These Rules Could Stall Germany's Job Engine

The trains made by Märklin may be small enough to chug around a tabletop, but they're a pretty big business. Last year, the company based in the south German city of Göppingen generated $146 million in sales and employed more than 2,000 people at four factories. Family-owned and dominating its market niche worldwide, 143-year-old Märklin is typical of Germany's famous Mittelstand, the small and midsize companies that underpin the nation's economy.

Maybe too typical. Like many of its Mittelstand peers, Märklin got into trouble in recent years. The company suffered an undisclosed operating loss in 2000 and had to trim 200 jobs. It expects to report a profit for 2001 on a sales increase of at least 10%. But now, the so-called Basel 2 agreement presents another problem. The accord, if adopted, will compel banks to set aside more capital when lending to smaller companies and others considered higher risks. This means that German toy and hobby retailers--Märklin's key customers--would have to pay higher rates to banks for the money they need to stock Märklin products. Owners of these mom-and-pop stores already are telling Märklin they'll have trouble handling the tighter scrutiny from their bankers that Basel 2 requires. "They simply aren't professional enough to deal with it," frets Wolfgang Topp, a member of Märklin's management board in charge of marketing. So while Topp concedes that Basel 2 will increase transparency, he complains: "As far as the Mittelstand goes, it overshoots the mark."

For the Mittelstand, tighter credit only adds to an array of problems including a lackluster world economy, a national government perceived as unfriendly, and ever greater competition from foreign rivals. Bankruptcies rose an estimated 15% in 2001, according to the Institute for Mittelstand Research in Bonn. In the building industry, debts exceed equity by more than 2 to 1. Critics fear that Basel 2 will force the small, local banks that typically lend to such outfits to curtail their loans.

Some of the Mittelstand's problems are self-made: Many companies have fallen behind by failing to innovate. But the Mittelstand hasn't gotten much help from Berlin, either. Tax reform helped big businesses but often added to the tax bill for smaller ones by eliminating exemptions. And labor legislation added to the costs of small biz: One new law forces outfits with as few as 200 employees to pay the salary of a full-time workers' representative.

That's a funny way to treat the nation's job motor. Perhaps even more important, the Mittelstand is integral to German national identity: That's why the Basel 2 proposals have raised such a furor there. Most Mittelstand companies are family-owned and take a benevolent attitude toward employees. When Berthold Leibinger, president of machine-tool maker Trumpf, spoke to workers on the factory floor in Ditzingen just before Christmas, he vowed that there wouldn't be any layoffs despite the sagging global economy. "This company is run in a very personal way," says Leibinger, whose profitable concern doesn't have trouble raising capital. But rules like Basel 2 could threaten this age-old method of doing business.

By Jack Ewing in Frankfurt

    Before it's here, it's on the Bloomberg Terminal.