Market Forces Loosening State’s Grip on ‘Germany Inc.’

There is a law in Germany against firing a worker for any reason short of having committed a felony. There’s a law forbidding shopping at night and on Sunday. There’s a law ordering sidewalk cafes to shut by 10 p.m. so as not to disturb those who turn in early. There are even laws prohibiting clearance sales, lifetime guarantees and product rebates.

In this bastion of order and regulation, government-imposed strictures meant to ensure peace and social security have long strangled growth, hindered competition and snuffed out entrepreneurial spirit.

But as globalization, e-commerce and eastern Germany’s less protected workers force their way onto the business scene, the paternalistic directors of Germany Inc. are in retreat.

In the last few years, major tax reforms, some key international mergers and the sale of erstwhile government monopolies have reduced the role played by the state in shaping the national economy. Although the ubiquitous regulators still micro-manage much of life, such as specifying hours for dumping trash and flushing toilets, economic analysts see positive signs that Germany Inc. is slowly going out of business.

“There are two mega-themes driving this process: globalization influences like the Internet and the change from a national economic policy to a European policy with the euro,” said Norbert Walter, chief economist at Deutsche Bank.

Germany can no longer isolate itself from international business trends such as takeovers and mergers.

And the Continent’s common currency means the economic machinery here must operate in sync with the other euro countries.

The transformation of the German business climate is far from complete, as evidenced by the recent failure of a planned merger of Deutsche and Dresdner banks and the government’s clumsy attempt in December to bail out bankrupt construction firm Philipp Holzmann.

But many analysts saw the successful resolution in February of what began as a hostile takeover of Germany’s Mannesmann by U.S.-British company Vodafone AirTouch as evidence of a change in the relationship between government and business.

Cross-border mergers are a reality of an increasingly global economy, and the government has neither the intention nor the interest to intervene, said Matthias Schuergers, economic policy director at the federal Ministry of Economics and Technology.

“Mergers don’t put pressure on jobs, they are just the means by which a necessary adjustment can be made. If a company gains a more competitive position because of a takeover, even if there are short-term job losses it means more stability in the long run,” Schuergers said.

In the mere 18 months since the leftist leadership of Chancellor Gerhard Schroeder took over after 16 years of allegedly business-friendly conservative government, the first significant structural shake-ups since the post-World War II economic miracle have allowed German companies to function more like their foreign competitors.

Schroeder made job creation and loosening the shackles on employers the campaign rallying cries of his ideology of “the new middle” when he challenged and defeated Helmut Kohl in 1998 to become chancellor.

Since then, $16 billion in federal budget cuts last year and a string of tax relief measures have made it less expensive for employers to expand their work forces. The measures also made it less attractive for big enterprises to perpetuate their practice of cross-capitalization, which often led to poor decisions.

Close Ties Clouded Decision-Making

During the decades when business and government were basically partners, major companies often bought stock in one another--and were loath to sell it when capital gains taxes were so high they ate up most profits. Those stakes often got in the way of good judgment, such as Deutsche Bank’s generosity with loans to failing Philipp Holzmann--a company in which it held a significant block of shares.

Among the 250 tax law revisions was an exemption on capital gains tax for firms that want to divest themselves of shares in rival or unrelated businesses.

The wide-ranging tax reforms mean Germans will have $35 billion more in disposable income this year, Schuergers said.

That cash infusion is the main reason Germany’s six top economic research centers predicted in April that gross domestic product would rise an impressive 2.8% this year after a decade of flat performance.

Meanwhile, competition from eastern German enterprises that pay workers less and give them fewer benefits also has begun to influence the cozy labor conditions long enjoyed in the Western states.

Early this year, the once-omnipotent IG Metall trade union alliance settled for one of the most modest wage hikes in decades--a sign that organized labor recognizes that German production costs must get leaner if the country is to maintain its strong export profile.

Fewer than 30% of those employed in the east work under union contracts, and less government regulation there means more opportunity for commerce and transport, said Leipzig Mayor Wolfgang Tiefensee.

Leipzig’s new airport, for example, is grabbing business by operating on a 24-hour basis. By contrast, Frankfurt and Berlin ban late-night use because of dense population and stricter noise abatement rules.

And workers in the east, where unemployment tops 17%, are more flexible in negotiating wages and benefits. That explains why some high-profile companies such as Porsche have recently shifted new investment to the east.

Companies with operations on both sides of Germany, such as the Edelhoff environmental services firm in Iserlohn, are finding the easterners more accepting of global market realities.

“It’s a cultural influence,” said Edelhoff chief Joachim Ronge, citing easterners’ greater “openness and a lot more flexibility.”

