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Paradise Papers and the International Fight vs Tax Havens

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Early this week, the financial world was rocked by the latest revelations about tax tricks used around the world by corporations and the super-rich. The leaks, which included 13.4 million documents and were labeled the “Paradise Papers,” were the product of an international investigative consortium including journalists from influential German daily Süddeutsche Zeitung.

The cases uncovered are similar to those revealed in the previous leak, the Panama Papers, which triggered global outrage last year. The data describes how the rich and super-rich, international stars and companies try to avoid paying taxes in their home countries. It is a game for the wealthy.

The players are usually multinational corporations seeking to shrink their tax bill using convoluted structures. Tech-giant Apple once again stands accused of skullduggery, as does sporting-goods producer Nike. The accomplices are also largely the same. The deals in question invariably involve tax havens such as the Bermuda Islands, British dependencies such as the Isle of Man or Jersey, and European member states like the Netherlands, Luxembourg and Ireland.

The questions facing politicians are also the same ones that come up after every new substantial leak: How can we continue to tolerate a situation in which tax loopholes still haven’t been closed? And why are EU member states still allowed to cheat their partners within the bloc out of tax revenues?

Indignation is understandable, though out of date on many points. Many of the tax avoidance strategies wouldn’t work today because numerous countries have joined forces to eliminate tax loopholes. The malfeasance uncovered by the Panama and Paradise Papers is sometimes akin to looking in the rearview mirror.

But it is also true that closing all of the loopholes that exist is an arduous, sometimes frustrating political process, with the economic interests of the countries involved far too divergent to ensure universal satisfaction. There are, though, several positive developments. Cooperation between the fiscal authorities of dozens of countries is now taking place on multiple levels. For example, the largest industrialized and developing countries are working together within the framework of the G-20 on the so-called “base erosion and profit shifting” (BEPS) initiative. Participating countries are no longer allowed to wait until they are asked, but must automatically provide fiscal information to participating partners. The regulation has been in force since September, with 50 countries having already joined and 50 others planning to do so.

Hurdles to Profit Shifting

International agreements will also supposedly make it more difficult for companies to shift profits from one country to another in an effort to pay the lowest tax rate possible. The most popular vehicle for doing so among multinationals is charging inflated “management fees” and brand licensing fees among susidiaries.

An international register has also been introduced to publicize the owners of companies, including those that participate in tax-saving models. That creates transparency, though it doesn’t go quite far enough for German Chancellor Angela Merkel’s outgoing administration. Berlin had initially wanted to list all companies and individuals who profited from the structures. But the proposal for such an expanded register was blocked by Britain and the Netherlands. Erstwhile German Finance Minister Wolfgang Schäuble and his allies from other EU member states could do nothing since tax issues must be passed unanimously in the bloc.

That also explains why there is no universal minimum corporate tax rate in the EU, an absurdity given that such minimum rates have been agreed on in Europe for tobacco taxes and VAT. In both cases, the taxes levied by EU member states may not fall below a predetermined level. But countries like Malta, for example, prevent the introduction of a minimum corporate tax rate in Europe.

The Mediterranean country is also known for trying to lure the owners of smaller companies to set up shop on the island. If they do so, earnings up to 5 million euros per year are only taxed at a rate of 15 percent. Anything above that is tax free.

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Those opposed to tax avoidance measures only managed to close one tiny loophole. Recently, an informal minimum tax rate was applied to so-called license boxes. That model involves the separate declaration of income from patents, income which is then taxed at a lower rate. In Ireland and the Netherlands, such income is taxed at half the normal corporate rate. The problem, though, is that EU law is silent about what the minimum corporate tax rate should be.

An additional transparency initiative has thus far been held up by opposition in the U.S. and Japan. The initiative focuses on tax payments made by internationally active companies in their home countries. Thus far, only tax authorities in the countries involved have been able to learn where companies are taxed and how much they pay. Washington and Tokyo are opposed to making such information public.

Tax experts in the German government have understanding for national peculiarities when it comes to such regulations. “It’s like in your private life,” says one. “Not everyone who climbs naked into the bathtub likes to expose themselves at a nudist colony.”

Half-Hearted U.S.

