Tuesday, July 13, 2004

Germany also in the firing line

It is not only the French who are in the firing line, with their fatal obsession for giving state support to failing companies. The Germans too are taking flak from the commission, which is ratcheting up the ante on a long-standing and bitterly-fought dispute – the rules on foreign take-overs of German enterprises.

At the centre of the dispute is the car maker Volkswagen, which is protected by local law from take-over – preventing any one shareholder owning more than a 20 percent stake - contrary to the EU's laws on the free movement of capital.

After three years of delay, the commission has lost patience and has given Germany a deadline of next Tuesday to commit itself to revising the law, other which Brussels sees as violating rules on the free movement of capital within the European Union. A refusal, the commission has indicated, will force a hearing in the ECJ.

But there is much more to this than meets the eye. The VW firm is part-owned by the Land (Region) of Lower Saxony, of which Schröder was once president, who also sat on the VW board. And it is this type of financial arrangement – replicated in other Länder with other major firms – which underpins the autonomy of the German regional governments.

The commission, therefore, is challenging the core political structure of Germany, where regional loyalty is much stronger than is any feeling towards the federal government. This is almost a case of the irresistible force meeting the immovable object.

What will lend greater interest is how commission-president designate Barroso will handle the issue. No friend of state intervention, his instinct will undoubtedly be the commission action. But, with the ECJ judgment on the growth and stability pact imminent – and the prospect of fining both Germany and France a real possibility - he may find he has bitten off more than he can chew.

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