Commentaries

Germans vote for change; will they get it?

Germans have voted for change. A centre-right government with a clear parliamentary majority will replace the ungainly grand coalition of conservatives and Social Democrats that ran Europe’s biggest economy for the last four years.

This should mean an end to ”steady as she goes” lowest common denominator policies, and at least some reform of the country’s tax and welfare system. The liberal Free Democrats, who recorded their best ever result with around 14.7 percent, will try to pull the new government towards tax cuts, health care reform, a reduction in welfare spending and a loosening of job protection in small business.

Conservative Chancellor Angela Merkel, a cautious centrist, made clear in her first post-election comments that she she would not allow a radical lurch to the right. She promised to be the ”chancellor of all Germans” — old and young, entrepreneurs and workers — and said the conseravtives would be sufficiently dominant in the new coalition to prevail “in questions that affect social balance”.

The new government faces tough economic challenges in what is bound to be a more polarised political atmosphere, with the Social Democrats in opposition. The economy is expected to contract by at least 5 percent this year, and export-led growth is likely to return only slowly. Unemployment is set to explode in the coming months as short-time work schemes run out. The budget deficit is set to top 6 percent of gross domestic product next year, more than twice the EU limit. So 2010 will be an extremely difficult year. But there are some problems that are even more urgent.

The first big choice involves Germany’s ailing banks. Outgoing Finance Minister Peer Steinbrueck admitted last week that the public-owned regional Landesbanks “continue to pose an enormous systemic risk to our market”. The outgoing parliament passed a virtually useless “bad bank” law meant to encourage stricken financial institutions to put their toxic assets into state-guaranteed special purpose vehicles. The banks have so far spurned the system because it leaves the risk of losses with them rather than with the taxpayer.

Merkel and her new partners need to amend the law so that the state takes more of the risk, otherwise Germany faces a future of “zombie” banks that are too burdened with liabilities to lend to the real economy. That won’t be popular, with the left bound to claim that taxpayers are being forced to bail out wealthy bankers.

Fixing the banks is more urgent than cutting taxes or curbing public spending to revive the economy. That also means merging the Landesbanks, shrinking their activities and privatising as much as possible. The Germans must also be ready to allow healthy foreign banks to buy up sickly German ones. That is the logic of the European single market, to which a centre-right government is likely to be more committed.

“Tobin tax” gaining ground in Europe

No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.

European Union leaders could not agree to put it on the agenda of this week’s G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept. (more…)

Steinmeier’s recipe deceptively seductive

It was about as scintillating as a discussion among accountants, but Social Democratic challenger Frank-Walter Steinmeier outshone conservative Chancellor Angela Merkel in Germany’s only general election television debate.

True, Steinmeier failed to land the knockout punch he needed to overcome a 12-point deficit in opinion polls two weeks before the Sept. 27 vote. But he did score a points win that makes Merkel’s preferred option of a centre-right pact with the pro-business Free Democrats slightly less likely, and another glacial Grand Coalition of the two major parties more likely.  And that is concerning.

The centre-left foreign minister’s platform of a national minimum wage, executive pay curbs and switching off nuclear power is hardly a recipe to pull Europe’s biggest economy out of its deepest post-war slump.

In the current anti-capitalist mood, both leaders felt obliged to support regulating bankers’ bonuses, although Merkel made clear that, absent an improbable international accord, she opposed tough national rules that would drive business abroad.

On nuclear policy, Steinmeier has a point that investment in renewable energy could stall if Germany changes course and lets its atomic power stations keep working beyond 2020.

The idea of a minimum wage isn’t necessarily bad. The problem is the timing.

Contrary to liberal dogma, minimum wages do not necessarily destroy jobs or lower growth. Europe cannot hope to compete with China or India on pay, but only on know-how and quality. 

RHJ plays cool hand in Opel bidding

RHJ International is playing a canny hand in the political poker match that is the sale of GM’s Opel. The Belgian financial investment house is keeping itself in the game by steadily upping the stakes, increasing the pressure on Berlin to take its bid seriously.

While the German government has so far thrown its considerable backing behind a rival offer for Opel spearheaded by Canadian car parts maker Magna, it has yet to force GM into a deal.

This is in no small part thanks to RHJ’s willingness to play a tough hand. After scrutinising Opel’s books, the investment firm on Wednesday increased the cash on offer for a 50.1 percent stake in Opel to 300 million euros and cut the amount it is asking for in state aid to tide Opel over for the next few years.

