Germany tops subsidy league

Date: 07/03/1996

By Tim Jones

IN these times of free market orthodoxy, it may come as a surprise that the EU's economic locomotive also gobbles up a third of its state aid to the manufacturing industry.

When compared to the net output of the industries concerned, aid is the highest in Greece, Italy and Portugal but, in absolute terms, German industry is by far the largest recipient of state aid.

Between 1988 and 1992, annual average state aid to manufacturing industry in the EU totalled 36 billion ecu. While the aggregate level fell 5&percent; over that period, it rose 14&percent; to 10.7 billion ecu in Italy and by a massive 56&percent; to 12 billion ecu in Germany.

In the same way that the slowdown in economic growth in Germany has caused some wry smiles in other member states, so the recent fraught case of its largest shipbuilder, Bremer Vulkan, has provoked Schadenfreude elsewhere and, if anything, increased the EU's unpopularity in Germany.

At a series of crunch meetings in Bremen two weeks ago, even workers' representatives were blaming 'Brussels' for the current plight of the company, which lost 14 million ecu in the first half of 1995 and accumulated debts of 530 million ecu.

The company has sought protection from its creditors.

“What happened at Bremer Vulkan should make a difference to us,” said an official in the rival Danish shipbuilding industry.

“It suggests that you cannot flout the rules forever and they will be more strictly enforced from now on.”

Indeed, this week Competition Commissioner Karel Van Miert warned that the Bremer Vulkan case would lead to stricter controls over the diversion of subsidies.

The origins of the problem lie back in 1989, when the Berlin Wall collapsed. Suddenly, West Germany had to cope with 17 million extra citizens from the east and their antiquated industries.

The Treuhandanstalt was created - the biggest privatisation agency in history - charged with taking 13,000 east German industrial assets into the private sector without provoking mass unemployment. Even its worst enemies would acknowledge that the agency's achievements were extraordinary.

Jobs were found for 1.4 million workers and investment commitments worth 100 billion ecu were secured between 1990 and 1994, although debts totalling 125 billion ecu were also accumulated. Obviously, the arms of rich firms had to be twisted and management skills bought. Some of these industries were 50 years behind their western counterparts and nobody was prepared to take them on without major inducements.

The Commission understood this, but had to ensure that the state aids were not diverted into other parts of these profitable western groups, and that the subsidies were not used to give an excessively competitive edge to the revived eastern firms.

A regime for vetting these aids was drawn up and agreed in November 1992, then replaced at the beginning of 1995 when the Treuhandanstalt was abolished and replaced by the Bundesanstalt für Vereinigungsbedingte Sonderaufgaben (BVS) agency.

Given the needs of east Germany, clashes between the Commission services and the German authorities or the beneficiary firms have been relatively few and far between.

Investigations have been opened under Article 93(2) of the Treaty of Rome, which allows the Commission to look into diversions of aid but, until Bremer Vulkan, the set piece inquiries were into aid payments for steel companies Eko Stahl and Klockner Stahl.

A plan to sell Klockner Stahl to a group of Bremen companies gave rise to suspicions in the Commission that this was at least partly a public sector operation.

A deal was finally agreed in July 1994, allowing Belgium's Sidmar to take a 25&percent; stake in the venture.

The clearance for the sale of Eko Stahl to Belgium's Cockerill Sambre was permitted only after the Treuhandanstalt had reduced the amount of the German company's borrowings from the 105 million ecu planned originally to just 32 million.

Things really came to a head with the investigation into Bremer Vulkan. The firm had received 445 million ecu in aid via the Treuhandanstalt to take on and operate some east German yards.

After sifting through Bremer Vulkan's books, BVS found that, as times became more difficult for the group, as much as 380 million ecu was diverted to cover losses in other parts of the company.

The Commission opened an investigation, on 28 February, into the diverted aid and an unauthorised investment aid of 60 million ecu, while giving preliminary clearance to a 116-million-ecu bank loan underwritten by the city of Bremen to complete the work already begun.

But to critics of the policy, the damage has already been done to yards trying to compete with the eastern Baltic yards. The moment operating aid was granted, they say, prices were cut and extra cash was used to upgrade plants to levels equivalent to those in Scandinavia. The Kvaerner yard at Warnow, for example, is completely new.

The fact that the plug has been almost pulled at Bremer Vulkan has come as a relief to Danish shipbuilders, who have challenged the Commission's decision to allow aid to the MTW yard in the European Court of Justice.

Van Miert has been understanding. As recently as January, he replied diplomatically to a question from a Euro MP complaining about the disparity of state aids in the EU.

“The disparities between the richest member states and those covered by the cohesion arrangements must be looked at in the light not only of the growing budgets of the structural and cohesion funds, but also the very significant needs created by the exceptional situation of German unification and by the essential restructuring of ailing industries,” he said.

However, officials who heard Van Miert's speech to November's meeting of EU industry ministers tell another story.

He informed them that action taken over the past three years had managed to reduce the total amount of state aid in the EU. Forms of aid not linked to specific EU interests had been made harder to obtain, restructuring aid had stricter qualifying criteria and non-notification of aid was being met with fire.

Nevertheless, he told them, the levels of aid were still too high and must be reduced. His remarks this week over tighter enforcement will serve as a warning.