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EU: Common Currency Puts Car Buyers In Driver's Seat

  • Breffni O'Rourke

The euro is now the sole legal tender in all 12 nations of the European Union's eurozone. The euro is meant to produce new efficiencies, not least by making the single market more transparent. For the first time, Europeans can easily compare the price of a product in, say, Finland, with that of the same product in, say, Italy. In the case of car prices, consumers can now plainly see that prices on various national markets can differ by more than 50 per cent. RFE/RL correspondent Breffni O'Rourke reports on where thrifty consumers should buy their cars and whether the huge gaps in pricing show any signs of ever closing.

Prague, 1 March 2002 (RFE/RL) -- Buying a new car is a big economic decision for most people. It makes sense to shop around. That usually means exploring auto showrooms in one's own town or region.

Now, however, with the euro common currency in place, a family in the German city of Cologne can check at a glance -- using the Internet -- the price of their favorite model in, say, the Spanish city of Granada.

Would it be cheaper to buy that new car while the family visits Granada to see the famous Alhambra Palace? Consumers who take the trouble to think in such pan-European terms are in for some surprises. For example, the same small car that costs $9,000 before tax in Finland costs well over $14,000 before tax in Britain.

Of course, the drive-away price, once taxes are paid, may not reflect the same difference between base prices, because national tax rates differ from country to country.

However, buyers of motor vehicles are allowed to buy a car tax-free in a foreign EU country, paying only the tax of his or her own home country. If that tax level is lower than that of the exporting country, the buyer pockets the difference.

Where is the best place in the European Union to buy a new car from a pre-tax price point of view? A study issued last month by the EU's Executive Commission found that the most expensive country is Britain, with Germany not far behind. The cheapest are Finland, Spain and Greece.

This immediately highlights an anomaly in the EU's single market -- namely, how can the market be open and level when each member state imposes its own taxes?

This contradiction in logic has naturally led to pressure to harmonize tax rates in the EU, a controversial topic, politically. As David Harley, a spokesman for the European Parliament's press service, puts it:

"There is a big debate in Brussels at the moment, as you may know, about whether or not taxation should become a matter of European community competence. At the present, it is not. That is an area where the member states retain full power."

Car manufacturers justify price differences largely through these tax differences, saying they market their models at an artificially cheaper base price in countries where the tax levels are high. Critics would say the pricing policies also reflect what the markets will bear. In other words, base prices for automobiles in high-income Germany are more than they are in low-income Greece.

A spokesman for the German luxury car manufacturer BMW in Munich denies manufacturers are seeking to profit from the capacities of individual markets. The spokesman, Jurg Diner, is calling for tax harmonization within the EU, saying that, in some cases, high taxes makes some cars practically unsellable.

"The reason is not that the manufacturer demands higher prices so as to cash in, as the media sometimes says. We offer keen prices [in every market] because competition in the car industry has been very hard for years. We [at BMW] are in sharp competition with Mercedes, also Porsche and Audi, and we simply cannot allow ourselves to demand too high prices."

At the beginning of this year, BMW introduced a new model in its 7-series, which will have a common price in all eurozone countries. Diner says other models with similar common pricing will follow.

London-based car industry analyst Hilton Holloway agrees there must be common tax levels and that, without that, accurate comparisons are impossible:

"You either do the thing totally properly, or you don't bother. It's my opinion that, at the moment, we are halfway between nowhere. In the end, if you are going to do a proper single market, then you have to do it like America."

Holloway, the news editor of "Car" magazine, says a wholly different price picture emerges when you consider national taxes:

"You find that if Germany is [taken as a level of] 100, you find that Britain is above that, but only eight or nine percent, and countries like Denmark are 165 to the German 100, so they are 65 per cent more expensive. The problem is you can't really compare prices when you don't have a proper single market. It's impossible."

With up to 10 Central and Eastern European states expecting to join the EU by 2004, a new situation will develop. If Western manufacturers are still offering cars in the East more cheaply than at home, a type of auto tourism could develop. As analyst Mark Bursa, editor of "Automotive Emerging Markets" in London, puts it:

"[From] somewhere like Germany, where you could nip over to Poland very easily, yes, you could see that as a problem. I think the EU certainly has to be mindful of that."

Bursa says the European Union is in the midst of changing the rules on car sales and car distribution at the moment, and that these sorts of issues will have to be considered.