RHJ’s improved offer makes it considerably harder for German Chancellor Angela Merkel to justify pushing for a decision on the Opel sale ahead of the election on September 27.

Berlin will also find it increasingly hard to justify backing Magna’s bid and the 4.5 billion euros in state guarantees that it requires, given that RHJ now says it needs just 3.2 billion euros in state guarantees and would repay these by 2013, a year earlier than originally thought.

The revised bid also plays into GM’s hands, giving the automaker an excuse to postpone making its recommendation.

GM prefers the RHJ offer because it will retain a larger stake in Opel and will not have to share know-how with Magna and its Russian backers Sberbank and carmaker GAZ. Its resistance to Magna has proved a headache for Merkel and her government in the run up to the election.

Driving a hard bargain on GM’s Opel

John Smith, General Motors’ chief negotiator on the sale of Opel, deserves a medal. But he certainly won’t be getting one from German Chancellor Angela Merkel.

Magna says it has reached an agreement in principle to buy a controlling stake in GM’s European unit. However, GM says it is going to think about the revised offer from the Canadian auto parts maker. It wants more details of the government financing package on offer before it can make up its mind.

Even though this contest has been one-sided from the start, GM and Smith have stuck resolutely to their guns in talks with not only the potential bidders but also the German government — resisting its attempts to bully them into accepting the Magna bid to the last.

Berlin has unashamedly skewed the race towards Magna at every step of the way — supporting its Russian-backed consortium in the belief that fewer jobs will be lost than under the rival takeover proposal of Belgian private equity group RHJ International favoured by Smith and GM.

With a general election looming on Sept 27, Merkel is desperate to show voters that her government is protecting local jobs at a time when the economy is fragile.

The “auction” involving Magna, RHJI — and in the early stages Fiat and some Chinese buyers — has driven up the price GM is getting for Opel to a reported 500 million euros. However, a key ingredient of Magna’s offer are the loans being made to Opel — totalling 4.5 billion euros — guaranteed by European governments.

Magna, along with Russian backers Sberbank and carmaker GAZ will get a 55 percent stake in Opel.

GM and Germany in Opel chicken run

   By Alexander Smith and Paul Taylor

General Motors and the German government are playing out the Chicken Run scene from the 1950s James Dean classic film “Rebel Without a Cause”.     Neither has leapt from their car yet, but there are growing signals from Germany that GM has its hand on the door handle and is preparing to drop its preference for financial investor RHJ in favour of handing control of Opel to Canadian auto parts maker Magna.     GM has so far been in no hurry — although the U.S. car group has been doing its best to keep up appearances with a statement following this week’s board meeting saying it hoped to make a recommendation to the Opel Trust Board “shortly”. But German pressure has been rising as a Sept. 27 general election approaches.     Germany’s eagerness to seal a deal with Magna — which has teamed up with Russian bidding partner Sberbank and automaker GAZ — is palpable.     Berlin is ready to get its cheque book out to provide state aid for a deal with Magna. But has made clear this would be reconsidered if GM opted for Belgian-based RHJ, which Chancellor Angela Merkel’s government fears would cut more jobs. RHJ would be an unpopular choice in Germany, where a leading politician famously branded private equity buyers “locusts”.     Berlin wants a deal closed in September and has set up an Opel Task Force to oil the wheels. Yet Opel workers are concerned that GM has been playing for time so that a decision is delayed until after the election.     They fear that stalling until after polling day would make it easier for GM to put Opel through insolvency proceedings and shed some of its factories and staff at a lower cost.     For Merkel, a deal on Opel’s future now would deprive her Social Democratic junior partners and rivals, who back Magna, of a potentially damaging campaign issue (“Merkel dithers while Opel burns”). But while it may yield short-term benefits, Berlin’s rush to hand Opel to Magna could yet backfire.     GM’s chief negotiator John Smith has been vocal in his criticism of Magna’s bid, specifically citing concerns about the use of GM patents and Russian expansion plans.     Magna’s Kremlin-backed partners operate in an opaque business environment where foreign players can suddenly lose control of a joint venture or face tax or regulatory obstacles.     It may well be GM that blinks in the run-in with Berlin over Opel, but Merkel shouldn’t forget that whoever bails out first, the Chicken Run inevitably ends in a car wreck.