At the moment, the transparency initiative isn’t being pursued, simply because any attempt to force it through would be futile. If all the remaining countries were to agree on more extensive steps, Japan and the U.S. would simply withdraw from the current deal. The resulting damage would be greater than the additional value.

Another way to undercut tax havens is to compete with them. But this option is unrealistic for larger economies. For countries with hardly any industry like Malta and Cyprus, it may be worth it to attract foreign profits with low tax rates. But larger countries with established industrial bases would ultimately lose money. They would, after all, have to offer the lower tax rates for foreign companies to their domestic companies as well, meaning they would lose more revenue than they would gain.

Making the battle against tax loopholes even more difficult is the fact that the world’s largest economy, the U.S., is rather half-hearted when it comes to fighting tax havens. The state of Delaware offers an anonymous home to hundreds of thousands of shell companies. The U.S. government – whether Democratic or Republican – has also for years been rather indulgent when it comes to multinationals dodging the taxman, despite the fact that it is the U.S. itself that is shortchanged by the tricks employed by Google, Apple, Amazon and co.

Tax revenues from American multinationals should be flowing into U.S. coffers, just as all profits from German automobile manufacturers, for example, are taxed in Germany. Global tax doctrine, after all, holds that taxes should be levied in the country where products are produced.

But for decades, U.S. tax law has maintained a loophole for American companies. They are allowed to park their intellectual property – in the form of patents, licenses or film rights, for example – with subsidiaries based overseas, which means that those subsidiaries are taxed in the countries where they are based. That is why Apple, as the new document leak indicates, didn’t decide to pay taxes on its profits back home once an Irish loophole was closed. Instead, the company went searching for tax havens that might offer it a new home.

An Arduous Process

Why does the U.S. government allow such a thing? Why doesn’t it close this long-known loophole? There are two reasons. Early on, the regulation was established to prevent the U.S. from losing money. After all, if companies don’t need to tax their profits back home, they also aren’t able to claim deductions when they lose money. But when the highly innovative companies ultimately proved profitable, the tax authorities didn’t remove the loophole. The U.S. government has always seen it as a kind of export subsidy for domestic companies. For Washington, the influence of American companies abroad is more important than the loss of billions in tax revenue.

So is the fight against tax havens in vain? Not necessarily, but it is an arduous process that doesn’t produce quick results.

Once coalition negotiations are complete, Merkel’s new government will have little option than to continue doing what it can to block the flow of money to tax havens around the world. Some of those involved in those negotiation believe that Germany has a number of tools at its disposal for putting pressure on tax havens. One of those is Wolfgang Kubicki, the deputy head of the business-friendly Free Democrats (FDP) who could become Germany’snext finance minister. He even thinks that Berlin could solve some problems unilaterally.

Regardless of who takes over the finance portfolio, he or she should focus most efforts on convincing European Union partners to stop offering improper tax privileges. And convincing the U.S. of the same. Because just as with climate change, without the world’s largest economy on board, little will change.

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Business

Coffee Boom: Profits in the West and Poverty in the South

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When exactly did coffee become so important? It has long been Germany’s favorite drink, but for decades it was hardly anything to get excited about. Ads touted its “rich aroma” in an attempt to turn it into a lifestyle commodity, but it was long merely a symbol of housewife heedfulness – in the same league as washing powder, detergent or low-fat margarine.

Times have changed. These days, coffee is a luxury product, almost a fashion accessory. Or at least that’s the way it’s presented. Coffee pods, as advertised by George Clooney, are presented in Nespresso shops as if they were pieces of jewelry.

Starbucks, too, is increasingly seeking to present its paper-cup lattes as luxury products. In Seattle, the company is testing a new café concept, with coffee beans not just ground but also roasted on site – in stout black machines made from cast iron, reminiscent of steam engines and designed to convey tradition. Cafés in Shanghai, Tokyo and New York are to follow.

The German company Probat, the world’s leading manufacturer of roasting machines, built the model specifically for Starbucks. “A coffee brand’s success,” says Wim Abbing, the company’s managing director, “is 90 percent about the story it tells.”

