The agreement between France and Germany on the future of the internal combustion engine in the EU is supporting stocks in the auto sector. The European automotive sector recovered from the six-year low it reached the previous week. As the best industry index from the Stoxx 600, it gained 2.3 percent at midday. Among the individual stocks in the DAX, the shares of Volkswagen, BMW and Mercedes rose by more than three percent.
The two countries have agreed on a position that would mean a weakening of the de facto ban on new combustion engines planned for 2035 in the EU. Both governments announced this today. "We owe it to our workers, our industry and our citizens to ensure that Europe takes a leading role in the global automotive transformation."
“Important signal” or uncertainty?
Accordingly, the CO2 reduction target for new cars should fall from the current 100 to 90 percent without any further compensation measures being necessary. The weakened target meets the wishes of German car manufacturers. They could continue to sell new petrol and diesel vehicles as long as their new car fleet complies with the prescribed limit.
"More flexibility in CO2 fleet limits for cars is an important signal for financial support for the European automotive industry in its switch to electromobility," commented the Center for European Politics (cep). Criticism, however, comes from the opposition. “People have long since decided: more and more people are relying on electromobility,” explained Green party leader Katharina Dröge. In fact, the high fuel prices and the electric car bonus are making electric cars increasingly popular in Germany.
A total of 88,599 fully electric vehicles were newly registered in September - a share of 34.5 percent. “We now have to invest fully in the electric car, in future technologies such as battery technology, consumer-friendly charging, electric cars as storage for our energy system or autonomous driving,” said Dröge. If Merz continues like this, the jobs for battery cells and electric cars would be created elsewhere: "While China is racing towards the future, Merz and Macron are creating chaos and uncertainty for the market and consumers."
Experts fear job migration to the USA
Car expert Ferdinand Dudenhöffer assumes that even European jobs could move overseas. The agreement between Merz and Macron "doesn't initially sound unreasonable in order to avoid additional burdens, including for jobs in the European auto industry." "But at the same time it opens the import barriers for cars with internal combustion engines that European car manufacturers have manufactured in the USA."
It is currently foreseeable that new cars with combustion engines in the USA “will still have a long life,” Dudenhöffer continued. If the current rules came into effect from 2035, combustion engines produced in the USA could no longer be sold in the EU. "German car manufacturers would then offer combustion engines produced in the USA exclusively for US buyers and some smaller other markets. At least not for the EU and probably hardly to China either."
If the restrictions are relaxed, ten percent of new cars in the EU will probably still have a combustion engine from 2035 onwards. German manufacturers would probably build these cars in the USA, where the majority of them are sold, and meet demand in Europe with US exports, explained Dudenhöffer. "New car production of up to ten percent of the EU market almost 'automatically' moves to the USA." "Merz and Macron are providing an impetus to export workers from the EU to the USA. Who would have thought that?"
Merz and Macron want more car production in Europe
“Electric cars will definitely prevail because they are technically superior and you can save a lot of money when driving,” said Environment Minister Carsten Schneider. The crucial question is where these cars will be built in the future. "Our goal is for them to be built in Europe and not just in China." According to the SPD politician, manufacturers would now have a little more leeway with CO2 values in order to enable them to invest in electromobility and European locations.
The Franco-German paper provides for additional flexibility so that manufacturers can react to external shocks and avoid disproportionate fines. "For the period 2030/2031, multi-year target periods should therefore be introduced that enable averaging - as well as a crediting mechanism for CO2 credits that were only generated in 2029," according to the documents available to Reuters.
In addition to softening the CO2 target, Germany and France also want to strengthen Europe's capacity for the development and production of electric cars. “A central element of the package should be a stronger link between public funding and European value creation,” the paper says. Therefore, a steadily increasing share of European production is proposed. For the automotive sector, “Made in Europe” should encompass the EU-27, but also offer countries such as Great Britain an opportunity to join.
Warsh statements and strong corporate balance sheets drive stock markets
Meanwhile, the recent concerns of many investors regarding the interest rate environment and financing of AI investments have subsided on the stock market. The DAX rose by 0.8 percent to 25,588 points at midday. Over the course of the week, surprisingly high inflation in the USA had fueled concerns that the US Federal Reserve could raise the key interest rate again in October, thereby making financing more expensive for consumers, companies and the government.
In addition, some investors feared that the AI companies' billion-dollar investments might not pay off. The fact that Fed Chairman Kevin Warsh did not specifically comment on monetary policy in a speech meant that the likelihood of an interest rate increase in October fell significantly again from the market's perspective. On the topic of AI, Warsh said that investments in this area strongly support the US economy.
“Kevin Warsh is giving the stock markets back optimism,” said Thomas Altmann from asset manager QC Partners. There are also encouraging company balance sheets. The electronics group Schneider Electric raised its sales and profit targets for 2026 for the second time. The shares of chip system manufacturer Aixtron were also in demand for convincing figures. The business of the wind turbine manufacturer Nordex also developed better than expected.
