Germans turn on Lafontaine

With his goal of tax harmonisation, Bonn's finance minister is scaring even his own business community

GERMAN businessmen are hitting out at Oskar Lafontaine in the intensifying war of words over tax harmonisation and siding with the British government in its rejection of the German finance minister's dirigiste approach.

"There should be tax competition between nations, not tax harmonisation," declared Hans-Olaf Henkel, president of the Federation of German Industries, at a German-British Chamber of Industry & Commerce conference in London on Thursday. "Corporate income tax, personal income tax, down to the level of customs duties. Why should I agree to pay more for a government's inefficiency?"

Referring to the open battle between Mr Lafontaine and Chancellor Gordon Brown over tax harmonisation, Mr Henkel said: "I count on Britain's common sense and Britain's veto."

Attacks on Mr Lafontaine by other German businessmen at Thursday's conference were more veiled, but Josef Ackermann, a leading member of the managing board of Deutsche Bank, explicitly warned that efforts to impose unified taxes on income from savings and investments in the single market would drive banks to "set up special purpose vehicles" enabling their customers to get round the tax.

The German businessmen gathered at the conference expressed staunch support for both the common market and the single currency. "Euroland is the platform from which we draw strength to compete in global markets," Mr Ackermann said.

But virtually everyone there seemed worried that Mr Lafontaine's policy orientation - to raise wages, taxes, and government spending to stimulate demand - would backfire in the form of rising government deficits and corporate flight from Euroland.

Mr Henkel went a step further and attacked German Chancellor Gerhard Schroder for supporting Mr Lafontaine's push to move to majority voting in the European Union - a move which, if successful, would deny Britain its veto power on tax harmonisation issues. Mr Henkel said of this support from the top for Mr Lafontaine: "Mr Schroder supports everything. This one day, that the next."

The lone voice in support of Mr Lafontaine at Thursday's conference of German and British business leaders came from Rudiger Ludeking, head of the economic affairs department at the German embassy. He said the dirigiste labels that had been attached to Mr Lafontaine were caricatures, and that Germany's Social Democratic-led govern- ment "had learned from the mistakes of the past".

Mr Ludeking acknowledged that withholding taxes on eurobond investors in the City of London could drive the eurobond market out of the EU altogether. He said discussions were continuing in Ecofin, the EU finance leaders forum, over how to improve tax efficiency in the eurobond market without forcing international borrowers and investors to seek a venue for getting together elsewhere.

The German businessmen at the conference also blamed Mr Lafontaine for the outpouring of euro-scepticism in British tabloid press last week, and warned that a gutter debate over tax harmonisation will deter Britain's entry into European Monetary Union.

"There is no question that Lafontaine's statements are making Britain's entry into EMU more difficult," Mr Henkel said.

Both in their formal presentations and in coffee break conversation between sessions the 50 German and British businessmen present at the conference, entitled "Germany & Your Business Prospects", appeared frustrated that tax harmonisation was overshadowing the radical changes that will be set in train with the start of the single currency on 1 January.

Mr Ackermann foresaw sweeping changes to the European financial landscape. "The top five banks in Europe account for only 15 per cent of total European assets," he said, while forecasting "much consolidation to come".

The atmosphere at the conference, however, was tense. Among those present there was a palpable sense of national divisions. These seemed fuelled in equal measure by Mr Lafontaine's confrontational approach on the tax harmonisation issue and the sensationalist response of the British tabloids.