And the stories that people want to hear are changing. Two decades ago coffee ads featured cozy family celebrations. Then Starbucks’ paper cups began to represent a new laptop elite, always on the go, where home was nowhere and everywhere. Then along came George Clooney and his Nespresso pods, representing coffee individuality produced by a machine. Top-class espressos at home, as easy as frozen pizza.

“Quickly pop in another pod of this drug before your energy begins to wane and you will always be awake. It suits the new pace of our accelerated, individualized, thoroughly economized era,” says Munich sociologist, Stephan Lessenich.

The new Starbucks roaster-steam engine is an attempt to tell a new story, one for our post-globalized age. Coffee roasted on site before your eyes by people you know. A place to slow down amid the hectic pace of life. An artisanal product, not an industrial one. It’s a story told in thousands of smaller coffee shops where the barista celebrates the preparation of every cup of coffee as if it were a spiritual act and talks shop with the customers about the influence of the Arabica and Robusta beans on the structure of the crema.

It’s part of coffee’s success that no one talks about the reality behind these stories. The brutality of speculators, who push the price of coffee beans according to their whims. The global concentration of the coffee market. The protectionism of German roasters. The ridiculous prices for expensive espresso machines. The terrible quality of the 500-gram vacuum packs of supermarket coffee.

This is about one of the most important raw materials being traded globally. The market for roasted beans is worth over 50 billion euros and each year, around 1 trillion cups of coffee are drunk around the world. In Germany alone, each adult drinks an average of 162 liters annually.

Coffee is constantly being reinvented and repackaged for consumers. But its history is as old as the hills. It shows that much of what we today call globalization, is really just another name for colonialism.

I: The Harvest

A Nespresso pod contains 5.2 grams of coffee and costs between 30 and 40 cents. That’s the equivalent of 60 to 80 euros a kilogram.

Starbucks charges 3.85 euros for a latte, paper cup included. Each cup contains roughly 15 grams of coffee.

It’s possible that Juan Gonzales picked the beans for that coffee. He is 12 years old and works alongside his mother Maria, a Mayan woman, harvesting coffee on the slopes of Toliman, a volcano west of Guatemala’s capital city. The beans that grow here are the Arabica variety, in high demand across the West. The boy and his mother work for a finca that belongs to Carlos Torrebiarte, who sells his coffee to Starbucks, among other clients.

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“That sack weighs over 50 kilograms and Juan carried it himself,” his mother says, looking at her son with a mixture of exhaustion and pride. She is barely 30 but looks over 50. She has a steel pin where one of her teeth is missing.

The coffee harvest is in full swing on the mountain and women with droves of children are making their way up the slope. It’s difficult for journalists to speak with them, with an armed guard from the plantation immediately intervening. It’s really only possible to speak with Maria, Juan and the other women and children if you jump on one of the flatbeds that take them back to the village.

The costs are low here at the start of the supply chain. The coffee-bean pickers earn 42 quetzales, around 5 euros, for a 50 kg. bag of picked coffee, a pittance compared to what will be earned with that coffee later on. And even in a country like Guatemala, it’s a starvation wage. In a European Starbucks, it would be just enough for a particularly large caramel macchiato.

Maria shows a yellow control slip, which shows how much she and her son have picked each day. She is paid every 15 days, with the amount dependent on the total weight of the beans she has picked. Sometimes it’s 75 kilograms a day, but usually it’s less. Early in the season, after all, many of the beans have to be left on the bush because they’re not yet ripe.





DER SPIEGEL

Graphic: Where Coffee Comes From

Maria’s daily wage is usually under the 87 quetzales, or 10 euros, that constitute the legal minimum for a day’s labor in Guatemala. It would be even less without the help of Juan, who is not officially allowed to work, since child labor is forbidden for those under 14. Yet it is a normal part of life for children to work on the big plantations. Without them, it wouldn’t be possible to harvest the coffee so cheaply.

“If you saw children on the plantations,” owner Torrebiarte later tells DER SPIEGEL, “then they are children who want to be with their families.” He does not employ children, he says, adding that he even offers daycare for families.

Coffee company Starbucks also claims not to have seen anything untoward on the farm. The Santo Tomas Perdido plantation was designated a “Top Performer” after an inspection of suppliers in October 2016. The company claims it has a “zero tolerance” policy regarding child labor and that there would be consequences were the plantation found to have been violating it.

