The State as Über-Entrepreneur Berlin Sees No Limits to Economic Intervention
As part of her efforts to combat the economic crisis, German Chancellor Angela Merkel is increasing the state's influence in the market, buying holdings in banks and bailing out individual industries and companies. Is Germany turning into a planned economy?
Grayish-white slush is piled high along the streets in Selb, a town in the Upper Franconia region of Bavaria. The mood at the headquarters of Rosenthal AG, a fiercely traditional porcelain maker, suits the gloomy weather. Since Rosenthal's parent company, Ireland's Waterford Wedgwood, filed for bankruptcy, the company's 1,500 employees worldwide have feared for their jobs. "Many are deeply concerned about their livelihood," says labor representative Jörg Bauriedel.
The company sees itself as a victim of the financial crisis. However, its plight is in fact a reflection of a lengthy decline. Rosenthal's expensive designer porcelain, which once adorned coffee tables in upscale living rooms during Germany's postwar Wirtschaftswunder economic boom, is now being sold in, among other places, discount stores. At the same time, low-wage manufacturers from China and India are whittling away at the German luxury brand's share of key markets in the United States and Asia.
The ailing company could soon be getting assistance from an unlikely source. Federal and state government authorities, fearing the loss of hundreds of thousands of jobs in a recession, have declared saving companies as one of their main objectives -- and have seized upon Rosenthal as a worthy contender. Senior politicians from Bavaria's conservative Christian Social Union (CSU) party are campaigning in Berlin to support Rosenthal with government assistance, if necessary. Peter Struck, the floor leader of the center-left Social Democratic Party (SPD), which governs together with Merkel's Christian Democrats in a grand coalition, has even volunteered government support for the company. "We will have to discuss the issue," says Struck, "if the company continues to face difficulties."
But now, suddenly, it seems like the public sector's economic intervention cannot be forceful enough for the administration. Last week, Merkel introduced the biggest economic stimulus program in German postwar history, as well as giving her blessing to a series of government interventions into companies and industries, the likes of which the country has not seen since German reunification.
The government has acquired a 25 percent share of Frankfurt-based Commerzbank, and it plans to purchase a majority stake in the ailing Munich-based mortgage lender Hypo Real Estate. It is looking into providing assistance to the highly leveraged Schaeffler Group, based in the Bavarian town of Herzogenaurach, and has made several hundred billion euros in additional guarantees available to companies. The grand coalition hopes to stimulate business in the auto industry with a so-called "scrap premium" to encourage drivers to take old vehicles off the road, and the conservative Christian Democratic Union (CDU) leadership is debating measures that the party would have derided as the work of the devil in the past: direct government investment in companies.
The government has many strong arguments to support what the Frankfurter Allgemeine Zeitung has called a "boom in government." The international financial crisis has ballooned into the worst recession in German postwar history, and has taken many banks to the brink of bankruptcy. Even fundamentally healthy companies are often only able to get loans at terms that would make virtually any business unprofitable. Many major corporations will have to take out billions in loans this year, warned CDU business issues spokesman Laurenz Meyer at a meeting of his party's parliamentary leadership. "What happens if they have to pay interest of 8 or 9 percent on those loans?" This, in Meyer's opinion, would be "unacceptable" to the coalition government.
Such fears have led experts to take a positive view of the government's decision to fight bottlenecks in the credit markets and, after prolonged hesitation, to unveil a clear economic stimulus program that will combine additional government spending with tax cuts.
But experts also criticize the many measures in the package with which the government will intervene in the economy to an unnecessary extent. With its investment and lending programs, the Merkel administration is promoting questionable merger projects, turning itself into something of an über-entrepreneur in many industrial sectors and, by placing the state-owned KfW in a key position, promoting precisely the financial institution that acquired the reputation of being "Germany's stupidest bank" during the financial crisis.
"With this economic stimulus package, Germany is moving a step closer to the French approach to industrial policy," warns Bert Rürup, chairman of the German Council of Economic Experts. Proposals like the scrap premium for cars, says Rürup, benefit "an individual economic sector in a targeted way," even though the recession "should not be fought with sector-specific measures."
Merkel's new course has triggered unease, even among senior members of her own party. At a recent CDU meeting in the eastern city of Erfurt, Christian Wulff, the governor of the state of Lower Saxony, proposed excluding direct government investment in private companies from the final statement. But his counterparts Roland Koch and Jürgen Rüttgers, the governors of Hesse and North Rhine-Westphalia respectively, were against the restriction. "It is possible," said Rüttgers, that ailing companies "will have to be bailed out in the form of a temporary government investment."
Merkel herself maneuvered herself between the fronts, as she so often does. Although she spoke out at length against "socialist experiments" last week, she was unwilling to rule out nationalization altogether. Worried CDU/CSU supporters wonder whether Angela the Fainthearted is turning into Angela the Unprincipled.
Graphic: German government interventions to combat the economic crisis
The dispute is about more than the usual party wrangling leading up to an election. It has to do with the question of whether the government, in times of financial crisis, should continue to hold fast to the principles of the market economy, or whether the state ought to intervene in the country's economy.
The government's planned investment in Commerzbank reveals the extent to which the usual standards are threatening to slip. The roughly 18 billion ($24 billion) that the government plans to invest in the Frankfurt-based bank will supposedly make the institution "weather-tight, in light of the heightened financial crisis," says Michael Blessing, the spokesman of the board of Commerzbank.
In reality, however, the main purpose of the government investment is to bolster the questionable merger of Commerzbank and Dresdner Bank and protect the Allianz insurance company, which owned Dresdner until recently. Under the rules of the bank rescue package, it ought to have been up to Allianz to place its ailing subsidiary under government protection. But then it would have been far more difficult for Commerzbank to fund the Dresdner takeover, a deal the federal government wants to see happen, so as to create a "strong player next to Deutsche Bank," says Finance Minister Peer Steinbrück.
Now the government is acquiring more than a quarter of all Commerzbank shares and pumping additional billions into the bank in the form of a so-called silent participation. The problems are obvious. On the one hand, it is questionable whether the shaky bank will ever be able to service the interest for the government's financial injections. On the other hand, Berlin's rescue operation distorts competition. Cooperative banks and savings banks are already complaining that the new state-backed bank is trying to steal their customers with cutthroat terms.
- Part 1: Berlin Sees No Limits to Economic Intervention
- Part 2: Distorting Competition