Schroder's tax reforms herald shakeout of German industry

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The Independent Online
GERHARD SCHRODER, the German Chancellor has announced plans to scrap punitive capital gains taxes, paving the way for the wholesale dismantling of the network of cross-shareholdings between banks and industry which has underpinned Germany's economic structure since the Second World War.

The proposals, which would abolish Germany's 50 per cent tax on asset disposals in 2001 and clear the way for the country's powerful banks and insurance companies to offload an estimated $100bn worth of industrial holdings over the next few years, set the Frankfurt stock market alight yesterday.

Frankfurt's Xetra Dax index soared 4.46 per cent to a new high of 6782.39 points as foreign investors piled into stocks of financial-sector companies who have been lobbying for years for this change.

"This would be the death of Deutschland AG," said one official at a major German insurer, referring to the tight web of relationships which has marked out corporate Germany for decades.

Robert Law, banks analyst at the investment bank Lehman Brothers, said: "Schroder has made it clear that the rationale is to restructure corporate Germany. If the proposals go through it is a very significant move for corporate Germany. The government appears to take very seriously the requirement to restructure the corporate sector. It views the industrial holdings as a barrier to that."

Germany's big financial institutions hold significant stakes in the largest German companies accounting for a third of the total value of the German stock market.

Allianz, whose shares rose nearly 11 per cent yesterday has around $30bn tied up in various companies including the giant power concern RWE, Bayer, the chemicals group, truck maker MAN and Linde, the industrial gases group. Deutsche Bank, whose shares rose nearly 9 per cent yesterday, has around $23bn tied up in various companies, including a massive stake in DaimlerChrysler, the German-US auto giant.

The networks are tightest within the financial sector itself. The big three banks, Deutsche, Dresdner and Hypovereinsbank, have significant stakes in Allianz and Munich Re, Germany's largest insurance groups, which in turn own big slices of the three banks. Analysts said dismantling this web of shareholdings will free those institutions upas Europe's financial companies consolidate.

In the past these cross-shareholdings have been seen as an integral part of so-called Rhineland capitalism, supposedly encouraging a more supportive relationship between suppliers of capital and the corporate sector. However, the recent collapse of Philip Holzmann, the German construction giant in which Deutsche Bank had a 15 per cent stake, highlighted the system's weaknesses.