The drive home passes the farm’s so-called galeras, concrete and stone huts that house around 100 pickers. Up to two families, including their children, are housed in just one room, which has little more than a bare concrete floor. Cooking takes place out in the mud in front of the huts. There are no private toilet facilities. This is where migrant workers, the poorest of the poor, live during the harvest season.

Emanuel Sabuc has a fair amount of experience with the less pleasant side of the global coffee trade. The 26-year-old lived as a child in one of the huts on the Santo Tomas Perdido plantation. “Back then, it was really like a village, every family had their own shack and lived there permanently,” he said.

Then around 20 years ago, Torrebiarte bought the plantation and that precarious idyll was over. “The entire village was forced to leave the farm,” Sabuc says. Torrebiarte, who is one of the most influential members of the national coffee association, Anacafé, dismissed this accusation. No workers were pushed off the farmland, he says.

Today the harvest is carried out by seasonal workers, while the plantation is cared for by so-called parcelistas, Sabuc says. They are employees of the farm and responsible for specific parcels – and are completely depended on the plantation owner or his foreman, Sabuc says. “If you complain, you’re out.”

II: The Roasting

Coffee prices have hit rock bottom. For too long, companies like Kraft and Melitta have prioritized mass production and in doing so, they have promoted monoculture in addition to environmental overexploitation in the source countries. They have also hurt their own margins: A kilogram of coffee often costs just 6 euros in supermarkets.

The parsimoniousness often displayed by German consumers is particularly apparent when it comes to the standard, 500-gram vacuum-packed block of ground coffee. The price has remained low for years – with devastating consequences for the quality of the beans that go into the product.


Graphic: Where Coffee Is Roasted


DER SPIEGEL

Graphic: Where Coffee Is Roasted

To keep the supermarket prices low, roasters have to work with beans that are of poorer and poorer quality. Indeed, to produce a product that is at all palatable, they are forced to rely on tricks. It used to be that the different varieties of coffee that make up each brand were roasted and ground together. With the quality of the beans falling, that’s not enough anymore. Each different variety is roasted separately to pull the last bit of flavor out of it. And they are ground separately so that the size of the grains can be varied according to quality. Only at the very end is everything combined, a procedure that allows good roasters to get the last bit of flavor out of even the poorest quality beans.

Roasting is the most interesting point in the production process, not only for connoisseurs, but also from a profit-margin perspective. It’s here that cheap coffee beans are turned into a sometimes-expensive consumer product. It is at this point in the supply chain where value is added.

Brazil is the world’s biggest exporter of green coffee, the raw material that is eventually turned into the coffee we drink. The country sells every kilogram that is laboriously picked in the fields for $2.70. Germany, meanwhile, is the world’s biggest exporter of roasted coffee – and sells each kilogram for $6.21. That’s a markup of over 100 percent.

Germany and the European Union protect their coffee industry. A tariff of 7.5 percent is imposed on roast coffee imported from most countries while green coffee can be imported tariff-free. One can call such an economic policy coffee protectionism or colonialism. The result, however, is the same.

Probat head Wim Abbing, the man who believes that narrative is one of the most important factors of success for coffee, knows more about coffee roasting than almost anybody in the world. His factory is located in Emmerich, a town just across the Rhine River from the Netherlands. The company founder invented the world’s first “ball roaster” in 1870. Before that, most people had simply sizzled their coffee beans in a pan at home. Probat soon began supplying the entire world with its machines, from small coffee manufacturers to major companies.

Abbing speaks enthusiastically about the roasting process, about roasting time and amount, and how adding air can speed up the process. He notes the trend toward smaller, artisanal production. From big plants to drum roasters. He doesn’t, though, want to say much about the tricks used by the coffee roasters themselves and avoids talking about the problems faced by his clients. He only says that he is sometimes surprised by the “swill” that is sold to the masses.

Probat doesn’t sell any coffee itself but it produces its own brand of beans to test its machines, which is then only sold to employees at cost. “It’s around 12 euros per kilogram,” Abbing explains. “You can’t seriously produce good coffee for anything less.” However, most consumers are not prepared to pay that much.

