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Volkswagen Scandal: A Reflection of the German Economic Model ?

The following article is referenced to the Financial Times article: Volkswagen: System Failure by Richard Milne:  

The article gives a good overview of the various scandals that the Volkswagen (VW) was involved in, as well as some basic information with regards to the so-called ‘German model of capitalism’ and the corporate governance practices that result from it. It was included in the ‘Big Read’ section (a long, general, in-depth and opinionated one), and was written by Richard Milne who is the Nordic and Baltic correspondent of Financial Times. It is seen that the overall point of the article is to put the VW system (as can be induced clearly from the title ‘System Failure’) and the German model of corporate governance into question. It is claimed that the scandals that took place in different periods in VW’s history were caused by the VW system itself, although it may seem that they have little in common to an outsider. Although, the article does not recommend a specific direction of change for the system failure, the author seems to believe strongly in the need of change. We could speculate that this critique of the VW’s system , a company which can be seen as a quasi-symbol of the German model, implies that a change is needed in the German model. Overall in the direction of the Anglo-Saxon model of capitalism (or Liberal Market Economy rather than staying as a Coordinated Market Economy following the work of Hall and Soskice).

With regards to the question on who is to blame for the scandals, it should be answered on various levels in my opinion. There have been multiple scandals and each scandal has its own story and specific people to blame for.

What didn’t work in the system looks clear; it is the system itself by which I mean the VW’s system (and in my opinion it would be controversial to extend this failure to the German system as a whole). It is a corporate governance failure and it shows that the complicated system of VW lacked the control mechanisms to prevent a corporate misconduct of this scale. Managers failed to act in the interest of the shareholders; and therefore, this scandal has been extended as a further critique of the German model as a whole which emphasizes a stakeholder approach. However, VW’s governance was raising some doubts among analysts prior to the scandal in 2015. VW’s management was rated below its competitors by Morgan Stanley Capital. Furthermore, as indicated by former employees the decision-making system was flawed, it lacked transparency, some issues were deemed as taboo (notably with regards to unemployment), thus overall there were not real discussions taking place on some critical issues.

With regards to the question whether the VW scandals point to the failure of the German model of capitalism, I would firstly say that it is too broad of a question and vague as well. The reason why I find the question too broad is the fact that a system of this kind constitutes many dimensions (political, economic, legal, cultural) and the ways of measuring the overall success of the different systems is disputed. Furthermore, this ‘varieties of capitalism’ approach is not straightforward and without problems. By being a recent trend (after the end of the Cold War and especially after the 2008 financial crisis) there are many debates on the measures/ways of classification between different models and on the within-country differences that are typically omitted in these studies. Furthermore, these conceptions, notably the LME and CME distinction made by Hall and Soskice imply the existence of static models, whereas in reality the different models are in constant flux.

Moreover, when we take other scandals where major German firms were involved in the past years (international bribery allegations at Siemens and Deutsche Bank’s mis-selling of mortgage securities in the US), we see that these tended to happen outside Germany and especially in Anglo-Saxon countries where rules that apply in Germany do not apply and vice versa. Thus, there is the argument that these scandals highlight the weaknesses of the German system in contexts where the rules are absent and therefore causes managers to feel less constrained. However, to answer the question whether this scandal posits a general failure of the model in Germany, we need to compare how the other so-called models are faring, notably the Anglo-Saxon shareholder capitalism. To begin with, there is a certain irony about the question whether the German model is failing since the interest in studying the varieties of capitalism surged after the decline in trust of the Anglo-Saxon shareholder capitalism (during the 2008 financial crisis), when people began to question the sustainability and the perceived superiority of the Anglo-Saxon model (often comparing it to the German model or the Scandinavian model which actually had a significant impact on public opinion and political discourse as we can see with the attention Bernie Sanders’ campaign attracted). In our comparison of the models and the scandals surrounding them, more important than the notorious Enron scandal and the Dotcom Bubble, I believe that the 2008 financial crisis showed us the weaknesses of the Anglo-Saxon economic model in many ways and can be considered as the indication of the failure of the model as a whole since the financial markets and institutions (which are very central to the Anglo-Saxon model that is characterized by dispersed ownership of firms , high stock market capitalization and lack of/fewer state interventions) failed to function properly due to inaccuracies in regulation and supervision caused by moral hazard, collusion, excessive risk-taking and short-termism.

The crisis caused many people to lose their jobs and many businesses to fail as well as contributing to the European Sovereign Debt crisis. Massive bailouts and expansionary monetary policy were used in order to prevent a potential collapse of the whole economic system which put a significant burden on the public. The German economy overall is doing well with a historically low unemployment rate (almost reaching full employment), a high export quota as well as an innovative industry. The corporate tax level is lower than that of the US which benefits investors and encourages savings. The industry has a strong place in the economy with the highest share of industry among the G7 countries. Moreover, Germany is ranked 9th in the 2018 Social Progress Index (which combines the three dimensions of well-being and progress; basic human needs, foundations of well-being and opportunity), whereas the average Anglo-Saxon country is lower in the ranks with the US being ranking 25th.

In my opinion, there is little need to compare the German model with the so-called Mediterranean model (Italy, Spain , Greece , Turkey). The latter is primarily characterized by ‘’a large agrarian sector and a recent history of extensive state interventions that have left them with limited capacities for non-market coordination in the sphere of corporate finance, but more liberal arrangements in the sphere of labor relations” (Hall & Soskice, 2001, p.21). The Mediterranean model is clearly not doing well economically and politically, and all the Mediterranean countries are suffering crisis to varying degrees. Thus overall, we can conclude that the German model is far from being a failure vis-à-vis other models and I do not consider the VW scandal as a failure of the German model of capitalism.

With regards to the appointment of Matthias Müller as the new CEO after the scandal, I believe that he revived the company even though many people had some doubts about him due to his well-known close relations to the Porsche and Piech families and the possible involvement of a Porsche model in the scandal (Porsche was Müller’s former employer). In the 3 years that have passed after Müller’s appointment, we can say that he has managed the crisis surprisingly well and has started an aggressive expansion into the electrical vehicle industry. Sales VW’s profit margins increased from 6% to 7.4% in 2016, the year following the crisis. Under Müller, VW also remained the largest automaker in the world and did not concede its position to Toyota Motor Corporation. Of course, all these positive changes did not just happen. As mentioned in the first part of the essay, Müller tried to change the rigid, malfunctioning top-down governance structure by delegating more authority to the brand and regional managers. Furthermore, Porsche Automobil Holding (largest shareholder of VW) stated in a release that any change in the VW governance structure would be reflected in its own.

To conclude, the VW’s corporate governance structure was flawed and was already alarming before the emissions scandal. It was bad implementation of the German co-determination model and showed its potential weaknesses. However, the scandal cannot be said to imply a failure in the German economic model, as this is functioning better than other comparable models (the Anglo-Saxon one which lost its almost unquestioned superiority after the 2008 crisis and the Mediterranean model). The scandals involving German firms tended to happen in Anglophone countries which further provides an argument against the failure of the German model. Moreover, Matthias Müller’s appointment as the new CEO after the crisis proved to be a good decision with regards to the firm’s reputation, sales profit margins and reforms in the governance structure.


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