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Commentary: It's Time For German States To Go Out Of Business (Int'l Edition)


International -- Int'l Business: COMMENTARY

COMMENTARY: IT'S TIME FOR GERMAN STATES TO GO OUT OF BUSINESS (int'l edition)

Not many drivers tooling around in Volkswagens realize it, but Europe's biggest auto maker is 20% owned by the German state of Lower Saxony. And the state's Prime Minister, Gerhard Schroder, is a vocal member of VW's board of supervisors.

Until recently, few Germans openly questioned why a state government was so closely involved in an industrial giant's operations. Fewer still asked what expertise states and cities brought to other investments, such as the Rothaus brewery in the Black Forest, the Frankfurt Airport, and the Westdeutsche Landesbank (WestLB) in Dusseldorf. State officials say they are protecting local economies and jobs. Too often, though, the result is featherbedding. At one bank that has a state investor, executives privately say the payroll could be halved. VW admits it has 30,000 workers too many.

GAPING HOLES. Now, it's time for the German states to shed these corporate shares. They are sitting on assets with a market value of $33 billion, according to the ruling party, the Christian Democratic Union (CDU). The states could use that money to plug gaping holes in their budgets. Another reason to sell, according to advisers to the Bonn Finance Ministry, is that the states' role threatens the actions of free markets in Germany's regions.

The Economic Council of Chancellor Helmut Kohl's CDU wants state and local governments to launch a mass privatization program. Federal officials know their leverage is limited. "We can't send in the army to force them," says one. But Kohl's recent austerity plan will step up the pressure. That plan will cut federal aid to state governments by more than $16 billion. Meanwhile, Germany's wealth tax, which supplies state governments with $5 billion in receipts, has been declared unconstitutional and may be abolished by Dec. 31. Faced with such fiscal strains, the states may have to peddle their assets.

Some state officials are seeing the light. On June 19, Baden-Wurttemburg Prime Minister Erwin Teufel announced plans to sell its housing-and-construction agency, LEG. Teufel figures LEG will bring in $620 million, which will support youth training and education programs. Bavaria has raised $3.5 billion since mid-1993 by selling shares in Daimler Benz Aerospace as well as a utility company and a fire-and-casualty insurer. It is balking at selling its 51% stake in Munich Airport, but the airport's other shareholders, the city of Munich and the federal government, are ready to sell.

Plenty more could go on the block. States and municipalities own banks that command 35% of the banking market, and a survey showed that four out of five voters support selling off these shares. The voters know what their rulers have forgotten: Democracy won't perish if taxpayers don't own everything from swimming pools to subways. It may even work better and cost less.By John Templeman


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