III: The Pods

For a long time, no one at Nestlé, the world’s largest food and beverage company, believed that coffee sold in small aluminum tins could ever be a success. Within the company, working for Nespresso was seen as a career killer.

Jean-Paul Gaillard was also warned before he began working in the hapless department back in 1988. Many of his coworkers tried to persuade him against making the switch.

But the executive managed to infuse the small tins with the allure of class, opening boutiques in which grand cru coffees were celebrated like expensive wines. Within a few years, a sort of sect had emerged, one that was as loyal to the Nespresso pods as Apple consumers are to its products. “We were the iPhone of coffees,” Gaillard says.

The staging is phenomenal. George Clooney is the face of Nespresso in the ads while black-clad employees welcome visitors to the shops. In the “Tasting Area,” they gently inquire about a customer’s preferred flavor as though they were asking about something intimate. The entrance looks like that of a bank, with machines that look like ATMs, only classier. The customers swipe their credit card and pods fall into paper bags decorated with gold lettering.

Gaillard is no longer a believer. He never got much further at Nestlé after Nespresso and he left the company – and then sabotaged it. In 2008, he founded the Ethical Coffee Company (ECC) and launched his own pods, as a direct competitor to Nespresso. His pods not only could be used in Nespresso machines, but were also 25 percent cheaper and, he claimed, biodegradable.

Nestlé fought back and, for a time, introduced a mechanism in Nespresso machines that destroyed foreign pods. The ECC sued in response. A Nestlé spokeswoman now says that the company no longer produces those types of machines.

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Business

Energy Transition Blocked by Brown Coal

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When Lars Zimmer walks through his village, he hardly recognizes the place any more. The bakery, the pub, the street signs, they’re all gone. The only things left are the streets, vast empty lots and. in the center, the Immerath Cathedral, which recently saw the cross dismounted from its steeple.

“I find it hard to imagine where the houses once stood,” the 45-year-old says. “The reference points are missing.”

There’s nothing much left of Immerath, the place where Zimmer grew up. The village, which lies between the cities of Aachen and Düsseldorf, was once home to 1,500 residents, but only around 20 remain. Zimmer is holding on until the excavators arrive and energy giant RWE swallows up the village into the Garzweiler II lignite mine. “It’s my way of protesting,” he says.

For years, gigantic bucket-wheel excavators have been moving northwards toward Mönchengladback, the city located not far from Germany’s border with the Netherlands. They are following the coal seams that lie just below the surface — and destroy the forests, fields, farm houses and villages that lie in their path. Obstructions are simply torn down and rebuilt elsewhere while people are resettled.

Zimmer has become the public face of his home town’s resettlement. He’s been interviewed by foreign reporters and filmed walking through the ghost town. Then in May, he treceived an important visitor from Berlin.

Green party co-leader Katrin Göring-Eckardt was looking for a suitable backdrop to criticize lignite mining. Even more journalists came along with her to hear her say things like: “It is depressing to watch a place that has been slated for resettlement slowly empty out.” Then she sat with Zimmer under the apple trees in his garden as he spoke about the “huge catastrophe” that was approaching step by step.

A Political Issue

But Zimmer has regained a “glimmer of hope,” he now says. After all, brown coal is back in the news. Earlier this month, 25,000 delegates from 170 countries attended the COP23 conference in Bonn to discuss the Paris climate agreement. As part of that accord, Germany committed to reducing its greenhouse gas emissions by 40 percent by 2030, relative to the 1990 levels. That would mean a death sentence for the massive excavators.

And coal has also been an issue in Berlin. Göring-Eckart’s Green Party had made sure to insert it into the negotiations aimed at assembling Germany’s next governing coalition — talks that collapsed dramatically on Sunday night.

But the issue isn’t just a matter for the Greens. Whoever forms the next government will have to deal with the country’s lignite problem – and not just from an ecological perspective, but also from an energy point of view.

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Lignite, that dark brown, brittle material which once fueled Germany’s economic miracle, should really be obsolete in a world that claims it wants to end its reliance on fossil fuels. Nevertheless, 100,000 tons are dug out of the ground just beyond Zimmer’s garden fence every day. And each year, 170 million tons of brown coal are mined in Germany and used to produce almost a quarter of the country’s total electricity output.

