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Lifting the hood on Germany’s crony capitalism

Published in Business Spectator (Melbourne), 1 October 2015

vwThe Volkswagen emissions cheating affair is only the last in a long row of German corporate scandals, as I wrote last week (The fallout from the Volkswagen fiasco, 24 September). But it is not just a corporate scandal we are witnessing, what is on display is also a piece of crony (or at least cosy) capitalism. For too long German carmakers have been worryingly close to politicians that are supposed to regulate them.

In a way it is unsurprising that German car makers wield enormous influence. Last year, the automotive industry in Germany had a combined turnover of €367.9 billion, just shy of 13 percent of the country’s GDP and employed 774,900 workers. Without any exaggeration car manufacturing is Germany’s most important industry.

This elevated position within the Germany economy makes car manufacturers a political force too. No German government would have ever dared to confront the car industry, say, on suspicion of manipulating test results. Quite on the contrary, because of the car industry’s national importance, politicians were all too willing turn a blind eye to the industry’s failings and to promote its interests internationally.

The Volkswagen scandal could change that.

To understand how closely linked German car manufacturing and politics are, you just need to look at the personal links. Former Social Democrat chancellor Gerhard Schröder was even nicknamed the ‘car chancellor’ because it was his personal mission to promote the industry.

The German Association of the Automotive Industry is headed by Matthias Wissmann, a Christian democrat and former federal transport minister. Another Christian Democrat, Eckart von Klaeden, managed a seamless transition from being a minister in Angela Merkel’s chancellery to Daimler’s chief lobbyist. Meanwhile, von Klaeden’s counterpart at Volkswagen, Thomas Steg, previously served as the federal government’s deputy spokesperson under both chancellors Schröder and Merkel.

In Volkswagen’s case, the company’s connection to politics goes even deeper than just personal connections. The company is part-owned by the state of Lower Saxony, which holds 20 per cent of all voting shares. Thus Stephan Weil, state premier of Lower Saxony, and Olaf Lies, state minister for the economy, labour and transport, are members of Volkswagen’s supervisory board. With no disrespect to Messrs Weil and Lies, the interests of state politicians will always be skewed towards job creation. That does not make state government officials the best possible candidates for supervisory boards.

In the past, it was not always easy to distinguish between corporate and national interests. What was good for the car industry was supposedly good for the country as a whole. To a degree, this was probably even true.

However, the intimacy between the car industry and politics is also problematic as the Volkswagen affair now reveals. The German government’s answer to a written parliamentary question put by the Green Party indicates that Berlin was at least aware of the possibility of emissions cheating, weeks before news of the Volkswagen scandal broke.

On July 28, the German government filed its answers to a catalogue of questions regarding the car industry’s emissions and fuel-efficiency standards. In one of them, the government admits that corporate practices to falsify emissions tests are not properly prevented. Having admitted that, the government nevertheless claimed it had no knowledge of such practices being employed by car manufacturers. Yeah, right.

It was a strange self-contradiction. On the one hand, Berlin admitted it was aware of the problem of emissions manipulation. On the other, it pretended never to have come across any such practice. The reason for this may well have been that the government preferred not to look at the matter too closely — for obvious reasons.

In the same vein, it is only logical that Germany is thwarting EU efforts to reform the way emissions tests are conducted. The EU is working on a new test cycle known as WLTP (worldwide harmonized light vehicles test procedures). The WLTP were supposed to close the gap between official test results and real-life driving conditions, which can be substantial. However Germany, along with car manufacturing nations France and Britain, has lobbied the European Commission against the adoption of these new standards. Germany is also trying to delay the new WLTP regime by at least four years.

What superficially looks like a Volkswagen affair, is actually a more systematic problem of German industrial policy. The fact the Volkswagen and other manufacturers were never effectively challenged on emissions and fuel efficiency standards in Germany (despite obvious indications of discrepancies), may have induced the company to take the same lax approach to compliance to the US market. That was naïve, to say the least, and it has now backfired.

Politics and business should never be as intertwined as they were in the German car industry. It is unhealthy to see politicians in the role of co-owners of corporates, nor are frequent moves from political office to executive functions helpful. Both lead to a politicised industry and an industry focused on political favours.

Given the size of the automotive sector, it is understandable that German politicians would like to see a successful car industry but after the Volkswagen disaster, they should nevertheless become more wary of blind industry cheerleading.

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