FRANKFURT -- Reintroducing European car-scrappage schemes would provide a short-term boost to sales, but may be damaging in the long run, Fitch Ratings said in a statement.
The long-term results of such a move could distort market trends and have a far-reaching influence on automakers' model lineups and future sales, the agency added.
Many European governments including France, Germany and the UK introduced government-sponsored subsidies during the last recession in 2009-2010 to help encourage consumers to trade in their old cars for new ones in an effort to boost sales.
As European demand continues to suffer from ongoing economic difficulties in the region and carmakers face overcapacity problems, there are calls to bring back scrappage schemes. Last week, Carlos Tavares, Renault's chief operating officer, called for governments to consider offering support to European auto markets.
But the agency believes public support for such programs and the benefits they previously brought are missing now.
"Despite mass-market manufacturers' recent calls to governments and the EU for the renewal of such schemes, we think the potential for public support is lower than during the past recession because of tighter sovereign budgets. We also believe that the sector remains on course for a sustained period of sales decline or stagnation in Europe, which could turn into a sharp drop in the worst-case scenario of a euro break-up," Fitch said in a statement.
The agency added that the programs, which grant buyers a discount on a new car when they scrap an old one, do not create sales but merely pull forward purchases that would have been made anyway, leading to a sharp drop in sales and revenue when incentives end.
The discounts are often used to buy cheaper, lower-margin cars and that leads to an unfavorable sales mix for carmakers and dealers, Fitch added.
Governments have other options to help the struggling European car industry, Fitch says, which include offering tax incentives and cheap loans to fund research and development or supporting carmakers in their plans to restructure operations in the region.
Fitch added in the statement that it expects the slowdown in sales to hit PSA/Peugeot-Citroen the hardest, followed by Fiat and Renault. BMW, Daimler and Volkswagen will be less affected by the slowdown in Europe, the agency added.
Car registrations in the EU and EFTA countries fell 7.3 percent to 5.64 million in the first five months of 2012, according to data from industry association ACEA.