German business braces itself for bumpy ride

One of the first people to congratulate Germany's chancellor-elect, Mr Gerhard Schroder, after his spectacular election victory on Sunday was Mr Hans-Olaf Henkel, head of the German Federation of Industry (BDI). Many were taken aback by Mr Henkel's eagerness to shake the hand of a man he had spent the previous month condemning as a menace to Germany, but Mr Schroder was not surprised in the least.

"The representatives of business despite their closeness to the Christian Democrats and Free Democrats are people who realise that they too must work with every democratically-led government," he said.

By Monday morning, relations were back to normal, with Germany's business leaders warning of the damage a coalition of Social Democrats and Greens could wreak on the economy. They are particularly angry about Mr Schroder's promise to reverse reforms introduced by the government of Dr Helmut Kohl, including cuts in sick pay and a measure that makes it easier for firms to sack employees.

"I'll be using all my influence to prevent the reversal of these measures. An alliance with business is unthinkable on such a basis," warned employers' leader Mr Dieter Hundt.

Mr Schroder wants to bring together employers and trade unions in an Alliance for Work aimed at creating jobs and training places. But business leaders insist that the best way to cut unemployment is to reduce labour costs by cutting taxes and insurance contributions.

They also want to see Germany's rigid labour laws relaxed so that work becomes more flexible and more part-time jobs are created.

Mr Schroder attempted to reassure employers this week by reaffirming his intention to include in his cabinet Mr Jost Stollmann, a self-made millionaire who does not belong to any political party. Mr Stollmann wants to revolutionise the German economy by copying the American economic model but he is likely to be an isolated voice at the cabinet table.

What business leaders fear most is the influence of the Social Democrats' party chairman, Mr Oskar Lafontaine, who is almost certain to become finance minister in the new government.

Mr Lafontaine speaks the language of an old-fashioned class warrior, denouncing business fat cats who demand ever greater sacrifices from those on low incomes. But he is a sophisticated thinker on economic matters with a clear view of the state's role in regulating a market economy.

This week Mr Lafontaine demanded that monetary policy should be used to encourage job creation as well as to keep down inflation. This heresy against the Bundesbank dogma that places currency and price stability above all other goals has profound implications for the future of the European Central Bank (ECB).

Germany will now almost certainly drop its objection to a French proposal that economic ministers should accompany ECB representatives to International Monetary Fund and G7 meetings. More crucially, Mr Lafontaine believes that political influence over the ECB is not only admissable but essential.

In this context, it is scarcely surprising that Paris has given such a warm welcome to the new German government.

In the midst of these manoeuvres, the growing global economic turmoil has not been lost on the incoming German administration. Mr Lafontaine has drawn up an initiative - backed by Mr Schroder - for stronger international co-operation to avert a world recession. The plan would involve setting target zones for the world's main currencies and was described by the chancellor-designate on Monday as "one of the most important tasks of the new government".

Mr Schroder has also supported proposals for the reform of the International Monetary Fund and the World Bank and for improved monitoring of worldwide capital flows in response to the international financial crisis financial crisis.

Mr Lafontaine has already called for a cut in German interest rates to take account of lowered expectations of growth for next year and he wants to see the euro, the dollar and the yen linked in an international currency system.

None of this sits easily with the Bundesbank president, Dr Hans Tietmeyer, who will be replaced by a Social Democrat nominee when he steps down next year. The departure of Dr Kohl also robs ECB president Mr Wim Duisenberg of his strongest supporter and could make it exceedingly difficult for the austere Dutchman to push through his uncompromising policy of putting stability first.

If Mr Lafontaine were not terrifying enough as a bogyman for business, he will be joined in government by the Greens - a party that makes no pretence of being a friend of industry.

The Greens are committed to tripling the price of petrol within ten years, increasing the cost of energy immediately and closing down all Germany's nuclear power stations.

They also oppose environmentally questionable infrastructure projects such as the Transrapid high-speed rail link between Berlin and Hamburg. And they want to impose a speed limit on the autobahn - thereby robbing German businessmen of the pleasure of speeding through the countryside in their expensive cars.

The Greens will not be given any of the key economic ministries and some of their wilder proposals will be vetoed immediately by the dominant Social Democrats in government. But with Mr Lafontaine in the finance ministry, a trade union leader as labour minister and a government programme committed to putting employees first, German business is bracing itself for a bumpy ride.