Such competition from the new states combined with the drive within European Union states for harmonized tax and labor regulations is slowly forcing the more traditional labor venues of western Germany to see that the costly old security blankets have been outgrown.

“You can’t stop it. If the eastern German work force is just as motivated and productive with five weeks of vacation a year instead of six, it’s only a matter of time before that becomes the norm in the western states too,” said John Zindar, director for international strategy at the Industrial Investment Council, which is seeking to draw new economic life to the still underdeveloped east. “The east is proving that life goes on without all these benefits and regulations.”

It was from Leipzig and Dresden that a revolt against the strangling shop-closing laws emanated last summer.

A loophole in the legislation allows shops in high-traffic tourist areas and transport facilities to open Sundays, so both cities developed shopping malls adjacent to their train stations.

That prompted a land-office business for the east, prompting retailers in some western cities to open illegally on Sundays and pay modest fines for the violations.

Store Closure Rules Are Challenged

Even Berlin’s showcase KaDeWe department store defied the powerful retail workers union by opening on the first Sunday in May, prompting a strike by a few hundred union members that dissipated within an hour as hordes of shoppers stormed past them without a backward glance.

“I have no problem working on a Sunday. My husband is a policeman, so he works weekends too, and we can often arrange our days off together at other times in the week,” said Andrea Eichler, who sells linen at Kaufhof department store. “The shop-closing law is obsolete. Each company should be able to decide for itself how long to stay open.”

Retirees Ruth and Erich Lange concede they have time to shop on weekdays but turn up for the occasional Sunday openings because the atmosphere is more relaxed.

“I think it’s time we stopped being so overprotective,” Lange said. “It seems to me that working late shifts or on weekends is better than having no job at all or being on the dole.”

German economic analysts uniformly contend the reform process still has a long way to go before the government stops trying to run the country as if it were a family-owned company.

Over-regulation of retail activities remains one of the enduring sins here, despite several high-profile challenges by foreign merchandisers accused of unfair practices--like offering lifetime guarantees or reimbursed parking.

Land’s End Germany, a daughter company of the Dodgeville, Wis., mail-order empire, was taken to court by a retailer lobbying group for advertising an unconditional guarantee on all its merchandise. German courts ruled in the lobbyists’ favor because there remain laws on the books here against such practices.

But Land’s End Germany director Steve Bechwar sees the tide turning.

“What is driving the change is the Internet influence,” said Bechwar, who notes that most German political parties now support revocation of the 1930s laws against rebates and lifetime guarantees. “These restrictions are putting German businesses at a competitive disadvantage in Internet sales with companies domiciled outside of Germany.”

Some analysts contend foreign investors have unfounded fears of the restrictions on employers, noting major new projects such as Advanced Micro Device’s $1.9-billion chip plant in Dresden.

In fact, investments like Silicon Valley-based AMD’s have helped the eastern states orient themselves to the American ways of doing business rather than those of western Germany, said the Dresden plant’s spokesman, Jens Drews.

“If a firm gets into difficulties, it can shed labor. There are very complicated laws if you want to get rid of a certain person, but the German system is more flexible than perceived,” says Gustav Horn, director of forecasting at the German Institute for Economic Research in Berlin.

Many analysts are worried by the rosy economic outlook. They fear Germany’s huge trade surplus, fueled by a weak euro, and prospects for GDP growth are breeding complacency about the need for more reform.

The weak common currency has made Germany’s exports cheaper overseas. But as if to underscore the fragility of an economy based on currency values, the euro in recent days has been gaining steam.

“The euro decline has created such export confidence that it makes people believe things can go on like this forever,” says Paul Bernd Spahn, a professor of public finance at Frankfurt’s Goethe University.

The announcement by Dresdner Bank in mid-April that it was unable to conclude the merger with Deutsche also seemed to testify to a two-steps-forward, one-step-back pace of change in Germany’s business climate.

Deutsche’s Walter complains that many captains of industry here, even in the highly internationalized field of finance, are still clinging to the old ways.

“It’s an attitude averse to change, averse to risk, averse to the very idea that change is an added quality and can be fun. This is alien to Germans,” Walter said.

Bricks-and-Mortar Shops Transformed?

Noting the tens of thousands of retail banks occupying prime real estate in every European city, town and village, Walter recently proposed, tongue in cheek, that they be converted to a chain of gourmet restaurants as online banking puts the local storefronts out of business.

“I suggested we call this chain of gastronomic temples Left Bank,” Walter recalled of his double-entendre. “No one was amused.”