Boost for the euro as Lafontaine exits in German power struggle

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OSKAR LAFONTAINE, the German Finance Minister dubbed "Europe's most dangerous man" in the British tabloid press, resigned yesterday after apparently losing a power struggle against Chancellor Gerhard Schroder.

The departure of "Red Oskar", as he was known to friend and foe alike, is certain to herald an abrupt policy shift in Germany, with repercussions for the balance of power in Europe. Mr Lafontaine represented old-fashioned socialist values, whereas Mr Schroder is flattered by comparisons to Tony Blair. For "New Labour", read "New Centre" - the ill-defined slogan which propelled him to victory in last September's elections.

Germany's recent tempestuous relations with Europe are likely to improve dramatically. Berlin holds the EU presidency and Mr Lafontaine had antagonised the British government by repeatedly calling for "tax-harmonisation" in Europe. Mr Lafontaine's heavy taxation policies have shaken confidence in the euro and were in part responsible for yesterday's failure to radically reform the Common Agriculture Policy.

Mr Lafontaine alienated fellow Socialists in Paris with his plans to create a new world financial order based on fixed exchange rates. And he irritated other EU countries by striding across the Continent, issuing commands to the European Central Bank and fellow finance ministers.

Mr Lafontaine, who has been rumoured to be coveting the job of President of the European Commission, also quit as Chairman of the German Social Democratic Party. In his absence, Mr Schroder is likely to have a freer hand in implementing economic policies opposed by Mr Lafontaine, the leading figure of the left.

Although tensions had been rising between the German Chancellor and his powerful rival, last night's announcement was completely unexpected. Mr Lafontaine, who survived an assassination attempt in 1990, had been credited with more staying power. According to a terse statement issued through a spokesman, Mr Schroder was "surprised" by Mr Lafontaine's action, regretted it and thanked him for all his good work.

That is not quite the version that leaked to the press after an extraordinarily bitter cabinet meeting on Wednesday night. According to these accounts, the Chancellor castigated several ministers for pushing policies that did not enjoy the support of the voters. He was particularly scathing about that way the German business community was affronted by Mr Lafontaine's tax reforms.

According to ministers attending that meeting, the Chancellor warned his leftist colleagues against putting too great a burden on business. Last week he received an open letter from managers of 22 of Germany's biggest concerns, complaining of Mr Lafontaine's tax reforms. Insurance companies, in particular, threatened to move their operations out of Germany and to stop buying German government bonds.

At Wednesday night's stormy cabinet session, Mr Schroder read a litany of economic policies which had gone wrong. He lambasted the tax reforms which appeared to threaten the creation of new jobs, and took a side-swipe at the Greens' efforts to bump up fuel prices and tighten the law on car emissions.

"There will come a point where I will no longer take responsibility for such a policy," Mr Schroder is reported to have told his colleagues.

He was scathing about Mr Lafontaine's plans to inflict punitive taxes on the nuclear industry, just as the government was trying to negotiate a deal to phase out nuclear power. Mr Lafontaine had proposed to tax the utilities' financial reserves set aside for the closure of nuclear plants. Mr Schroder is reported to have described the move as "a strategic error".

The government's chief spokesman, Uwe-Karsten Heye, yesterday confirmed that the Chancellor had ordered all ministers to check all new policies "for any negative effects on the economy". "All problems have to be viewed realistically and interests weighed so that the coalition keeps its majority support," he added.

Mr Schroder has been rattled by a series of setbacks, culminating in an unexpected defeat for the Social Democrats and Greens at regional elections in Hesse.

He is acutely aware of the sentiment on the street, which held his government in contempt but awarded him good marks for style. As the most business- friendly Social Democrat Chancellor ever, he was stunned by the "business revolt" of recent weeks. Throughout his political career, Mr Schroder managed to get ahead by cutting deals, especially with business.

But the government has antagonised the business classes. The "alliance for jobs" between employers, employees and the government was getting nowhere, unemployment was rising, and the Germany economy was spinning out of control.

As in September last year, the country was ready for change.