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German Business Bites Its Nails (Int'l Edition)


International -- European Business: GERMANY

GERMAN BUSINESS BITES ITS NAILS (int'l edition)

Germany is in an uneasy phase, not sure how far left the new government will veer

It was barely dusk on Sept. 27, hours earlier than expected, when Gerhard Schroder stepped out into the cool air to declare his victory in Germany's parliamentary elections. The crowd of supporters at Social Democratic Party (SPD) headquarters in Bonn cheered and toasted the news that Schroder had ousted Helmut Kohl as Chancellor after 16 years. But 170 kilometers south, in Frankfurt, some 500 business leaders watched the news on TV at Commerzbank's new skyscraper headquarters and moaned. "It's a complete shattering of [center-right] forces," fretted Leonhard H. Fischer, a member of Dresdner Bank's board.

In the eyes of many business leaders, the elections couldn't have gone worse. Schroder quickly opened negotiations with the leader of the Green Party, Joschka Fischer, to form a left-wing coalition that many executives fear will pelt companies with a hailstorm of new taxes and regulations. Perhaps their biggest worry is that Social Democratic Party chief Oskar Lafontaine will play a powerful role as Finance Minister. In a press conference with Schroder the day after the election, Lafontaine called for European central banks to slash interest rates. "They haven't even formed a government, and Lafontaine is already trying to influence the central banks," says Thomas Mayer, a Frankfurt-based economist for Goldman, Sachs & Co.

Germany has entered an uneasy period in which no one is quite sure how far left Schroder will veer. That's partly because of the wild reputation of the Green Party, which floated such unpopular energy-saving measures as strict autobahn speed limits and tripling gasoline prices to over $11 per gallon. Lafontaine's interventionist pronouncements don't help either. But the biggest unknown of all is Schroder himself. Throughout the campaign, he was resolutely vague, and he's only slowly revealing his policies on key issues even now.

The best bet is that Schroder will prove less onerous for business than initially feared, just as have Romano Prodi in Italy and Lionel Jospin in France. That's partly because strict budget-deficit limits under Europe's new single currency, which comes into being on Jan. 1, won't allow him to sharply boost borrowing to fund jobs or social spending. Schroder almost certainly won't make the deep government-spending cuts and labor-market reforms that German companies want. But he has been meeting with executives behind the scenes to reassure them he will follow a carefully calibrated economic policy. "Our feeling from our talks with him is that he will fight for fiscal and tax reform," says an official in a big German financial institution. "The real issue is whether his party will follow."CRUCIAL TEST. Business leaders are trying to draw a line in the sand with the new government, even before it's formed. "If they make decisions which hurt the economy, hurt entrepreneurship, and increase our costs, we will not sit on the sidelines," warns Jurgen Schrempp, CEO of Daimler Benz. One key test will be Schroder's first budget later this year. Business will pressure the new government to keep a lid on spending and stay within deficit limits required by the European monetary union. Executives also want Schroder to keep Helmut Kohl's modest reforms, such as cutting sick pay from 100% to 80% of wages.

Schroder may not heed that call, since it would break a key campaign pledge. "The Socialists have to implement some of their promises quickly," warns Jurgen Hesse, a worker's rep at Daimler Benz's auto plant in Sindelfingen. "Bringing sick pay back up to 100% would have a high symbolic value." But business may have better luck stopping plans to reinstate a wealth tax abolished two years ago. Schroder only half-heartedly supported the measure, and it could cause major capital flight if passed.

Another concern for executives is that the Social Democrats' planned largesse with their core voters may force them to drive up taxes overall. A key part of Schroder's platform, for instance, is to cut taxes for low-income wage earners. Schroder hopes to fund the plan by wiping out tax loopholes aimed at boosting construction in former East Germany and propping up uncompetitive industries such as shipbuilding. Wealthy investors are howling about the loss of their loopholes, but much of the criticism is self-serving. Many experts favor simplifying Germany's complicated tax code. "Let's clear out the loopholes, as long as it's in exchange for lower tax rates," says Paul Achleitner, head of Goldman Sachs's German operations.

The big doubt about Schroder is how stable his government will be. He'll likely get a honeymoon of at least a year. But when midterm regional elections approach two years from now, analysts expect infighting to break out within the coalition. The Greens are so factionalized they're almost two parties in one: the radical, pro-ecology Fundis and the more pragmatic Realos. Analysts doubt that Fischer, a Realo likely to be Schroder's pick for Foreign Minister, can keep the wilder elements of his party in tow forever. "Inevitably, tensions will build," says PaineWebber Inc. analyst Alison Cottrell. "I give a [Socialist]-Green coalition 18 months."

Schroder, meanwhile, will face a difficult juggling act in dealing with Lafontaine. The rank and file of the SPD is well to the left of Schroder and accepted him as their candidate only grudgingly. He won the election in part because Lafontaine kept strict discipline during the campaign.

"The big problem is that within the SPD, the majority of the politicians [back] Lafontaine," worries Harald Korte, CEO of Schoneweiss & Co., a machine-tool maker near Bonn. Early this year, Lafontaine scored a disastrous 1% approval rating from business executives.Executives are especially worried that Lafontaine, with French officials, will try to pressure the European Central Bank into adopting an expansionary monetary policy when it starts operations on Jan. 1.

Schroder may be tempted to adopt Lafontaine's pro-growth policies. With the global crisis biting into exports, Mayer has pared his forecast for German economic growth to just 2.25% next year, off from 2.7% this year. But Schroder also understands he can't improve on those numbers unless he quickly gains the confidence of business to promote investment. "If the Social Democrats don't pursue a market course, they'll get a reaction very quickly telling them they are on the wrong path," warns Christian Strenger, CEO of mutual-fund group DWS. Executives who know Schroder believe he'll do his best to heed that warning.By Thane Peterson, with Karen Lowry Miller in Bonn, Laura Covill in Frankfurt, Kathleen Kerwin in Paris, and Stanley Reed in London.Return to top


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