The European Central Bank has come out with some harsh criticism of programs that pay consumers for scrapping old cars. The Wall Street Journal calls the report “an official slap on the wrist to European governments.”  In its monthly bulletin for October (see page 47), the ECB notes that 11 euro-area countries have adopted cash-for-clunkers programs. The increased spending on cars has a crowding-out effect on other consumer purchases, the bank says:

In the first half of 2009 it appears that the positive contribution from car sales was to a large extent compensated for by a corresponding negative contribution from other purchases.

Moreover, the boost to car sales may not last:

Second, a negative impact on demand for new cars can be expected once the measures have been phased out. The car scrapping schemes lower the price of current as opposed to future car purchases and thereby lead to a frontloading of private car purchases. The more car purchases have been brought forward into 2009 as a result of the measures, the stronger this unwinding will be. In surveys for Germany, around half of the respondents report that they have brought forward car purchases into 2009 owing to the premium. In such a case, a substantial weakening of car demand might be expected in early 2010.

In the U.S., of course, we’re already seeing the post-clunkers dropoff in demand. And that isn’t the worst of the program’s effects, the ECB says:

… it should be borne in mind that fiscal measures that benefit a specific industry cause relative price distortions which may prevent necessary structural adjustments, lead to increased pressures from lobbying groups to introduce additional subsidies and distort the level playing field for international competition. Moreover, the early destruction of cars that are still in working order as a result of fiscal incentives to private households reduces the economic wealth of an economy.