Schröder′s Political Boomerang | Business| Economy and finance news from a German perspective | DW | 17.07.2002
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Schröder's Political Boomerang

Gerhard Schröder's Social Democratic government has been accused of interfering in the personnel affairs of Deutsche Telekom for political gain. But that strategy may have backfired.


Did Gerhard Schröder orchestrate the Telekom CEO's ouster or was he just caught in the crossfire?

German Chancellor Gerhard Schröder got dealt a bad hand of cards from the beginning.

During the past six months, the German economy has continued to stagnate, unemployment has grown and some of the country's largest companies have gone bust. With each new piece of bad news, criticism from the opposition of Schröder's stewardship of the economy increased.

Egged on by Stoiber

The pitch grew louder nine days ago when Edmund Stoiber, the Bavarian premier who is challenging Schröder in national elections, ridiculed the chancellor over Deutsche Telekom's sagging performance. He called share holders "huge losers" and accused the government of allowing Telekom executives to get huge pay raises as the ship took on water.

More than three million Germans snapped up Telekom stock under strong urging from the government, which recommended it as a Blue Chip stock and promised huge upside potential that could help them in their golden years. The 1996 initial public offering is widely credited with having launched a private shareholder culture in Germany.

But after the initial euphoria, Telekom shares began to slowly collapse, losing 90 percent of their value since the stock's peak in 2000. At the same time, the company racked up 67 billion euro ($68 billion) in debt from the acquisition of US mobile phone provider VoiceStream and the purchase of expensive UTMS mobile communications licenses.

Pointing the finger at Schröder

The company responded to the mounting pressure, and on Tuesday Deutsche Telekom CEO Ron Sommer found himself out of a job. Though the government is vehemently denying it played any role in the push to force Sommer's resignation, both opposition politicians and the German media are pointing fingers at Schröder.

Criticism is growing that the government has its fingers in the strategic decision-making of too many companies – both private and former state-run businesses. Last week, Schröder faced criticism for government regulators' decision to cut prices at Deutsche Post, the country's partially privatized national mail carrier. Post officials said the decrease could lead to billions in losses and hit shareholders in the pocketbook.

And Schröder has also been criticized for his efforts to intervene on behalf of failed German flagship companies like engineering giant Babcock Borsig and the Holtzmann construction company. For many, such intervention was anathema to the transition toward a shareholder culture – which has been a key government strategy.

But it is the government's entanglement with Telekom – of which it owns 43 percent – that has drawn the greatest criticism.

"One of the biggest disasters in German economic history"

Laurenz Meyer, the General Secretary of the Christian Democratic Union (CDU), on Tuesday accused the government of pulling the strings to get Sommer oustered from the very beginning. "I don't want to get too personal here, but having a 72-year old fill the roll shows just what kind of chaos the federal government has caused," he said, referring to the six-month caretaker CEO Helmut Sihler, who was appointed on Tuesday by the board.

Guido Westerwelle, the chancellor candidate for the liberal, free market-oriented Free Democratic Party described the public debate over Sommer as "one of the biggest disasters in German economic history," and said the government carried responsibility. But he extended his criticisms to both parties. "It's a scandal that Telekom has been used as a pawn by the election headquarters of the Social Democrats and the Union," he said.

The head of the German Monopoly Commission, an independent body that provides the federal government with competition policy-making advice, Michael Hellwig, told DW-WORLD that the government, as the largest shareholder in Deutsche Telekom had a right to intervene, but he nonetheless criticized it for not moving ahead fast enough to fully privatize the former state enterprise.

"As long as privatization isn't there, there is always going to be the suspicion that if the government interferes in terms of its economic interest as a major shareholder," he said. "This is ascribed to political motives that may or may not be considered appropriate."

Shareholders threaten lawsuit

For their part, Telekom shareholders and employees see a greater government conflict of interest.

In an advertisement placed in major German newspapers last Friday, Telekom employees defended Sommer and accused Schröder of using the company in an election year tug-of-war against the opposition parties. In the ad, the employees wrote: "If one of the biggest German companies becomes a political football, Germany as a place of business will suffer serious damage."

"Deutsche Telekom has apparently become the center of election campaign disputes, and that threatens to do significant damage," the ad continued.

American investors apparently agreed. According to a Monday report in Bild, a group of U.S. shareholders are investigating whether the German government exerted illegitimate influence on the company's supervisory board. If they can build a case, the paper reported, they may sue for damages.