Corporate migration

The death spiral of the Schröder administration continues in Germany, with the latest shot coming from German business leaders warning that the crisis that is developing is going to eclipse anything Germany has seen since the war. By inference one is tempted to compare the current crisis with the situation before the war and the conditions that led to the rise of the nazis. It's nowhere near as bad as that at the moment, but ten more years of stagnation will bring the spectre of those days a lot closer. Nonetheless, there is a crisis and there are no signs of it getting better. It's not just that the economy is depressed, but it's also the prospect that things won't get better anytime soon. The government has a wafer thin majority in the lower chamber of parliament, the Bundestag. The upper chamber, the Bundesrat is controlled by the opposition. The upcoming state elections in Lower Saxony look likely to skew the Bundesrat even further in the opposition's direction. This is the inverse situation of the last years of the Kohl government, when the SPD and Greens had a majority in the Bundesrat, which they promptly lost after their election victory in the general election on a wave of public disenchantment with the new government. But the gridlock that prevailed in the closing years of Kohl's reign is likely to be repeated now. The Bundesrat can block certain kinds of legislation, and most of the big reforms require the Bundesrat's approval. Stagnation is the prognosis.

This prospect is leading German businessmen to despair. The CEO of the chip maker Infineon has now threatened to move his company out of Germany.

Ulrich Schumacher said German taxation rates, often double those paid by competitors, were a dangerous burden on Infineon. "In a normal business year, where there is for example $2bn (£1.26bn) in profit, it means there is some $300m to $400m more [tax] than your competitor has. Think what you would have to do to compensate for that. It's a brutal disadvantage," he said.

Moving an entire company's headquarters is a big operation. We're not talking about the tax-efficient corporate inversions which have been popular lately in the US; what Schumacher is referring to is actually moving the company and the people. It'd be corporate brain-drain. More importantly, it would undercut the knowledge base that exists within the country. Once expertise like this is lost, it's expensive to rebuild it if you can do it at all.

Threatening to move a corporation is not unprecedented. Many Swedish companies had been threatening to leave the country because of the punitively high tax rates, and AstraZeneca actually did move its headquarters to London from Sweden. But this was under the cover of the merger of Astra and Zeneca, so it's not a pure departure either, and it still maintains R&D facilities in Sweden. Ericsson also moved some R&D functions out of Sweden because of taxation. The steady trickle of high value added jobs out of the country is something the government should be very concerned with. There's a world of difference between moving a widget factory to Estonia and moving the intellectual engine of your company elsewhere. Increasingly that's where the true competitive advantage lies, and losing that knocks a hole in the local economy.

I don't think Infineon is going to move its HQ out of Germany just yet. But a few more years of drift and stagnation and Schumacher will actually do it and take his company to greener pastures. German politicians better take heed.