The ugly face of German capitalism

Prosecutors and police have raided offices across Germany following the interrogation and subsequent resignation of Klaus Zumwinkel, the corporate fixer and head of Deutsche Post, who is believed to have evaded e1m in taxes.

The raids were triggered after the German equivalent of MI6, the BND, reportedly paid an informant e5m for data stolen from the LGT Group, Liechtenstein's biggest bank, which pointed to widespread tax evasion. Prosecutors says they were investigating more than 750 cases "essentially a Who's Who of the German corporate establishment" involving an estimated e3bn-e4bn hidden from the German authorities, says Wolfgang Munchau in the FT.

Zumwinkel exemplifies the "ugly face of German capitalism", but he is not alone, says William Echikson on Breakingviews. VW's personnel director was convicted last year of entertaining labour leaders with prostitutes at company expense and Siemens' CEO resigned after revelations of the group's practice of giving bribes. This "slew of scandals shows something rotten in the state of German business".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Germany also has a long-standing system of bosses and union leaders hashing out minimum wages for entire sectors "good for insiders with well-paid jobs but bad for outsiders" and EU investigations into price-fixing have revealed the worst offenders to be Germans. But the tax-evasion scandal is partly the fault of its tax system, says the FT. Marginal income and inheritance-tax rates for high earners approach 50%: "tough enforcement will never stop evasion if taxes are punitive".

That is not to say the wealthy have a right to evade tax; and in such circumstances, the only response to "uncooperative tax havens" may be to "send in the spies". Since 2000, 35 uncooperative jurisdictions have been taken off an Organisation for Economic Cooperation and Development blacklist. "Liechtenstein is one of only three that remain." One can see why, says Eric Pfanner in The New York Times. As other tax havens have shut down, Liechtenstein has thrived. Assets at its banks have risen to about £200bn Swiss francs from £67bn in 1996.

Yet it can no longer justify its status as it used to, says the FT. The rise of Liechtenstein and Switzerland as tax havens began in the 1930s when German Jews sought to put their money beyond the reach of Nazi agents. "But limited co-cooperation with tax authorities will hardly result in the persecution of modern-day Germans, and nor does it end their legitimate right to invest wealth offshore if they choose."

Yet the Alpine principality's Crown Prince Alois has remained defiant, says Eric Pfanner. "We are a sovereign state," he told a news conference, "and, we hope, we do not live in an era when might makes right rather than international law [and] agreements." Alois says his country would take legal steps to protect bank clients from German investigators and bankers have been calling clients to reassure them about the security of their accounts. Since Liechtenstein is not an EU member and is home to few international firms, the leverage outsiders can exert is limited. Bankers say this may explain why Germany is "mounting so public a campaign". It may be trying to "frighten its own citizens" into transferring their money back into taxable accounts at home.

Whatever happens, this scandal is unlike to remain confined to "the moneyed elite", says Carter Dougherty in the International Herald Tribune. It's fuelled "suspicions that many ordinary Germans have long felt towards highly paid corporate bosses" and will do little to further the pro-business cause. The political implications could be great.