Big business threat to quit Germany

GERHARD SCHRoDER'S red-green coalition is not even six months old, but already the honeymoon period with the German business community seems to be over.

Growing concerns about tax reform, higher wages and economic slowdown have prompted many of Germany's most powerful businesses to take direct action in an attempt to push the government into pro-industry reforms.

This week, Allianz, Europe's biggest insurer, became the latest multinational to threaten to locate elsewhere if the red-green coalition presses ahead with controversial economic reforms putting 73,000 jobs at risk.

In Allianz's case, the main bone of contention was proposed changes to the tax system that could, according to the company, cost it almost pounds 1bn over the next four years.

Helmut Perlet, Allianz's chairman, described the government's plans to restructure corporate taxation as "unjust and overdone", and said he would move key parts of his business out of the country unless Chancellor Schroder and his colleagues backed down. A spokesman for the company said: "We have a duty to protect our shareholders and investors. Some businesses can be transferred relatively quickly."

Allianz's threat came just days after Dana Corporation, the US motor component manufacturer, switched production from Germany to Leeds, and followed a similar move from the electronics giant Sony. Observers say these are not isolated incidents, but rather reflect growing dissatisfaction among the business community with the economic policies of the coalition. Business concerns focus not only on the structure and the level of corporate taxation - which has a top rate of 45 per cent compared with 30 per cent in the UK - but also on labour costs. According to some calculations, employment costs in Germany are, on average, some 70 per cent higher than in Britain.

The pay deal struck last week in the German metal industry did little to reassure employers concerned about rising costs. After a bitter dispute and threats of widespread industrial action, IG Metall, Germany's biggest trade union, negotiated a wage increase for its members of between 3.6 and 4.2 per cent, substantially above the rate of German inflation.

Analysts now expect similar pay deals to be struck across the metal, engineering and electrical industries, and have predicted that the consequences for German business could be severe.

Heinrich von Pierer, chief executive of the industrial group Siemens, is just one leading businessman to argue that his costs will increase substantially because of the IG Metall deal. Siemens' costs could soar by pounds 300m a year, he estimated, and analysts have warned that other German industrial giants could face similar cost increases.

Economists at the investment bank ABN Amro said: "The main issue for companies is how they will respond to this increase in costs.

"Industrial companies can no longer pass on higher costs in the form of higher prices. Inevitably, the short-term result will be a direct hit to corporate profit margins. Companies may be forced to cut costs through further job-shedding."

None of this is pleasant news for Chancellor Schroder, who has made the challenge of driving down unemployment from its current level of 4.5 million a centrepiece of his economic policy.

Faced with a rapidly slowing economy - which contracted in the fourth quarter of 1998 for the first time in three years - the government has begun to badger the European Central Bank (ECB) for help.

Most vocal among those asking for interest-rate cuts has been the Finance Minister, Oskar Lafontaine. So far, however, his entreaties have fallen on deaf ears. Wim Duisenberg, the ECB president, insists he has to balance the demands of all 11 countries in the euro-zone. "The high unemployment rate in Europe is far more the consequence of structural rigidities within the European labour and product markets than adverse cyclical developments," said Mr Duisenberg. "The solution is to be found, above all, in structural reforms."