By Aude Lagorce

NEW YORK (Dow Jones) -- A government-sponsored plan to boost sales of new cars in Germany has helped to lift that market out of the doldrums in the past three months, spurring the U.S. and other countries to mull similar schemes even as industry experts worry such measures will backfire.

The so-called "scrappage" incentive in place in Germany gives buyers 2,500 euros ($3,323) toward a new car when they trade in a model older than nine years.

The measures, which are financed by the government, have proved extremely popular. It helped boost car sales in Germany by nearly 22% in February and 40% in March and has been extended until the end of the year after attracting 1.2 million applications in its first two months.

According to the German car importer's association, VDIK, about 600,000 cars have been bought with the scheme since it was ushered in at the end of January.

Germany's cabinet is expected on Wednesday to approve a plan to spend a total of 5 billion euros, rather than the 1.5 billion euros first allotted, on the program.

Similar incentives in France and Italy have also yielded positive results, with both countries registering a rise in new car sales in March.

In the U.K., however, where no such plan is in place, new car sales have slumped 30% since the start of the year.

And it's not the only market in crisis. Around the world, demand for new cars has collapsed in recent months as key Western economies have slipped into recession, unemployment has started to rise and consumer spending has taken a dive. Many auto manufacturers, both in Europe and the U.S., have switched to part-time working and imposed pay cuts to avoid mass redundancies as they sharply reduce production.

Despite this raft of measures, General Motors and Chrysler are now teetering on the brink of bankruptcy, and governments across the globe are desperate to save them.

Scrappage incentives, because of their success in some European countries, are top of the list of measures politicians in the U.K. and the U.S. are considering.

Pressure on U.K., U.S. governments for incentives

In the U.S., scrappage bills have already made their way to the U.S. House of Representatives, and President Barack Obama last week publicly endorsed a "cash for clunkers" program for the first time.

Action could now be very quick, partly because the situation is so dire and partly because the administration has publicly committed to doing something to stimulate sales, analysts said.

"We have urged the government for a few months now to look at some creative, innovative way to get car sales going again. We feel like there have been loads of bailouts but nothing done with the revenue side of things," said Michelle Krebs, senior editor at Edmunds' AutoObserver.com.

The U.S. car market has deteriorated faster than Europe's in the past few months, slumping nearly 37% in March to 857,982 units.

U.S. carmakers have tried to stimulate sales by offering discounts averaging over $3,000 per vehicle according to Edmunds. Last week, inspired by the success Hyundai's job-loss protection plan, Ford Motor and GM launched a similar offer to take back the vehicle acquired in case the customer loses his job, as well as beefed up auto warranties.

But the government is concerned that the discounts and additional warranties won't be enough to lure U.S. consumers back into dealerships and is exploring additional ways of stimulating sales.

The U.K. has not exactly done nothing to help its carmakers. In fact, it's promised to guarantee up to 2.3 billion pounds of loans to the industry to soften the blow from the recession. But with sales falling further each month, pressure is building on the government to do something soon.

The Society of Motor Manufacturers and Traders, which sees U.K. car sales falling nearly 20% to 1.72 million units this year, has urged the government to introduce a plan in its budget on April 22 offering motorists 2,000 pounds ($2,937) for trading in their old car for a greener model.

Cash-for-clunker bill could pass in matter of weeks

There are currently two "cash-for-clunker" bills in Congress. Although they are at an early stage and would still need to be referred to the appropriate congressional committee for debate before being passed into law, analysts at Thomas Weisel Partners said in a note to clients that the topic has now clearly become a "top priority."

John Wolkonowicz, an auto analyst at IHS Global Insight, said that with the right momentum the bill could be passed in a matter of weeks. Congress returns from recess on April 20.

But there are concerns in the industry that such a plan could end up doing more harm than good.

In Germany, although scrappage incentives have boosted sales, they've only really helped one domestic carmaker: Volkswagen AG , as consumers rushed to buy smaller cars. The affordable Skoda brand has sold 80,000 vehicles under the scheme.

For the other two German carmakers, BMW and Daimler , which specialize in bigger cars, the legislation has actually been a catastrophe, said Ulrich Hortsmann, analyst at Bayerische Landesbank.

Daimler on Wednesday said it's expecting a "significant" first-quarter loss.

"And even at Volkswagen, it's actually boosted sales of models manufactured in Spain," he said, adding that the positive effect on German manufacturers is actually highly debatable.

Hortsmann also expressed concern that sales could fall from a cliff once the scheme expires.

Ranjit Unnithan, an analyst at J.P. Morgan, said that's what happened in the mid 1990s. In France, for instance, sales rose 18% during the incentive period, and then fell 17% after completion.

"With unemployment rates in Europe not expected to decline before the fourth quarter of 2010, we remain skeptical about the sustainability of current demand levels in Europe and retain our cautious view on the sector," Unnithan said in a note to clients.

What's American?

In the U.S., one of the key issues of the legislation will be whether it rewards the purchase of any new car or only American cars.

Edmunds' Krebs said she would be opposed to the law specifying consumers are only eligible to the scheme if they buy American, partly because what American is would be difficult to define. Is an American vehicle one that's sold by a U.S. manufacturer or one that's built in the U.S., she asked.

Wolkonowicz, meanwhile, argued that the plan would have the most chance of success if the green agenda was severed from it.

"They need to decide what this scheme is about. To me, it's not about the environment, it's about getting people to buy new cars. So it should reward anyone who buys a new car and lose the trade-in element," he said.

He also argued that most people who own a car older than eight years own it because they can't afford a newer vehicle. In a recession, he believes there's no chance such consumers will be saddling themselves with a big loan for a new vehicle they had already decided they couldn't afford.

But even assuming they would actually consider a new car, the math doesn't work, experts pointed out.

The bills being floated would offer consumers between $3,000 and $5,000 when they trade in their old cars, however, both Wolkonowicz and Krebs said the owners could probably get nearly as much money from the vehicles by selling them on the second hand market.

"So there is really no financial benefit there at all for the owner," Wolkonowicz said.