The emission scandal at the world’s second largest auto maker, Volkswagen, has reportedly “rocked” the German political and business elites.  Some have argued that it will rival the refugee challenge for Germany.  Others have argued that it is a source of euro weakness.

To be sure Volkswagen is the not first automaker that has been caught manipulating its emissions tests. Ford was found to have done a similar thing with its vans in 1997.  Hyundai and Kia were fined $100 mln last year for fixing their tests.

This is not to justify in any way what Volkswagen has done, but simply to note that there is no precedent for this turning into some sort of systemic crisis.  Its impact on the euro’s exchange rate should not be exaggerated.  First, consider the euro-dollar’s correlation with the DAX.  Conducting the correlation on the basis of percentage change, finds the correlation is -0.39 over the past 60 days and -0.45 over the past 30 days.  However, the inverse correlation is greater between the euro and the S&P 500 than it is with the DAX at -0.52 and -0.60 for the past 60 and 30 days respectively.

Second, here is a Great Graphic (composed on Blomberg) that shows the performance of Volkswagen ADR (white line) and the euro-dollar exchange rate (yellow line).  The euro rallied strongly in April through mid-May, while Volkswagen shares continued to trend lower.  Similarly in the first part of June, the euro appreciated without the an interruption of Volkswagen’s downtrend.  This happened again in late August.  When news of the scandal first broke, the euro was already coming off from its post-FOMC bounce.

Just because the Volkswagen scandal may not be having broader capital market implications does not take away from the gravitas of the situation.  Volkswagen employs 270k workers directly and even more indirectly through its suppliers.  The German auto sector employs 775k people.  Autos and parts are the largest German exports accounting for about 20% of roughly 200 bln euros.

The fine from US authorities may be a maximum of $18 bln.  There are also other legal costs, including likely fines from other authorities.  In addition, there are costs associated with the recall.  There may also brand costs and increased costs of production to fix the problem, let alone costs associated with tougher regulation, which will be a likely consequence.  In terms of valuation, the market cap has been reduced by a little more than 20 bln euros.     The German auto industry also faces headwinds from the Russian sanctions and the slowdown in China.

More broadly, the scandal comes at a time when many Germans find themselves at a crossroads.  Through the financial crisis and the sovereign debt crisis, Germany emerged as a regional hegemon, though many Germans would not accept that label.  Yet it is clear that France has been unable to match German economic prowess or rival it for leadership in Europe, even if still can command key appointments in the multilateral institutions.

German was widely criticized for wanting to strictly enforce the controlling treaties of EMU, especially on fiscal transfers.  After losing a vote at the ECB, the Bundesbank participated in an end run to the European Court of Justice.  The ECJ overruled the Bundesbank’s objections.  Germany is also criticized by the EU, the IMF and the US for its large current account surplus and the lack of stimulus to help offset the austerity in the periphery.   Most recently, Germany has been criticized showing flexibility over the rules for its unilateral overture to take 800,000 refugees.

The Vokswagen scandal is more embarrassing for the German model and conceit of rules-based society than material for the German brand.  Germany’s two fears, being isolated or being blamed for the destruction of Europe are not at play here.  On the other hand, the German export of schadenfreude is fully in play.