Yet the once vital energy source has become something of a burden in the age of new technologies. Decarbonization is the term sometimes used to describe Germany’s transition to renewable energy, according to which the country wants to rely on wind and solar energy rather than on fossil fuels. Yet brown coal is hindering this progress. The electricity it produces exerts downward pressure on prices and makes natural gas-fired power plants unprofitable. Natural gas, though, was supposed to bridge the gap until a functioning system for renewables, including distribution and storage, could be established.

The outgoing government didn’t manage to put an end to lignite production. The open-cast mines continue expanding, consuming everything in their paths. One of the most recent victims is the A-61 Autobahn, which is to be moved by several kilometers to make way for mining operations – only to be rebuilt at its original site in 2035, once the Garzweiler II mine has eaten its way through the area.

“What is happening is absolute madness,” says Dirk Jansen, director of BUND, Friends of the Earth Germany. Particularly, he adds, when you realize that no one actually wants the coal that is being mined here.

Cheaper and Dirtier

Brown coal is far easier and cheaper to mine than the black coal that lies much deeper in the ground in Germany’s Ruhr Valley – a region where the phase-out of black coal mining will be completed next year. But lignite produces much less energy and is far more damaging to the environment than other fossil fuels.

Even the most modern lignite power plants only have an efficiency rate of just over 40 percent. Older plants from the 1970s and 1980s, many of which are still in operation, only reach rates of around 30 percent. When it comes to the emissions of pollutants, brown coal is almost always near the top of the list – and it leads the way on CO2. If Germany turned its back on brown coal, it would have little difficulty reaching its 40 percent emissions-reduction target.

But it’s not that easy. Two regions and two companies in particular rely on brown coal for their survival: the Rhineland and RWE in western Germany, and the Lausitz region and Leag in eastern Germany. The two firms combined employ 17,000 people and are fighting hard for the right to continue mining coal.

We are now seeing the consequences of decades of state protection for the brown coal industry. For decades, doctrine held that that coal was the only domestic energy source and that it would be around for centuries.

As a result, politicians and officials gave special privileges to RWE and other power companies when it came to lignite mining. For example, RWE was permitted to pump ground water from hundreds of square kilometers in the Rhineland to make way for its open-cast mines. This caused enormous damage to the landscape in the form of fissures, sinkholes and erosion. No one knows what will happen if the water level rises again in 20 or 30 years. Some experts fear that entire stretches of land, including villages, could be flooded.

The companies have long-term contracts with the states and federal government covering the use of the land, mining rights and amounts and they have no reason to voluntarily give those up. On the contrary, were they to do so, they would be responsible for replanting the land, restoring the water balance and repairing the villages and roads that were damaged.

That would cost billions, money that RWE doesn’t have yet. The company had planned to earn and set aside the money necessary for restoration in the final years of mine operation. For Leag, based in Cottbus, their problems are compounded by the fact that they are owned by Czech investors who only recently bought the company from the energy giant Vattenfall. There are some who speculate that the Czech investors only bought Leag because they assumed that the state would eventually have to step in and buy it and take over the costs of land reclamation.

The Agora Energiewende think tank has calculated the monetary costs of an environmentally-friendly end to Germany’s lignite era at 17 billion euros by 2040. But many in eastern Germany fear this figure is far too low. In addition to the actual costs of structural change, they also believe there will be a severe political price to pay if it all goes wrong.

The region is still hugely proud of the “black gold,” while mining jobs are highly prized and pay above average wages, according to “Structural Change in Lausitz,” a study carried out by the universities of Dresden and Cottbus-Senftenberg. If those jobs go, there won’t be anything to replace them on the short term.

A Region Left Behind

It is a region that has already dealt with enormous change in recent decades. Of the 80,000 jobs in brown coal mining when it was still part of the former East Germany, only 8,000 remain. The area has undergone a “demographically-linked depletion,” that is “deeply ingrained in the collective memory of the region.” People have been left with “a strong feeling of how precarious their own living conditions can be,” the study concludes.

