Germans sour on capitalism amid corporate scandals

The massive tax-evasion probe has netted more than 300 suspects, including top executive Klaus Zumwinkel of Deutsche Post.

from the March 25, 2008 edition

BERLIN - Germany was just warming up to a more hard-edged capitalism. Then came the scandals.

Engineering giant Siemens is under investigation in Europe, the US, and China on suspicion of paying up to $2 billion in bribes to win foreign contracts. A German court last month convicted two Volkswagen executives for their hand in improprieties including corruption and corporate-paid prostitutes. Now, a massive tax evasion probe has implicated hundreds of Germans including the CEO of Deutsche Post.

The scandals have undermined public trust in the integrity of corporations, bolstering a growing shift to the left and its social welfare ideals. The Social Democratic Party (SPD), the junior partner in Germany's grand coalition, has been steadily eating away at the popularity of the ruling Christian Democrats (CDU). The Left Party, meanwhile, has become the third most popular party since it was formed – in part by former East German communists – last year.

Both scored gains in regional elections this winter, campaigning on unemployment benefits, childcare support, a national minimum wage, and reining in corporate salaries.

Average Germans have watched the gap between rich and poor here widen in recent years, on the back of, among other things, increasing salaries at many of the country's top corporations. Kienbaum, a management consulting company, estimates that salaries for German executives jumped 17.5 percent in 2006-07.

The economic reforms of Chancellor Angela Merkel's predecessor, Gerhard Schröder of the SPD — a mix of corporate incentives and tax cuts — are credited for reducing Germany's unemployment, but are now increasingly criticized as having come at the expense of traditional SPD support for social welfare programs. The party's leaders today want to reverse that.

Many average Germans are backing them. Germany's low-wage earners pay 47 percent of their gross salary to the state each year – one of the highest rates in Europe for low-wage earners, according to Eurostat. That doesn't sit well amid revelations of executives misusing expense accounts and hiding their money from tax collectors.

"You may call this the increasing frustration of broad segments of the population of being treated unfairly," says Klaus Engelen, a veteran reporter at the financial daily Handelsblatt.

Chancellor Angela Merkel has been quick to condemn the recent tax scandal, but it's her finance minister, Peer Steinbrück of the SPD, who has looked tougher on corporate wrongdoing, analysts say. He's vowed to crack down on tax havens and has proposed federalizing tax collection in Germany to go after tax evaders directly.