A report highlighting the differences between the cost of new cars in each EU country reveals that many Europeans are able to make substantial savings by importing their new car from another country within the EU.
However, because of Ireland's vehicle tax regime, Irish motorists cannot avail of such savings, which in some cases are as much as €4,000.
It was predicted that as the effects of European competition rules introduced in 2002 were felt, the pre-tax prices of new cars throughout the EU would harmonise. While the European Commission, author of the report, says this is occurring in some instances, it is not happening as quickly as predicted.
This means that many Europeans who live in low vehicle tax countries can still save up to 30 per cent by buying their new car in a country that has a high vehicle tax regime.
For example, a motorist in Germany can make a significant saving by importing a new car from Finland, which has one of the lowest pre-tax prices in the EU, and then registering the car in Germany.
While German motorists are able to make substantial savings, Irish car buyers are prevented from doing so because tax is payable in the country that the car is imported into. Therefore, Ireland's Vehicle Registration Tax (VRT) and VAT rules mean any savings are wiped out when the car is registered here.
The motor industry and the European Commission have consistently argued that VRT is anti-competitive and should be phased out. The Department of Finance has refused to make any such moves, meaning Irish car buyers remain unable to enjoy savings open to other Europeans.
To cater for this market of "savvy car buyers" there is a growing number of dealers in countries such as Germany who have left the franchise network and are now acting as intermediaries who source cars from the cheapest countries and import them for customers.
To end this practice, it was expected that manufacturers would quickly standardise the pre-tax cost of their vehicles throughout the EU. However, as the report points out, new car price convergence across the EU has remained largely unchanged.
But according to an EU Commission official, prices have been harmonising over the past four years, although this was not the main aim of the new competition rules. "Certainly prices have converged," he said. "But it was not our primary aim to harmonise prices . . . we were looking to have functioning competition and [in such a situation] prices would tend to move closer."
Prestige manufacturers such as BMW and Mercedes-Benz have adopted price harmonisation at a much quicker rate than the mainstream carmakers. The difference in the cost of small and medium-sized cars has actually widened as manufacturers effectively subsidise their cars at different levels in less affluent EU markets as well as those with high tax regimes, such as Ireland.
This becomes more evident when the 10 recently acceded countries are added to the equation. In the majority of these countries, carmakers have reduced the cost of their new cars, especially smaller cars, suggesting not only that car prices across the EU have not converged, but also that carmakers have reduced prices.
While some European residents can benefit from savings by cross-border car buying, all motorists can take some comfort in the fact that the actual prices paid by car buyers, including VAT and registration taxes, only increased by 0.8 per cent compared to a headline inflation rate of 2.4 per cent. In Ireland, the cost of a new car increased on average by 1.3 per cent, although headline inflation was also higher at 3 per cent.
This, says the report, is consistent with the longer-term trend, which shows that during recent years, prices for cars have tended to increase significantly less than the average price for other products.