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Germany: Economic Model Comes Under Scrutiny

  • Tony Wesolowsky

The German economic model, which seeks consensus between labor and capital on major company decisions, is under scrutiny this week as two corporate deals have brought its viability into question.

Prague, 26 November 1999 (RFE/RL) -- Germany's brand of consensus capitalism has been granted a reprieve.

This week, German Chancellor Gerhard Schroeder announced he had brokered a last-minute deal to rescue the debt-ridden construction group, Philipp Holzmann. Credited with rebuilding much of Germany after the war, including the Reichstag building in Berlin, the 150-year-old company had been teetering on the brink of collapse.

The collapse of Holzmann threatened up to 70,000 jobs. The company's abrupt announcement last week that it was going bankrupt brought thousands of employees out on the streets to demonstrate. Under intense political pressure, Germany's leading banks agreed to provide $2.25 billion to bail out the firm, but only after Schroeder promised about $125 million in government aid and government-backed loan guarantees.

Irwin Collier, an economist at the Free University of Berlin, told RFE/RL that the government aid was key to the deal.

"Once banks know that they can lend money without risk, and they're happy to earn money without risk; so I think it was essentially coming up with the government loan guarantee that sweetened the deal sufficiently so that the problems were able to be resolved."

The case has fueled further debate on whether Germany's brand of consensus economics, known as Rhineland capitalism, can withstand the onrushing forces of globalization.

Established after War World II, Germany's consensus system anointed German banks not only as creditors, but also as shareholders in and -- in many cases -- managers of German firms. Labor was rewarded, too. Workers gained access to corporate boardrooms. Together, labor and capital worked to achieve a balance between the profit motive and the interests of workers. The results were impressive, as Germany rose from the ruin of war to become the world's third biggest economy.

But some foreign as well as German investors believe the time has come for German banks and companies to disentangle their operations. This, conservative critics say, is the best way to ensure greater efficiency, higher profits, and more value for shareholders.

Shareholders are being courted in another drama being played out on the German industrial scene that has further shaken faith in Germany's economic model. The world's largest mobile phone company, Britain's Vodafone, has launched a $128 billion hostile takeover -- the world's largest -- of the German engineering and telecommunications firm, Mannesmann. A hostile takeover is when one company buys up a controlling stake in another company against the wishes of the second company's management.

Large corporate mergers are routine in today's global economy, and German firms haven't been shy in taking part. Deutsche Bank bought out New York's Banker's Trust to create the world's largest bank; Daimler-Benz merged with Chrysler to create a colossal car manufacturer; the news empire Bertelsmann has gobbled up media outlets around the globe.

But not one hostile bid has ever succeeded in Germany, and the reaction to the Vodafone overture has been skeptical at best, one of outrage at worst. Some analysts, notably conservatives in the United States, have cast the Vodafone bid as a showdown between Anglo-Saxon capitalism, under which the shareholder rules supreme, and Germany's consensus approach, which takes into account the rights of employees.

But the Mannesmann saga is rife with irony. Collier points out Mannesmann is already, in a sense, foreign-owned: 60 percent of its shares are held by non-Germans. In fact, Collier says, Mannesmann is ripe for a takeover because it resembles a non-German firm more than a German one.

"So that makes it desirable, because you have a company that's not under the financial finger of a German bank, so it's not terribly transparent as to the general health of what you're acquiring -- so it's more desirable from that respect, and it's also easier to acquire. So it's very logical, why it would happen in this particular case. Mannesmann, I think, must have deliberately wanted to have this structure of ownership, and not be dependent on the German banking system."

Nevertheless, the German public suspects that globalization may be going too far. Such fears are rooted in a deep distrust of the market, Collier explains.

"I think absolutely within German public opinion there is a deep distrust of the market as a discipline to keep greed in check. They see it more as another instrument that can be used by the powerful to extract profit from the weak."

Judging by some of the comments coming out of Berlin, the political elite share some of the same concerns as the public.

Schroeder said in an interview with the French newspaper "Le Monde" last Friday that takeovers should be viewed with the "utmost possible caution." They harm not only the target firm, he said, but also the predator company. His finance minister, Hans Eichel, has called for new takeover rules in Europe to avoid a culture clash between Anglo-American capitalism and the consensus German model.

British Prime Minister Tony Blair has seemed taken aback -- and peeved -- by the public outcry that the Vodafone bid has stirred in Germany. Earlier this week, he said: "We live in a European market today where European companies are taking over other European companies, are taking over British companies and vice versa. That's the European model."

Both Blair and Schroeder belong to the ranks of a recast left that has shed its anti-business rhetoric in favor of a more conciliatory tone. But while Schroeder is pro-business, he supports a more gradual evolutionary approach to capitalism, very different from the American and British stance. While premier of Lower Saxony, he sat on the supervisory board of Volkswagen. Six years ago, he helped fashion a plan to save jobs under which its employees agreed to a four-day work week with lower wages in order to save thousands of jobs.

But some of Schroeder's critics argue his recent questioning of the attempted takeover of Mannesmann is politically motivated. The chancellor faces a potentially fractious party conference next month. Next Spring, his Social Democratic Party (SPD) faces a key test in elections in Germany's most populous region -- North Rhine-Westphalia. The region is an SPD stronghold and happens to be home to Mannesmann and its many workers.