in Germany' label.

Some observers also see some irony in the scandal.

While the German economy defied the euro zone debt crisis and, so far, the economic slowdown in China, it could now be facing the biggest downside risk in a long while from one of its companies.

"The irony of all of this is that the threat could now come from the inside, rather than from the outside," Brzeski said.

How VW's "defeat device" works #dieselgate @reuterspictures

Volkswagen Chief Executive Martin Winterkorn Resigns

Volkswagen CEO Martin Winterkorn © Kai Pfaffenbach / Reuters

The CEO of Volkswagen AG Martin WInterkorn has resigned over the emissions scandal that could cost his company billions of dollars. The German auto maker admitted 11 million vehicles worldwide were fitted with pollution control cheating software.

“I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group,” WInterkorn said in a statement.

WInterkorn said that as CEO he accepted responsibility for the irregularities found in the diesel engines, and “therefore requested the Supervisory Board agree on terminating my function as CEO of the Volkswagen Group.”

The head of VW added that his resignation would lead to a fresh start which the company needed.

VW's pollution scandal began in the US and has grown into the biggest in the company’s 78-year history. On Tuesday France called for an EU inquiry, with its environmental agency claiming it will conduct its own investigation. The UK transport secretary has also called for a probe. Germany, Italy and South Korea have also started investigations into Volkswagen vehicles.

German prosecutors are conducting a preliminary investigation into the manipulation of vehicle emission test results at Volkswagen, with US authorities also planning a criminal investigation.

The scandal broke last week, following a report from the US Environmental Protection Agency. The agency reported that VW vehicles contained software that turns off emissions controls when driving normally and turns them on when the car is undergoing an emissions test.

The device allowed VW vehicles to pollute 10 to 40 times over the legal limit, according to data from EPA.

The vehicles in question are four-cylinder diesel Volkswagen and Audi cars - Volkswagen Jetta (2009-2015), Volkswagen Beetle (2009-2015), Audi A3 (2009-2015), Volkswagen Golf (2009-2015) and Volkswagen Passat (2014-2015).

The Volkswagen Group is the world's biggest carmaker. The company owns the Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Skoda and Volkswagen brands.