Who says American carmakers can’t inflict real damage on the competition? Less than ten years ago, Daimler Benz, the mighty, synchronously engineered, luxury vehicle of European motor companies, paid $36 billion for Chrysler, by anybody’s estimation an old-fashioned clunker of an American model.

At the time it was Americans, and specifically Detroit’s elite, who were aghast at the news, seeing it as the latest and most egregious example of the capture of America’s industrial heritage by rapacious foreigners.

The “merger of equals”, as the legendary Daimler chief Jürgen Schrempp proclaimed it, was nothing of the sort. Chrysler was being subsumed into the maw of the mighty German machine; the US company’s handsomely remunerated executives would be forced to fly across the Atlantic almost weekly to Stuttgart, where they would have to take orders from humourless Germans who were paid a fraction of what the Americans got.

Shrewder and perhaps less interested observers thought better of the deal. They believed it would represent a new start for the most vulnerable of America’s Big Three. Having access to that German engineering and managerial expertise would surely mean another resurrection for the company Lee Iacocca (with a little help from the federal government) had saved 20 years earlier.

Unusually, neither the pessimists nor the optimists were proved right. The German takeover brought only misery to the Germans; and it did nothing for the Americans either.

The Chrysler part of what is now called DaimlerChrysler is now worth, according to the company’s optimistic estimates, perhaps $5 billion (£2.5 billion) — a $31 billion loss of value in nine years. Daimler could have given away 20,000 of its top-of-the-range sports cars to deserving and needy Americans every year for the past nine years and it still not have lost as much money as it has by purchasing Chrysler.

So less than a year after launching a US advertising campaign around the personality of Dieter Zetsche — “Dr Z”, the first German chairman of Chrysler, the man the company said “put us on the path to be competitive with the best in the world by combining the great strengths of two historic companies” — Daimler wants out.

If it can find a buyer it will happily end the whole sorry saga and put it all down to experience.

The story of the failed merger is not only a familiar tale of an unbridgeable cultural gap between two very different companies. It is probably the most powerful demonstration of the likely destiny of the American motor industry. If a company such as Daimler, the very model of successful German carmaking, cannot turn around the smallest and least burdened of the Big Three US carmakers, what hope is there for the industry as a whole?

The fate of Chrysler itself is uncertain. There are brave sounding noises from General Motors that it might be interested in acquiring Chrysler — but coming from a company that is losing each year more money than Chrysler is apparently worth, this is presumably somebody’s idea of a joke.

Another foreign company might be interested — Renault, for example, currently with no foothold in the US market. But why would anyone take the risk?

The Chrysler episode — and the dramas unfolding at Ford and General Motors — are not just about US carmakers failing to adapt to the shifting global demand for smaller, more fuel-efficient vehicles. They are rooted in the structural weaknesses of an economic system in the American auto sector that was already outdated in the 1980s, and looks prehistoric today.

It is true that the immediate cause of Detroit’s latest woes was the sharp increase in oil prices in 2005 and 2006. The companies had ridden a temporary wave of success in the late 1990s and early 2000s, on the surging sport utility vehicle and light truck market. For Detroit, it was almost like old times as consumers went in for vast five and six-litre vehicles they happily filled with petrol at little more than a $1 a gallon.

But when oil prices climbed towards their peak last year, this one success story of US carmaking turned into a nightmare.

The deeper problem was the whole way US automakers have been run for the past 40 years. The Big Three’s managements had caved in to powerful unions that bid up wages and health and pensions benefits to the level where car workers were the plutocrats of American industry. The most notorious example, the infamous Jobs Bank, ensured that workers would be paid to sit at home in lean times so they could return to work when demand picked up.

These “legacy” costs have created a financial burden that is literally bankrupting the companies.

Here is the ultimate irony in the decline of America’s car industry. Even as the US economy outperformed Europe for most of the past decade, thanks in large part to its more flexible hire-and-fire approach to employment, the motor industry has been running a welfare state within a state that would be the envy of most socially protected European workers. How doubly ironic that it should have been a German company that ended up bearing so much of the cost.

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