And far-right parties know how to tap into these feelings. The group Pro Lausitzer Braunkohle (Pro Lausitz Brown Coal) recently sent a paper on the issue to parliamentarians in Berlin. In it, they warn of a “societal collapse” in the region. The activists added up the votes cast the Lausitz electoral precincts in last September’s general election. Their results show that the right-wing populist Alternative for Germany ended up with 168,000 votes, making it the most popular party in the region ahead of the Christian Democrats’ 149,000 votes.

And it isn’t an issue that politicians can expect to benefit from. The outgoing governor in Saxony, Stanislaw Tillich of the Christian Democrats, learned that the hard way. In view of a potential lignite phase out, he proposed the creation of a 6.2-billion-euro fund to deal with structural change.

The AfD immediately went on the attack, shrieking: “Saxony’s CDU sells Lausitz jobs and demands money from the taxpayers!” Jörg Urban, the head of the AfD group in the Saxony state parliament, said the state would soon be “a new, regional poorhouse with no future, but a lot of wolves.”

In western Germany, abandoning lignite is less of a political than a fiscal headache. That is largely to do with RWE, the once proud energy giant, and its particular history. For many decades, shares in the Essen-based company were considered money in the bank. Which is why many towns in the Ruhr region invested in the firm.

In the good times, the investments produced tidy profits for the towns’ coffers. But if RWE were forced to abandon profitable lignite mining, those towns would lose out on the energy company’s dividends. And many communities in the Rhine and Ruhr regions are already facing bankruptcy. That is one reason why the new governor of North Rhine-Westphalia, Armin Laschet of the CDU, played hardball with the Greens over the issue of brown coal during coalition talks in the state.

Furthermore, Laschet knows that the profits from brown coal plants have already been earmarked to finance the phase-out of nuclear power. If those plants are shut down, the state would then not only have to pay for the reclamation of the open-cast mines but also for the expensive demolition of the nuclear power stations. That is why energy companies would demand either compensation from the state or they would drastically increase electricity bills were lignite to be prematurely phased out.

There is already an elegant solution at hand, at least from the view point of the politicians. Three coal plants which have essentially been taken offline are standing by as a kind of insurance policy should the the German electricity grid need them.

Encouraging Renewables

The companies operating these dormant power plants will receive 1.6 billion euros over the next four years, paid for by electricity customers. The Bundesnetzagentur, the federal agency responsible for overseeing the country’s energy supply, would likely be able to fold other lignite-fired power plants into that reserve capacity. RWE has indicated to the federal government that it would be prepared to abandon operating the brown coal plants in return for this transitional payment.

There is, however, another way to reduce CO2 emissions quickly and sustainably: an increase in the price of emitting CO2. Energy companies like EnBW and E.ON have suggested increasing the price of a ton of CO2 emissions from the current level of 6 euros to at least 25 euros, and eventually 30 euros. The appeal is obvious: It would essentially mean that energy sources like solar, wind, hydro and even natural gas, all of which emit relatively low levels of CO2, would be subsidized.

Meanwhile, other materials like oil, black coal and particularly brown coal, would become a lot more expensive. Their use as energy sources would hardly be financially viable. This would lead to a reduction of environmentally unfriendly coal-fired power plants involved in electricity production. “A fair CO2 price, standard across the EU, would be the right way to implement the energy transition,” says Johannes Teyssen, boss of the energy giant E.ON, which last year spun off its fossil-fuel business into a different firm.

But what about all the people working in the brown coal industry? Everything can be made to look nice on paper. The energy experts at the Agora think tank produced a study for Lausitz suggesting the establishment of a Fraunhofer Institute, which would create a research hub to replace the fossil-fuel reliant industry. “An economically prosperous country like Germany can handle the transformation of the region without major economic problems,” says Patrick Graichen, head of Agora.

At least in theory. A “future workshop” has just opened in Lausitz, which is working on strategies for the region up to 2020. There’s a company called Innovation Region Lausitz, which is cooperating with chambers of commerce and universities to find solutions. So far 70 projects have been identified that could boost growth in the region. That could lead to new business opportunities and markets in cities like Berlin, Dresden and Leipzig.

Whether such projects can ever replace the 20,000 jobs that directly and indirectly rely on brown coal in the region is doubtful.

