Overindulgence

For a politician whose popularity has plummeted recently, it must have been a moment to savor. Emerging from last-minute talks aimed at saving German construction giant Philipp Holzmann from bankruptcy, workers chanted "Gerhard, Gerhard" as Chancellor Gerhard Schrder announced that a rescue plan had been agreed. "I wanted to be sure," a grinning Schrder told his cheering audience, "my buddies will have something under the Christmas tree."

Playing Weihnachtsmann, the German equivalent of Santa Claus, may provide some temporary relief for the downtrodden Schrder, whose ruling Social Democratic Party has been trounced repeatedly in a series of state elections. But Schrder's sudden intervention to save a mismanaged private-sector company sounded suspiciously like a full-scale retreat from a pledge made this past summer to emulate the United States and Britain in applying the rules of a free market. "It's a black hour for Germany's economy," said Udo Ludwig, a researcher for the Institute for Economic Research in Halle. "It sends entirely the wrong message to entrepreneurs."

Only a week earlier, Schrder rattled the German stock market by openly opposing the takeover bid of British wireless firm Vodafone AirTouch for Germany's leading mobile phone company, Mannesmann. "Hostile takeovers are always negative," the Chancellor told a press conference. Taken together, Schrder's actions in two of the largest corporate battles of the year in Germany raised significant doubts that his government has a coherent economic policy as Schrder maneuvers to placate his party's left wing before the SPD's party conference in December. And since Germany is the largest economy in Euroland, those doubts have spooked investors overseas, who exchanged their euros for dollars, pounds and yen, driving the price of the new single currency to around $1.01.

And beyond those qualms about Schrder's economic leadership, few analysts believe that his dramatic rescue of Holzmann is guaranteed to save the company. The second largest construction firm in Germany, Holzmann stunned the country on Nov. 15 by revealing that it had uncovered $1.2 billion in losses, mainly in bad property deals in eastern Germany. Holzmann initially presented a $2.24 billion restructuring plan to its creditors, but the 10 main banks balked at the huge bailout and the company filed for bankruptcy last week.

To many it was a watershed event because Germany's banks, which have cross holdings in many big industrial firms, had formerly cooperated to save foundering companies. But after the banks rejected the deal, Schrder stepped in and agreed to provide $131 million in state guarantees, which still must be approved by the European Commission and which can have a term of no more than six months. That effectively shamed the banks into providing the rest of the interim financing to help the firm restructure its debts and operations.

But many of those workers who chanted "Gerhard" last week will be shocked to discover that even Schrder's rescue plan calls for 3,000 jobs to be cut in Germany. While the deal provides a lifeline to save Holzmann, the help is in the form of bank loans that must be repaid, a huge debt burden for the company to shoulder. And the downside for the rest of the economy is even worse. "The construction industry is suffering from over-capacity in Germany, so if you save jobs at a big, inefficient company with a direct line to the government, then little companies that are better managed will have to cut back,'' says Thomas Mayer, chief economist at Goldman Sachs in Frankfurt.

Unfortunately, Schrder's government has not cornered the market in Europe for self-defeating statist gestures. Last week, the French government blocked Coca-Cola's proposed acquisition of Orangina, a soft drinks company owned by the French liquor conglomerate Pernod-Ricard. France's competition regulator claimed that the purchase "does not offer enough economic contributions to outweigh the risk of hurting competition." Ironically, the French firm may now have to cut scores of jobs that Coke had agreed to preserve as part of the deal. Pernod also will not have the cash from the Orangina sale, which would have helped it expand its own business worldwide.

The French and German governments clearly want to enjoy the benefits of market economies, such as high growth and low unemployment, which have been such a huge success in the U.S., Britain and the Netherlands. The problem is that a market economy occasionally suffers the pain of bankruptcies and hostile takeovers, which are the market's way of cleansing itself of inefficient companies. Jolly as he is, Weihnachtsmann is doing more to destroy employment opportunities than to create them.