BUSINESSWEEK ONLINE : MAY 1, 2000 ISSUE
INTERNATIONAL -- EUROPEAN COVER STORY Hans Eichel: "It's Not a Government of the Status Quo" But Germany's Finance Minister doesn't expect popular resistance to change German Finance Minister Hans Eichel has been at the forefront of a government push to cut taxes, eliminate obstacles to corporate restructuring, and boost growth. The reforms -- currently moving through Parliament -- have gone further than investors expected and have helped lift business confidence to a five-year high. Eichel recently spoke about these developments with Business Week Frankfurt Bureau Chief Jack Ewing. Here are edited excerpts of their conversation: Q: To outsiders, it seems as if this government is suddenly moving very strongly toward reform. Why the change in direction? A: As surprising as it may seem, all the essential elements were already in the coalition agreement. Maybe it was not taken seriously by the public, but we wanted to end the reform blockade. That was never controversial. This is a government that wants to reform Germany. It's not a government of stagnation and the status quo. Q: After the government intervened to prevent the collapse of Philipp Holzmann, [a construction company that was on the verge of bankruptcy], the stock market had a different impression. A: We have a slightly different philosophy than on the other side of the Atlantic. But that doesn't change the fact that we have and want to have a highly functional market economy. That has historic origins that are much different than in America. European development was driven by the government. Q: How effective have your policies been so far? A: Oil prices have almost quadrupled. The euro is -- at the moment -- relatively weak, which could lead to imported inflation. Nevertheless, we have low inflation. The reason is that we're following a policy of market liberalization in the context of the European market. In Germany, telecommunications costs are falling sharply. Electricity costs are falling, as are other services. To a great extent that offsets external price pressures. That means Europe and Germany are in a process of fundamental reform. Q: Businesses were surprised when you proposed eliminating the corporate capital-gains tax on sale of shares in publicly traded companies. Was it your intent to break up Germany Inc.? A: That was a bit of a misunderstanding. We wanted to give the restructuring process [a boost]. The idea wasn't to encourage senseless buying and selling. Rather, [it] was to remove tax barriers to bringing things together that belong together -- allowing companies to do what they do best. That shouldn't be hindered by tax policy, it should be encouraged. It promotes employment. Q: Are you worried about public resistance? A: One of the advantages of Germany as a place to do business is that it has well-trained, highly motivated workers. We have to maintain that. That means workers can't have the impression that they're commodities to be shipped here and there. They have to feel that what's taking place serves the economy and therefore serves them. By the way, shareholder culture is expanding in Germany. A growing number of people are buying shares. I'm all in favor of that.... We want to see stock as widely distributed as possible. Q: How close are your contacts to business leaders? A: We have contacts on both sides, to unions as well as managers. That was true when I was Prime Minister [of the state of Hesse]. Every government must have an interest in prosperous companies. Q: But it seems this government is listening more to business than the previous government. A: Certainly, and why not? I place a great value on both. The government isn't properly doing its work unless it has equally close contacts with management and with employee representatives. We're only going to reduce unemployment if we have flourishing companies. That means good economic growth and stronger domestic demand. In our tax reform, we're leaving more money in working people's wallets, which strengthens domestic demand. On the other side, we're reducing the burden on companies to improve the conditions for investment. Both together. Q: What other reforms are planned? A: Throughout Europe there's a common concept that we want to eliminate government debt. Our population is aging. That means the need for the pension system will climb substantially. So we can't leave behind a big government debt. Simultaneously, we're following a policy of tax cuts. That means the state isn't creating as much demand in the capital markets, which helps keep down interest rates for the private sector, which is important for investment. Q: How about the labor market? A: We've already done a great deal. We saw a very clear increase in employment in the fourth quarter of last year. In addition, a great deal of flexibility has taken place through part-time and temporary work. Those have made the labor market more flexible and are increasing. Q: How about laws that make it difficult to lay off workers? A: That's not a subject we're working on now. In Europe the flexibility will be achieved through part-time and temporary work. That's also a reasonable way to go. Q: Some critics say the tax reform doesn't do enough to promote new businesses. A: That's a big misunderstanding. The opposite is true. The tax reform reduces the burden on small and middle-size companies. For small companies, that means they don't have to worry about quickly growing into a position where they have a high tax burden. In any case, creation of new companies is influenced more by other factors. Taxes aren't an issue in the beginning because new companies don't pay any tax initially. Rather, the question is first whether there's enough startup capital, and there we have a big range of programs, and we're in the process of expanding them. The other issue, where we've made a lot of progress but still need to do a lot more, is bureaucracy. There are a huge number of regulations that a person has to follow when he starts a company. Q: What role has the campaign-financing scandal involving the Christian Democrats [former Chancellor Helmut Kohl's party] played? Has it helped you? A: If anything, it hurt us in the beginning because it darkened Germany's image abroad somewhat. Q: You're working now on a takeover law. How will it look? A: I don't want to go too much into details, but I can say that Germany absolutely will not go its own way. Rather it will adhere to European rules. We need the European market. Q: Do you see any political danger if restructuring leads to big job cuts? A: Of course, that creates political problems. The only solution is to create enough economic dynamic that new jobs are created elsewhere. On this point the U.S. is much better than Europe. We have to catch up. The restructuring of the economy isn't anything new. It's just happening a lot faster. Q: Is Chancellor Schröder a convinced reformer, or just a pragmatist? A: I think he's a convinced reformer. Q: Will we see more Philipp Holzmanns, where the government intervenes in business? A: That will depend. In the Holzmann case there was a high probability that many jobs would be lost not only at Holzmann but at many small and medium-size companies.... Europe is a bit different than the U.S. People still have a long tradition of working at the same company a long time, of feeling very loyal to their employers. That has a lot of advantages for the company, by the way. With Holzmann, the banks and the private sector contributed 95% of the rescue action. The government's contribution was mostly symbolic. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Gerhard Schroder: The Accidental Reformer (int'l edition) EUROPEAN COVER IMAGE: The Accidental Reformer TABLE: The Path to Reform TABLE: Schroder's Agenda ONLINE ORIGINAL: Hans Eichel: ``It's Not a Government of the Status Quo INTERACT E-Mail to Business Week Online

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