To combat the crisis, Chancellor Angela Merkel is buying stakes in banks and bailing out industries. Is there no limit?
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."
The government in Berlin is undergoing an astonishing change of heart. Only a few weeks ago, Chancellor Angela Merkel spoke out against "arbitrary, unfocussed economic stimulus programs" and large-scale government intervention in the real economy. She made it clear that under no circumstance should "the government acquire permanent new responsibilities in the economy."
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.
The Social Democrats, for their part, took advantage of the friction within the CDU leadership to paint themselves as the true heirs of former Chancellor and Economics Minister Ludwig Erhard, a CDU politician famous for his role in postwar economic reform. The CDU/CSU had apparently rediscovered the "days of state monopoly capitalism," Finance Minister Peer Steinbrück, a member of the SPD, said derisively.
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.
Even more objectionable is another merger case that the Berlin government is seeking to promote under the auspices of fighting the recession. The Herzogenaurach-based Schaeffler Group, a manufacturer of antifriction bearings, acquired tire maker Continental, a much larger company. Now Schaeffler is deeply in debt, and the Economics Ministry in Berlin is deciding whether to help the company with a loan guarantee. At stake is the future of more than 210,000 employees, who produce tires, brake systems and other parts.
But what Economics Minister Michael Glos sees as a consequence of the financial crisis is in fact the result of faulty corporate decisions. The story began in late 2007, when Continental acquired VDO, the automobile division of electronics giant Siemens. The executives at Hanover-based Continental not only failed to recognize that VDO was something of a problem child, but they also paid too much for it and have been deep in debt ever since.
Continental might have been able to overcome its problems alone. But the situation became dangerous when Schaeffler acquired its competitor. Instead of bringing together the economic strengths of both companies, as hoped, the new entity merely combines their debts—to a grand total of €20 billion ($26 billion).
As a result, two once-healthy companies have gotten themselves into trouble through takeovers. This happens occasionally. But in the past hardly anyone would have hit upon the idea of the government using taxpayers' money to iron out the mistakes made by management during corporate takeovers.
But now that the financial crisis has taken hold in large sectors of the economy, there are apparently no longer any limits imposed when it comes to imagining how the state's influence can be expanded. But where is the limit? Under what criteria does the government decide into which industries it should and should not intervene? Most of all, how can it recognize whether a company's difficulties are attributable to the crisis or to bad corporate policies?
One thing is clear: Any intervention distorts competition, and weakens those competitors that are unable to crawl underneath the government's protective shield. Ironically, these are often the healthier companies.
The planned government bailout program for auto finance companies is a case in point. Chancellor Merkel and Finance Minister Steinbrück have already promised BMW, Daimler and VW that their banks will be able to resort to government loan guarantees should they run into problems. But why?
Until now, the principal purpose of auto finance companies has been to artificially stimulate sales. By offering low interest rates and attractive leases, they ensured that consumers who would normally have opted for a used car could afford a new vehicle. The system was especially beneficial to BMW, Mercedes-Benz and Audi.
But in the financial crisis, it is becoming more difficult for the auto finance companies to secure capital. They are forced to charge higher interest rates and are thus no longer able to offer discount financing to their customers. This may be bad news for the manufacturers, but it is not a justification for injections of government capital, as long as the auto finance companies do not run into difficulties themselves. Nevertheless, Volkswagen Financial Services and its subsidiary, VW Bank, have already applied for government loan guarantees for more than €10 billion ($13 billion). They are expected to receive between €4 billion and €5 billion. This enables them to borrow new capital at attractive interest rates and, in turn, offer low-interest car loans.
Even worse, the aid for VW Bank has triggered greed among the competition. Daimler CEO Dieter Zetsche says that his company's bank is not in trouble. But if competitors are begging for government bailouts, he cannot exactly hold back, he says, noting that failing to do so would put his company at a competitive disadvantage. Economists call this phenomenon a "spiral of intervention," when one government bailout triggers a series of new rescue programs.
It is no accident that the government is especially susceptible when it comes to the auto industry. To quote Chancellor Merkel, the auto industry is part of the "core of our industrialized nation."
This attitude is reflected in politicians' reactions to the carmakers' proposals, even when it comes to such questionable plans as the scrap premium. Under the proposed program, anyone who agrees to scrap his car when it is at least nine years old and buy a new one instead will receive a government subsidy of €2,500 ($3,300). The government hopes that the incentive program will stimulate car sales.
But whether the plan will actually work remains to be seen. It is clear that companies like Mercedes-Benz, Audi and BMW will hardly benefit from it, because consumers who drive such old vehicles are more likely to buy an inexpensive small car—an Opel or a Ford, say—than an expensive luxury car after scrapping it. They might even choose an Italian or South Korean car. Thus, the scrap premium could certainly save jobs, but not necessarily in Germany.
The notion that aid for individual companies or industries can prove to be useless is nothing new. From the government guarantee for the ailing Holzmann construction group to the rescue of the Maxhütte steelworks, politicians have often attempted to keep struggling companies afloat with government funds. But they have rarely been able to avert bankruptcy, in most cases merely succeeding at delaying it somewhat.
It is no less dangerous to turn the government into an arbitrator of competition. The government is about to find this out with its planned guarantee program. It intends to provide up to €100 billion to ensure that major corporations can secure loans at reasonable terms.
The program is well-intentioned, but it means the government will have to permanently grapple with difficult questions like: Which companies are in hot water through no fault of their own, and deserve to be saved? "No government official has the answer to questions like that," says Johann Eekhoff, a spokesman for the Kronberg Circle, a group of liberal economists. "They lack the necessary expertise."
There is a risk that ailing companies will be kept alive artificially and for too long—and at taxpayer expense. In addition, the program will result in the state-owned KfW becoming involved in the traditional business of private financial institutions.
There can be few objections to this, as long as non-state-owned banks continue to refuse to issue loans. But who can guarantee that the government's economic promotion agency will withdraw from the market in a timely manner, so that the banks can reclaim their turf?
"There is no exit strategy," says Rürup from the German Council of Economic Experts. He believes that the government must clearly define when it plans to withdraw again. "The planned guarantee and loan program should only be a temporary measure, and it should expire once lending by banks and the capital markets is functioning properly again."
There are also those who question whether KfW is even capable of living up to its expanded responsibilities. During the financial crisis, the actions of the Frankfurt-based government bankers bordered on incompetence on several occasions. For months, they failed to notice the dangerous speculation activities of KfW's subsidiary, IKB. Their naiveté cost billions.
KfW became the laughing stock of the industry when it transferred €350 million ($462 million) to Lehman Brothers after news of the investment bank's impending bankruptcy had become public. At that time, KfW itself was on the verge of liquidation—and now it is supposed to save the German economy.
This is only one of the reasons why many economists fear that the government is taking on too much. Politicians run the risk of overextending the government's financial strength with the billions in bailout programs, says Clemens Fuest, an economist at Oxford University and chairman of the economy advisory board at the Federal Ministry of Finance. According to Fuest, the government lacks the necessary expertise and personnel to invest in companies on a large scale. "There aren't even enough deputy ministers to serve on all those supervisory boards."
In the current crisis, Fuest advises, the government should rescue the banks and cushion the recession with economic stimulus programs. But he has a low opinion of targeted assistance for individual companies or sectors. All this does, says Fuest, is impair their willingness to help themselves.
This could well be the case with ailing porcelain manufacturer Rosenthal. To preserve the company, a spokesman said last week, Rosenthal is currently in negotiations with a rescuer with no government mandate: a private investor from Italy.