[A-List] Germany: political crisis, capital flight

[Michael Keaney]

Business leaders demand action on structural reform to halt decline
By Haig Simonian and Hugh Williamson in Berlin
Financial Times; Dec 16, 2002

The mood of German business is unprecedentedly bleak. Against the background
of a near-stagnant economy, tax rises and a floundering government,
corporate leaders fear their country is on the brink of irreversible decline
unless action is urgently taken on long-overdue reforms.

In an uncharacteristically frank account of the German corporate psyche,
heads of a cross-section of listed companies have expressed their anxieties
for the world's third-biggest economy as part of a survey by the Financial
Times and Financial Times Deutschland, its German sister paper.

The results, involving responses from 40 of Germany's top 100 companies,
include such household names as Siemens, Volkswagen, Bayer and BASF. They
paint a grim picture of a country with plenty of proposals of how to break
out of chronic low growthbut lacking the political will to do so.

Germany is also under pressure from the rating agencies, which last week
voiced their concerns about a deteriorating fiscal position. Standard &
Poor's said Germany was falling behind its AAA rated peers in terms of
fiscal and economic indicators and warned that the country's debt to GDP
ration could reach 64 per cent in 2004, above the Maastricht criteria of 60
per cent. Fitch said it would take a "long, hard look" at Germany's rating
early next year.

The business leaders react with collective pessimism to the first three
months of Chancellor Gerhard Schröder's second term of office.

"Along with the majority of German citizens, I am shocked by the present con
ceptionless government," says Herbert Hainer, chairman of the Adidas
sportswear group. "Even with the best of intentions, one cannot identify any
strategy in the government's plans which could make our country fit for the
challenges of the future. Nobody has a clue in this overall chaos."

"The economy is on the bottom, the prognosis for next year does not make
much hope for a lasting upturn, the mood in the country is bad," says
Bernhard Schreier, chairman of the Heidelberger Druckmaschinen printing
technology group.

Some business leaders are so worried they say exceptional political measures
are needed. Some call for action across party lines.

Even those who accept that Germany's problems go beyond a single party or
coalition, and touch on much broader social issues such as a consensus-based
model of society, have little good to say of the chancellor's Social
Democratic party and its Green junior coalition partner.

A surprisingly large number of respondents, covering sectors from heavy
industry to high technology and real estate, describe Germany's current
plight as the worst for more than half a century.

"Not since the end of the war have conditions been as bad as today," says
Alexander von Tippelskirch, head of the IKB Deutsche Industriebank, a
business lender.

The respondents focus on three main areas. They decry the inability of the
government to address the demographic timebomb caused by a declining birth
rate and an ageing society, expressing frustration at politicians'
unwillingness to grapple with the burden on the stretched state pensions
system, spiralling costs in healthcare, or the rising social-services
budget.

"We bitterly need the courage for extensive reforms: deregulation, less
bureacracy, spending cuts - including broad cuts in subsidies, lower taxes
and social welfare costs, as well as a thorough overhaul of the pensions and
health systems - these are the keys," says Werner Wenning, chairman of
Bayer,the pharmaceuticals giant. "[The government's] current economic policy
is characterised by an unwillingness to tackle reforms and a lack of courage
to tell the truth," says Gerhard Pegam, chairman of the Epcos electronics
group.

Many of the responses show sympathy with the opposition Christian Democratic
party - the list includes Lothar Späth, chairman of the Jenoptik technology
group.

Business's underlying observation is that politicians have for years been
unwilling to explain to voters that Germany's high level of public services
could only be sustained - if at all - at an increasingly high cost.

Liberalisation of the notoriously rule-bound labour market is seen as the
second priority. Most reflect on the recommendations of the Hartz commission
on labour market reform, lamenting the government's failure to live up to
its promise to enact its findings in full. They also stress that the
committee's report represents only a first step in moving towards more
flexible forms of employment.

"Hardly had the announcement been made to implement the already-weak Hartz
proposals word for word than the trade unions had pulled them to pieces - to
such a degree that that the person who gave his name to them [Peter Hartz,
VW's personnel chief] could not discover himself in them any more," says
Bernhard Termühlen, chairman of MLP financial services. This frustration is
reflected in frequent observations that Mr Schröder seems to have become
more susceptible to union pressure.

Thirdly, many leaders criticise the government's readiness to opt for
raising taxes as an emergency measure to cover looming budgetary gaps. They
would sooner it chose more difficult - but ultimately sounder - long-term
structural measures.

All stress how tax rises will undermine Germany's meagre growth by curbing
private consumption. A few fear that Mr Schröder may even resort, under
pressure from the unions and SPD leftwingers, to a rise in value-added tax
as a last resort.

"Instead of starting to reorganise the social system, simplifying the tax
system, decreasing the state share [of the economy], as well as labour
costs, it looks as if citizens and companies will have to pay more and more
taxes," says Jürgen Strube, chairman of the BASF chemicals group.

Many of the respondents stress that their companies operate globally and are
acutely aware of the threats to Germany's international competitiveness from
a rigid labour market and high non-wage labour costs

Surprisingly few executives express fears for their own businesses. "We
mustn't allow our worst fears to come true in terms of a self-fulfilling
prophecy," says Erich Sixt, chairman and founder of the car-hire group that
bears his name.

"The economic situation is difficult and we cannot expect support from the
government," says Metro's Mr Körber. "Nevertheless I think, with our German
thoroughness we are exaggerating our criticism. For some months people have
given in to hopelessness. This has additionally paralysed our activities."

A minority even deny the problems are as grave as so many of their
colleagues make out.

Heads of companies in sectors that have emerged relatively unscathed from
the downturn are least pessimistic. Many say they are still investing - not
only abroad, but also in Germany.

But some representatives of flourishing industries, such as pharmaceuticals,
warn about the potential consequences of continuing inaction. "We will
continue ongoing investment projects in Germany. Nevertheless, for new
ventures, the likelihood of locations in foreign countries [being chosen] is
increasing," says Nikolaus Schweickart, chairman of the Atlanta group.

However, few respondents are publicly comtemplating quitting the country.

Hans-Peter Keitel, chairman of Hochtief, Germany's biggest construction
group, says: "I would find it really depressing to think about to having to
move our holding out of Germany. All of us should work towards ensuring that
matters don't reach such a stage."
Additional reporting by Arkady Ostrovsky