The death of German corporatism

By: Wolfgang Munchau

It was always clear that German corporatism would not survive the first half of the 21st century. What was less clear was how long this process would last and which form its destruction would take. Two important events last week greatly accelerated that process.

One was the hostile public reaction to the German government’s bail-out of IKB Deutsche Industriebank, a small bank that gambled with subprime securities, lost and reached the brink of insolvency. The other was the televised raid on the home of Klaus Zumwinkel, the chief executive of Deutsche Post and one of Germany’s best-known corporate fixers, privatisation apparatchiks and government advisers.

Public prosecutors said Mr Zumwinkel was under suspicion of evading €1m in taxes, using some elaborate tax-dodge scheme in Liechtenstein – one of the few places in Europe where this is apparently still possible. Prosecutors said later they were investigating more than 750 cases – essentially a Who’s Who of the German corporate establishment – involving an estimated €3bn-€4bn of funds hidden from the German authorities.

So, Mr Zumwinkel’s misfortune is not an isolated incident. It is part of what might be the biggest tax fraud case in history. It is also the latest in a long string of affairs involving suspected or actual criminal actions by companies and their top managers. Siemens, the epitome of German corporatism, is embroiled in a corruption scandal – part of which has involved Heinrich von Pierer, probably the most renowned representative of the old system, being ousted as supervisory board chairman, even though he was not personally implicated.

Peter Hartz, author of Germany’s welfare reform programme, friend of Gerhard Schröder, the former chancellor, and a former personnel director of Volkswagen, was given a suspended two-year jail term on charges of breach of trust. This came as part of a wider investigation into the company after it emerged that labour leaders entertained prostitutes at company expense. The list goes on. As the country is already indulging in a general anti-capitalism mood, Mr Zumwinkel’s troubles with the taxman came at a bad time. Germany’s clubby corporatism is a source not only of crime but of restrictive practices.

With the help of the government, employers’ organisations and trades unions negotiate minimum wages for their entire sectors, which keep the long-term unemployed and immigrant workers out of jobs. Mr Zumwinkel took this to a new level when he managed to persuade the government last year to accept a minimum wage in the postal market. This drove Deutsche Post’s only private-sector competitor out of business.

The reason why the ugly face of German corporatism is being exposed now is not a sudden outbreak of criminal activity, but a change in public attitudes. Organisations such as the Berlin-based Transparency International have raised public awareness of corruption. Corruption is becoming less tolerated than it used to be. The laws have also been tightened, but it often takes years for this to have an impact.

While Germany’s system of corporate governance continues to be incumbent-friendly, it is not as protectionist as it used to be. It is no longer self-evident that executive chairmen will move over to the supervisory board after their retirement. Mr Zumwinkel had planned to do precisely this, as Mr von Pierer and countless other German chief executives had done.

Germany’s closely knit corporatist network would not be complete without the public sector banks, or those, like IKB, that operate in the twilight between the private and the public spheres. Last week’s bail-out of IKB is another desperate attempt by Germany’s establishment to hold the disintegrating corporatist model together. Peer Steinbrück, Germany’s finance minister, claimed it was to prevent a systemic financial crisis. This is nonsense. The bank is too insignificant and IKB’s depositors are insured. There is no way to justify the bail-out on any economic or ethical grounds, as Professor Willem Buiter argued in his FT blog last week.

The reason the government agreed to bail out IKB is to protect the bank’s industrial customers. IKB specialises in channelling money to Germany’s mid-sized industrial sector, probably the most mollycoddled economic group in the country today. Letting IKB go bust would mean that several German companies would have to obtain finance in the open market. Imagine that.

The good news is that the bail-out of IKB is hugely unpopular. Last week’s progressively angry editorials of Frankfurter Allgemeine – not normally a hotbed of anti-establishment sentiment – is a good reflection that the government’s decision to fork out more than €1bn to rescue IKB may yet backfire, as it should. The idea that greedy and incompetent bankers, who loaded up their portfolios with subprime junk and made large profits before the crisis, can then go cap-in-hand to the taxpayer is sickening.

Add to this the fact that one of Germany’s leading businessmen is suspected of not paying his taxes, at a time when many find themselves paying more, and one should not be surprised that people lose confidence in the system.

The upshot of this tale is that the inevitable demise of German corporatism came a big step closer last week and that this is now a lot more evident to a lot more people.

 

© The Financial Times

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