Update: It’s obvious I’m confusing as many or more folks with this post as I am enlightening some. As an addicted Economist reader, I enjoy unraveling the myths and stereotypes that Europeans pay $30k for a basic Ford Focus or pay $9 for a gallon of gas. We do, if we go there with our dollars. They don’t. The information below is intended as a set of tools to better understand the issues, but will not explain them all perfectly. I’ve run out of time to respond to comments, so I hope this helps. Or pick up an Economist :)
European new car prices can be as confusing to us Yanks as ordering from a menu in Latvia. We’re always hearing about tiny $29k econoboxes and the like. List prices are typically converted to US dollars, and the results can be very misleading. MSRPs are assumed to be more solid than ours. And the 19% VAT (value added tax) is not factored in. The result often is an assumption that European car manufacturers are getting ginormous prices for their little hatchbacks. Lets pull back the curtain of confusion and seek some truth. Like the Audi A3 shown above: if you factor in purchasing power parity, remove the (included) 19% tax, and factor in the 29% discount being offered, the equivalent US price is: $12,353. Allow me to explain:
Lets start with the MSRPs: Discounts are rampant, especially in the wake of Europe’s Cash for Clunker programs, with only high-demand models exempted. Obviously, slower sellers get higher discounts. The biggest, 42%, was for a Citroen Xsara. But if you follow this link here; it will take you to a (slow) slide show from Auto, Motor und Sport that shows a large spectrum of cars like the Audi above. It’s in German, but you’ll be able to figure out the two prices at the bottom of each screen and the percent discount.
VAT tax is included (by law) in all advertised prices. That means for our purposes, and to get a feel for the prices manufacturers are getting, reduce all prices by 15.966%.
Currency conversion: The dollar has swung by huge amounts in the last ten years versus the euro. But unless you personally are buying with dollars, its largely irrelevant to this exercise. Europeans are paid in Euros, and buy in Euros, and the general rule of thumb is to use a purchasing power parity ratio of 1 euro to 1 dollar (as per the Economist). So if you want to know what a car actually costs European buyers, don’t convert it to dollars. And as the European manufacturers exporting to the US have long known, the currency fluctuations can not drive their pricing; the market does.
They either hedge, make less profit until the dollar comes back up, or have US plants that ship some of their cars back to Europe, like BMW and Mercedes do, to offset the imports. Any way you look at European prices, converting their MSRPs to dollars will get you…confused. Yet it’s done all the time.