Volkswagen scandal: Automakers may be in their Lehman moment

     As in the aftermath of the collapse of U.S. investment bank Lehman Brothers, fraud allegations, hefty compensation claims and tighter regulations, could all follow in the Volkswagen fallout. That is raising concerns we will see an auto industry triggered crisis.

     Adding to the headache, economies tend to be more sensitive to the auto industry than the financial sector.

Plenty of problems

Ripple effects from an economic stall in China, a pending interest rate hike in the U.S. and the Greek debt crisis, which at one point rattled the equity market, have cast a dark shadow over the global outlook.

     Volkswagen adds to this list of concerns. The German automaker is at risk of up to $18 billion in penalties from the U.S. Environmental Protection Agency, which discovered the deception. Amid rising criticism, Americans see the massive fine as par for the course. Volkswagen will also inevitably face class-action lawsuits.

     The emissions scandal has ruined the automaker’s strategy of focusing on diesel cars and pushed the company into a corner. It also hurts the reputation of Germany’s auto industry and lowers the international competitiveness of the nation’s companies.

     Yet, the price tag could be much higher.

Spillover effects

The EPA recently announced that it will crack down on diesel cars produced by other automakers, such as Germany’s BMW and General Motors of the U.S. Gas-powered vehicles will probably come under more rigorous testing, too.

     Automakers will have no control over their fate. The agency will no doubt conduct thorough investigations and could unearth more damaging revelations.

     In addition, the U.S. is now moving into presidential election mode. Hillary Clinton, who served as U.S. secretary of state and has announced her candidacy for president in 2016, took to Twitter. “Outrageous,” she wrote on the social media platform. “When companies put profits ahead of safety and the environment, there should be consequences.” Her quick response to the issue likely came because she could come under criticism from her support base in labor unions in the American auto industry.

     On the presidential campaign, Senator Bernie Sanders, backed by left-wing Democrats, will not be alone in calling for tighter environmental regulations. Environmental issues are a hot topic in the U.S.

     In Japan, the Volkswagen scandal has dragged down car-related stocks on the Tokyo bourse. Automakers here heavily rely on their exports and overseas production, rather than domestic sales, and the auto industry is the key driver for the nation’s economy.

     Japanese automakers will try to separate themselves from the German company.