Corporate Germany's Bad Dream: Life Without Helmut

Business fears an end to reform if Kohl loses in September

Germany loses its shot at the World Cup, and a distraught Helmut Kohl appears on television to empathize with his disappointed nation. Vacationers at spa towns on the northern coast find him pressing the flesh. The German Chancellor is on the stump again, fighting for a fifth term in office.

But as Sept. 27 general elections approach, it's clear that after 16 years, voters are tired of seeing the same face. The Christian Democratic Union (CDU) and its partner, the Christian Socialist Union (CSU), have 37% support in the polls, trailing the 41% held by the Social Democratic Party (SPD) and its candidate, Gerhard Schroder. If the trend keeps up, Schroder will be able to form a government with the Green party, which commands 6% in polls, and to control both houses of the legislature--divided since 1990.

THE BEST BET. That's bad news for business. Over the past four years, German companies have streamlined radically to battle global rivals and get ready for the tougher competition in Europe as monetary union approaches. But they struggle with high taxes and wage costs that the ruling coalition has failed to attack aggressively. Yet most executives still think Kohl's coalition is their best bet. "Any other would slow or block reforms," says Hans-Olaf Henkel, head of the Federation of German Industries.

Trouble is, Kohl's long tenure means his chances of making an 11th-hour comeback, as he did in 1994, look slim. So executives are uneasily eyeing two potential alternatives: a Socialist-Green coalition or, if those parties don't command a majority, a so-called grand coalition between the SPD and the CDU/CSU.

The first job for any new government: tax reform. In January, 1997, the CDU proposed an $18 billion tax reform package that included cutting the top corporate rate to 35%, from 45%. After months of debate, officials of both parties nearly reached a weak compromise. But Oskar Lafontaine, the Socialists' old-fashioned leftist leader, killed it. Schroder has vowed to push through a tax plan if elected.

Tax reform alone, of course, won't ensure German competitiveness and lure foreign investors. Nonwage labor costs still total 80% of each worker's salary. Miles of red tape make new investments, both foreign and domestic, a nightmare. And Germany desperately needs pension-fund reform. But the campaign is being fought on image, not issues.

Although Schroder makes business-friendly noises, an SPD-Green coalition may move swiftly in the wrong direction. Already, CEOs are alarmed by the Socialists' plan to roll back even tiny steps achieved by the current government. The SPD would revoke the 1996 reduction in sick pay to 80% from 100% of salary, for example, and the scheduled drop in pension payouts to 64% of final salary by 2030, from 70% now.

"WHERE'S THE BEEF?" Schroder has tapped a computer entrepreneur with a Harvard MBA, Jost Stollmann, to serve as Economics Minister in his future Cabinet. But that hasn't soothed the business community. "I represent new markets, entrepreneurship, new culture, and new ways of communicating," Stollmann says. But he has come across as a lightweight by insisting that Germany is exaggerating its problems. "He needs to communicate issues and solutions," scoffs Henkel. "Where's the beef?"

It's now a far closer race than last spring, when Schroder seemed a shoo-in. Kohl is hoping that an economic upswing will give his popularity a boost. The economy grew at a seasonally unadjusted annual rate of 3.8% in the first quarter, the strongest since reunification. But Jan Hatzius, economist at Goldman, Sachs & Co. in Frankfurt, estimates that second-quarter seasonally unadjusted economic growth will drop to less than 1.5%--and the announcement will come right before the elections.

With Kohl still trailing in the polls, some business leaders are hoping for a grand coalition between the Socialists and Christian Democrats. Compared with a Socialist-Green government, "many think a grand coalition is the lesser of two evils," says Robert J. Koehler, CEO of SGL Carbon Group in Wiesbaden. One advantage: It could neutralize the Socialists' left wing. But the alliance could get bogged down in infighting, as happened during the last grand coalition in the late 1960s. And after a year or two, the parties will be looking to the next elections and will want to highlight their differences.

With two months to go until the election and at least 40% of voters still undecided, "the outcome is still open," says Stefanie Wahl, political scientist with Bonn's Institute for Economic & Social Research. From the viewpoint of German companies, there may be hope yet.

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