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July 14, 2005

Germany to Be the Vanguard of Moving the EU Closer to the US Economic Model? Political and Business Climate Shifting

It's looking like Germany will take the lead in moving the EU and continenntal Europe towards greater liberalization of its markets, particularly the labor market.

Today's Wall Street Journal features an article on East German born Angela Merkel and her free market philosophy. Ms Merkel is considered a serious contender to be the next leader of Germany. From the article Free Market Voice in Germany, (subscription required):

Polls show Ms. Merkel's Christian Democrats leading Mr. Schröder's party by more than 15 percentage points before an election brought on by Mr. Schröder's decision to call for a vote of no confidence in himself after losing an important local election. Although the election date, expected in September, has yet to be scheduled, her party announced its platform this week, and Ms. Merkel is now filling in the details of how differently she would lead Germany from Mr. Schröder.

In the interview, Ms. Merkel eschewed explicit talk about whether a Merkel-led government would change Europe's power balance, but she said an alignment in favor of more-flexible labor markets "could mean that Europe works better again." She continued: "We in Europe are unfortunately at a point where a great many decisions aren't being reached, and a standstill is the worst thing for Europe. For me it's not about the balance of power, but about an effective Europe that can reach the goals it has set itself."

On the business end the VW scandal that has been blogged about here (for past blogs on the VW scandal click the Volkswagen category on the left hand sidebar) is merely the setting for a re-examination of Germany's co-determination policy which does not mesh well in a world currently converging towards greater market liberalization. Today's business press features more articles and analysis on the VW Scandal.

The NY Times: From a Scandal Springs a Chance for an Overhaul at Volkswagen (registration required)

"If we cannot survive here at Volkswagen," he said, summing up his remarks, "then industrial Europe is going to die."
***

While Mr. Hartz has not been accused of any wrongdoing, he symbolized the convoluted web of ties between Volkswagen's management, union leaders, employee representatives and government officials, which critics say is rife with opportunities for graft and abuse.

The exit of Mr. Hartz and the ascendance of Mr. Bernhard, analysts say, could augur a new era at Volkswagen - one in which the management has more leverage over workers and unions, and shareholders have more say in the operation of the company, Europe's largest carmaker.

"It's a real chance," said Jürgen Pieper, an auto analyst at Metzler Bank in Frankfurt. "The biggest problem for investors has always been the enormous power of the unions. Slowly, steadily, Volkswagen may become more market-oriented, more profit-oriented."

John Gapper offers the following in German System that No Longer Works from today's Financial Times (subscription required):

You might have thought that he could live without suggestions that VW bribed members of its 67-strong works council by paying for their foreign holidays and prostitutes. But it has led to the departure of Peter Hartz, VW’s director of personnel, and given Mr Pischetsrieder a chance to crack into the company’s ossified structure of labour relations.

Looking at VW’s supervisory board, with its 50 per cent labour and union representation and seats for politicians from the state of Lower Saxony, which has an 18 per cent stake, it is not surprising that VW has problems taking tough decisions. The board is so replete with insiders and so painfully democratic it seems a wonder any cars get made at all.
***

As Britain’s automotive industry foundered on the rocks of strikes and low productivity in the 1970s and 1980s, we envied Germany’s way of persuading workers to co-operate. An industrial democracy movement sprung up and unions negotiated with the government and businesses in the awfully named – and awful – tripartite era. It did little good.

So it is strange to witness – as the remains of Rover are sold once again – VW’s travails. Co-determination helped VW to succeed for decades but something that used to have a living, breathing purpose has turned into a relic. In place of worker participation, there is union bureaucracy. In place of shop-floor involvement, there is expense-account shopping.
***
This suggests that even modest reforms of co-determination to allow more flexibility – as German employers want – would help. The shenanigans at VW are an extreme case but any company that allows itself to become co-opted by insiders runs the same risk. Twenty years ago, as Britain flirted with tripartism, Germany wrote the parity of workers and shareholders into federal law. It is time to think again.

July 14, 2005 in Comparative Labor Relations, Corporate Restructuring, Economy and Unions, Globalization, Volkswagen | Permalink

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