VW’s diesel deception: Where were the regulators?

More heads to roll at VW?
VW crisis deepens

Just one week after Martin Winterkorn pledged to do whatever it takes to clean up Volkswagen's emissions scandal, the former CEO now finds himself the subject of a criminal investigation. Prosecutors in Lower Saxony say the focus of the probe lies in 'the accusation of fraud through the sales of passenger vehicles with manipulated emissions data."

This comes as VW's new CEO, Matthias Mueller, pledged to get to the bottom of the scandal as quickly as possible in his first week on the job. VW is said to have been caught cheating on U.S. air pollution tests by installing sophisticated software known as "defeat devices" in the electronic control module of diesel vehicles issued between 2008 and 2015.

VW customers "in the next few days" will be told to retrofit diesel models equipped with the manipulated software, Mueller said in a speech at the beleaguered car company's Wolfsburg headquarters late Monday.

More heads are expected to roll amid allegations in German newspapers that at least one supplier and a company technician have been warning about defeat devices for at least four years.

Exhaust flows out of the tailpipe of a vehicle.
Getty Images

But as the witch hunt begins at the company's Wolfsburg headquarters, the blame game is already taking aim at officials in Berlin, Paris and London as angry drivers and investors alike ask: where were the regulators?

A new report published Monday by the Brussels-based lobby group Transport & Environment said some Mercedes, BMW and Peugeot models are producing around 50 percent more emissions than their lab test results, according to its own road results. The organisation, which has close ties to the European Commission, also says that the gap between official test results for carbon dioxide (CO2) emissions and fuel economy and real world performance has increased to 40 percent on average in 2014 from 8 percent in 2001. Transport & Environment clarifies that the gap does not indicate proof that other automakers are using VW-style defeat devices. Nevertheless, the group slams probable abuse by carmakers and laments the "failure of EU regulators to close loopholes."

German Transport Minister Alexander Dobrindt has come under increasing criticism in the country's press amid allegations that the government had become "too cozy" with the auto industry. Meanwhile, the U.K. government has defended claims from former Liberal Democrat Transport Minister Norman Baker that David Cameron caved to pressure from German Chancellor Angela Merkel to delay new emissions standards. A UK government spokesperson told CNBC 'negotiations on new car CO2 targets are entirely different issue to manufacturers illegally falsifying emissions tests."

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Nevertheless, governments across the continent are scrambling to keep VW's corporate crisis from turning into a European political crisis. German, French, Italian and UK officials have all pledged to carry out random testing on diesel-powered cars, including brands outside of VW and have all lent support to the merits of an EU wide probe. The European Union in turn, is gearing up to introduce new emissions tests next year involving on-road monitoring.

Carmaking plays a vital role in the European economy: The industry employs over 750,000 people in Germany, and in 2014, the big three carmakers, Volkswagen, Daimler and BMW, hauled in revenues of 413 billion euros, far bigger than the German federal budget, which stood at just under 300 billion, according to Reuters. There are fears in the auto industry that the popular backlash risks pushing regulators into over-correction mode and put additional pressure on automakers to move full speed ahead on electric and hybrid technology.

That shift in product mix, however, will come at a cost. So can policymakers right the wrongs of emissions cheating without biting off the hand that feeds Europe?

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