Wherever business people have gathered in Germany recent days, the main topic of conversation has always been the same - how much worse can things get?

The departure yesterday of Mr Oskar Lafontaine from his post as finance minister is likely to generate a more optimistic response to that question. The left-wing former SPD chairman was no friend of business, which believed him to be ideologically driven and unreceptive to its needs.

The Germany economy - Europe's biggest - shrank by almost 2 per cent in the last quarter of 1998 and there has been little sign of a recovery so far this year. Germany is expected to have the lowest growth in the euro zone in 1999 with the exception of Belgium and some analysts fear that the economy will remain stagnant in 2000 too.

Signs of recession are everywhere. The machine building industry had 16 per cent fewer orders in January than in the same month last year and only one German company in five expects orders to increase in 1999.

Germany accounts for one-third of the Gross Domestic Product (GDP) of the entire euro zone and analysts fear that a German recession could soon damage other European economies.

"From being Europe's wunder- kind, Germany is increasingly becoming the sick man of the euro zone. Germany's sclerosis is damaging the currency union," says Mr Holger Schmieding, of Merrill Lynch.

Mr Gerhard Schroder's centreleft government has been holding firm to its forecast that the German economy will grow by 2 per cent this year - a prediction that most economists dismiss as too optimistic. The German Institute for Economic Research, a thinktank close to Mr Lafontaine, believes the country will be lucky to achieve growth of 1.4 per cent.

Mr Thomas Mayer, chief economist at Goldman Sachs in Frankfurt, has been advising investors to stay away from German shares, despite the fact that many companies are still reporting record profits.

"Companies in Germany are trying to become more profitable through massive rationalisation programmes - which is a point in favour of their shares. But they are receiving no help from Bonn," he said.

Against this background, most business people blame Mr Lafontaine for the downturn in their fortunes, complaining that he was burdening them with more taxes and higher wages. For his part, Mr Lafontaine has blamed the European Central Bank (ECB) for Germany's woes, which he believes can be eased by a hefty cut in interest rates.

One reason for Germany's poor performance in comparison with its neighbours is the country's relatively high level of exports to the troubled economies of Asia, Latin America and Russia. Some 9 per cent of German exports go to these countries, compared to France's 6 per cent.

"Countries such as Germany, whose exports consist mainly of capital goods, suffer most from the worldwide under-use of production capacity," according to Mr Joachim Fels of Morgan Stanley.

Mr Lafontaine's solution was to boost domestic demand by cutting taxes and raising wages, thus giving consumers more money to spend. His contention was that a substantial cut in interest rates would stimulate the economy and create jobs and, with inflation in Germany close to zero, he argued that the ECB could afford to be more relaxed about monetary policy.

The ECB has shown little inclination to follow Mr Lafontaine's advice and the bank's president, Mr Wim Duisenberg, claims that political pressure for lower interest rates makes a cut less likely. Even if rates are cut next month, as many observers predict, business leaders have been insisting that their troubles will be far from over - although Mr Lafontaine's demise may improve their outlook.

A pay deal last month that gave metal workers an increase of more than 4 per cent is expected to set the trend for other wage negotiations during the coming weeks. Tough price competition means that companies cannot pass on the cost of higher wage bills to the consumer, so profits will fall.

The metal industry claims that its wage bill will swell by 3.5 billion deutschmarks (€1.8 billion) this year, more than half of last year's profits after tax.

Companies warn that lower profits will mean less investment and fewer jobs, and Deutsche Bank predicts that unemployment will rise steadily throughout the year. If this happens, there is little hope of a revival in domestic demand and the government's aim of taking one million Germans off the dole by 2002 will be doomed to failure.

A survey last week of 900 German businesses by the Munich-based Ifo Institute found that 80 per cent expect domestic demand to remain stagnant or to fall this year and a quarter expect exports to fall.

Mr Lafontaine argued that business got all the tax breaks during 16 years of conservative rule and that he was making companies pay for his tax cut for working people. The abolition of numerous tax loopholes will hit insurance firms, energy companies and the construction industry hardest. Some of Germany's biggest firms have threatened to move out of the country. Even a promise to reduce corporation tax to 25 per cent next year has done little to calm the wrath of business leaders.

The nature of the German government's relationship with the corporate sector came to a head on Wednesday when Mr Schroder reportedly threatened to step down if his coalition continued to push "anti-business" policies that endangered jobs. His frustration was directed at Mr Lafontaine and at the Green members of his governing coalition.

In the meantime, optimists continue to hope for a recovery in the second half of this year, but a growing number of economists fear that higher public service pay and lower than expected economic growth could drive Germany's budget deficit towards the 3 per cent maximum figure agreed in the Maastricht Treaty.

If this happens, the ECB would almost certainly respond by raising interest rates, halting any recovery and driving Germany into recession.