The American nightmare

Volkswagen's US lawsuit shows reboot is only half done

The United States is reversing Volkswagen's (VW) recent progress in tackling its emissions scandal. The US Department of Justice on January 4 issued a strongly-worded lawsuit against the German carmaker, upending a six-week rally in VW shares. Wolfsburg needs something big to stop American lawmakers wielding a scarily large stick.

Last year ended on a relatively positive note for the battered company. German regulators rubber-stamped an inexpensive and simple fix for the majority of the 11 million vehicles sold in the European Union. Suspected manipulation of fuel efficiency data uncovered by VW's internal investigation turned out to be much less widespread and severe than initially feared.

Yet both precedent and the lawsuit's content suggest the United States will be tougher. The Department of Justice accuses VW of four different violations of the Clean Air Act. Most strikingly, VW's theoretical maximum fine, if found guilty, has more than quadrupled to $90 billion - almost 125 per cent of its market capitalisation.

Moreover, VW has done little to win the goodwill of US authorities. It admitted wrongdoing in September 2015 only after months of stonewalling. The company still lacks a technical fix to lower toxic emissions of its affected US diesel vehicles to pass the country's more demanding emission regimes and effectively reduce exhaust fumes. And the complaint filed on January 4 also accuses VW of continuing to impede and obstruct its investigations "by material omissions and misleading information" after the September confession.

VW cannot afford to lose more time in the United States. It needs to ditch the ill-fated plan to repair the 580,000 US vehicles. A swift buy-back of all these would be far more effective, as it would end the extra air pollution at once. These benefits would by far outweigh the initial costs Evercore ISI analysts see at euro 5.8 billion.

More sweeping changes in VW's governance are also important. Chairman Hans Dieter Poetsch should go. The former finance director was one of VW's most senior managers during the emissions cheating era. A credible outsider, who is unburdened by the past and embodies a new culture, could then set about trying to limit the fallout across the Atlantic.