Britain’s car industry is in desperate trouble — production in January was an extraordinary 59% down on a year earlier, leaving policy makers with a huge problem that looks like getting worse.

So bad have things become that the industry’s biennial jamboree — the British Motor Show — has been abandoned. If ever a sector was crying out for help, this surely is it.

But what can the government do? One suggestion is to look to Europe for an example of help that is actually making a difference. The German government’s “scrappage” scheme, under which buyers who trade in a car more than nine years old for a new or nearly new one (less than 12 months old) receive a €2,500 (£2,336) payment, appears to be working wonders.

Car sales there last month were up by 21.5% on a year earlier, reversing months of decline. If it is good enough for Germany, why not do it in Britain?

That is certainly the view of the Society of Motor Manufacturers and Traders, which is campaigning hard for a British version of Germany’s scrappage scheme. The CBI backed it in its budget submission last week, saying the £500m boost, giving car buyers a payment of just over £2,000 if they trade in an old banger, would be money well spent.

The official view in government is that a scrappage scheme is under consideration, but that no decision has yet been taken. Lord Mandelson, the secretary of state for business, enterprise and regulatory reform, was said initially to back the idea. Last week’s intervention by Mervyn King, the governor of the Bank of England, who warned the government over increasing debt levels with stimulus packages, will almost certainly have cooled in his support. The April 22 budget is the obvious time for any announcement. The standard environmental argument against such a scheme is that it’s never a good idea to encourage people to buy new cars. Once you take into account the emissions generated during a car’s manufacture — about a fifth of its lifetime emissions — the most environmentally friendly thing you can do is run an old banger until it drops. The motor industry argues new vehicles are so clean that once they’re on the road, this argument no longer applies.

The second argument is that in a country such as Britain, where last year 86% of the cars we bought were imported, the beneficiaries of a scrappage scheme would be overseas manufacturers.

The strongest argument against, however, may be the nature of Britain’s car market. Britons are used to haggling over car prices. We expect a deal and a “scrappage reduction” on the list price is likely to be worth less than any cash buyer worth his or her salt could negotiate. Canny buyers might be better off avoiding part exchange, selling their banger privately for a few hundred pounds and getting the maximum discount at a dealer.

David Smith is economics editor of The Sunday Times