German capitalism bashing may undermine Schroeder

May 3 (Bloomberg) -- Criticism within Germany's ruling Social Democratic Party of free-market practices may undermine Chancellor Gerhard Schroeder's resolve to make the economy more competitive, said economists including Juergen Michels at Citigroup Global Markets in London.

Party chairman Franz Muentefering last month compared investors seeking short-term gains to the biblical plague of locusts that descended on Egypt, stripping it of vegetation. The Handelsblatt newspaper cited Finance Minister Hans Eichel as saying in an interview to be published tomorrow as criticizing companies that ``systematically give the impression they have to cut jobs to improve their share price.''

The criticism has made it ``more difficult for the government to push ahead with further reforms'' that might attract investment and lower unemployment, said Michels in an interview. ``There are already signs that the reform process isn't only braking, but rather going into reverse.''

Since Schroeder's second term in office began in 2002, the chancellor has enacted the first ever benefit cuts for the long- term unemployed, reduced protection from dismissal at small companies and forced those without work to accept any kind of job or lose benefits. That hasn't stopped the jobless rate from rising to a post-World War II record and has eroded support for the Social Democrats ahead of regional elections this month.

``It is rather shabby to create the impression that evil financial investors are to blame for the economic situation rather than the structural problems that still persist,'' Michels said. ``It conceals the true problems, such as an inflexible labor market, cumbersome tax laws and high labor costs.''

Corporate Tax

Germany's unemployment rate rose for 14 months to a postwar record of 12 percent in March before falling in April. At 38 percent, the average corporate-tax rate, including local taxes, is twice that in neighboring countries such as Slovakia and at 49,609 euros ($63,777) per worker, German annual employment costs are the highest in the EU, according to Deloitte & Touche LLP.

Schroeder's government plans to lower the corporate-tax rate by 6 percentage points, though it's yet to agree with the opposition, which controls the upper house of parliament, on funding.

Before the May 22 elections in North Rhine-Westphalia, Germany's most populous state, the Social Democrats and their Green party coalition partners are trailing the opposition Christian Democratic Union and its ally, the Free Democratic Party, by 10 percentage points, a poll by opinion researcher Forsa showed today. The Social Democrats have ruled the state for 39 years.

Election Defeat?

``With outspoken anti-capitalist sentiment within his government coalition, Mr. Schroeder could find it difficult to return to a pro-reform course,'' Thorsten Polleit, chief economist for Germany at Barclays Capital in Frankfurt, said today in a note to investors. ``An election defeat in NRW could even question Mr. Schroeder's leading role in the forthcoming federal election in autumn 2006.''

Germans are ``skeptical, even dismissive of `capitalism', and still believe in the `social-market' model,'' Polleit said. Politicians from other parties, including Wolfgang Boehmer, the Christian Democrat prime minister of the eastern state of Saxony- Anhalt, have backed Muentefering's criticism.

Stern magazine reported last week that an internal Social Democratic Party document names the Carlyle Group, Apax Partners and Saban Capital Group on a list of private-equity funds causing harm to the German economy.

`Excesses'

Handelsblatt cited Eichel as saying that ``unregulated offshore centers where half of all hedge funds are based'' are ``excesses'' of capitalism.

Guenter Grass, the 1999 Nobel prize winner for literature, called on his fellow citizens to ``resist the might of capital, for which humans are only entities that produce and consume,'' the weekly newspaper Die Zeit reported today. Parliament has become ``a branch of the stock exchange,'' he said.

The head of Germany's BDA employers' association, Dieter Hundt, said on ZDF television April 28 that he was ``disappointed'' and ``angered'' by the criticism. ``What's happening in this country at the moment makes me want to vomit,'' he said.

``The latest anti-capitalism critique might prove to be more than just a pre-election rhetoric with effects confined to Germany,'' Polleit said. ``It runs the risk of introducing a phase of a serious disenchantment with an actively sought reform process, in Germany as well as in Europe.''

Progress at ``structural reform'' has also been slow in the dozen-nation euro region, the International Monetary Fund said at its spring meeting in Washington last month. The IMF pared its forecast for the euro region to 1.6 percent, from a September estimate of 2.2 percent.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net. Last Updated: May 3, 2005 10:19 EDT

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