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Business

Eastern Europeans Tired of Inferior Products

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It was a mid-July day in Bratislava when Slovakian Prime Minister Robert Fico gave vent to his fury, pulling off his jacket and threatening to hand down sanctions. But his anger wasn’t directed at some tin-pot dictator. Rather, his tirade was focused on fish sticks from Iglo and fabric softener from Lenor. Those companies, Fico threatened, could find themselves boycotted if they continued to sell inferior products to the consumers of Eastern Europe.

His message could hardly have been clearer.

Fico, though, wasn’t speaking just for people in his own country. Rather, he was giving voice to those across Central and Eastern Europe who have long wondered why Nutella doesn’t taste as chocolatey at home as it does in Germany, for example, or why the cola isn’t as full-bodied and the washing powder doesn’t work as well.

He was speaking for 103 million EU citizens who for years have been forced to make due with second-rate versions of brand-name products. Not only that, but questionable studies have even claimed to show that Eastern European consumers prefer the mediocre goods to the real thing. The Polish newspaper Gazeta Prawna has referred to the phenomenon as “grocery racism.”

Fico’s mid-summer jeremiad was just the latest climax in an ongoing, potentially explosive conflict involving first- and second-class consumers. At issue is not just the question as to why large companies dump apparently inferior products onto the Eastern European market, thus “defrauding” millions of consumers, as Slovakian Agricultural Minister Gabriela Matecná puts it. It is also about the European Union’s commitment to unity and whether that commitment should extend to the recipes used by Nutella.

The European Commission in Brussels has been repeatedly informed of the fact that products sold under the same brand name sometimes contain different ingredients depending on where in Europe they are sold. But the EU executive body only got involved once several leading Eastern European politicians began focusing on the issue. This spring, the chief of staff to Hungarian Prime Minister Viktor Orbán referred to the situation as “the biggest scandal of the recent past.” The Czech agricultural minister said it made people feel as though they were “Europe’s garbage can.”

Justified Complaints

European Commission President Jean-Claude Juncker promised a bit of help in his September State of the Union address. And a first step was taken by European Justice and Consumers Commissioner Vera Jourová, who ordered an evaluation of tests that have been performed on products in various Eastern European countries. That evaluation found that Robert Fico may have been justified in the complaints he made back in July.

One test showed that a package of fish sticks sold in Slovakia contained just 58 percent fish whereas a package purchased across the border in Austria included 65 percent fish. When it came to the bottle of Lenor fabric softener provided by Fico, it cost 30 cents more than in Austria and contained 60 milliliters less. In other products, more expensive ingredients like butter have been replaced by cheaper palm oil for the Eastern European market while fruit flavors are augmented by aromas. In products like Coca-Cola, sugar is sometimes replaced with cheaper sweeteners like glucose syrup.

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In the first years following the collapse of communism, the use of cheaper ingredients could perhaps have been justifiable: Consumers had little purchasing power and delivery routes tended to be long, with most of the products being manufactured in Western Europe. Companies, though, have long since adjusted prices in Eastern Europe to match those elsewhere – but they have continued to use the inferior recipes. Armin Valet, an expert on grocery products for the consumer protection agency in Hamburg, estimates that selling inferior products saves companies millions.

Commissioner Jourová has now assembled an investigative committee which is to develop guidelines together with consumer protection groups and food manufacturers to address the issue. It’s not a particularly powerful lever, but the companies do seem concerned about more radical steps. A steady stream of companies and lobbying groups have been approaching Jourová and her team.

Unfair Commercial Practice

Whether their solicitation efforts are successful will be seen in how willing the Commission ultimately proves to be in granting concessions. One specific area to watch is the EU’s evaluation of industry studies pertaining to alleged regional preferences. In the future, companies that are unable to adequately explain why they use differing recipes could face proceedings for unfair commercial practices.

Past attempts by companies to explain the discrepancies have been prime examples of PR balderdash, including claims that they were simply trying to use local products or account for local tastes and preferences. In other words, skimping on premium ingredients was merely an expression of intercultural understanding. In the future, the Commission will demand convincing proof of the differences in taste between Eastern and Western Europe. To date, none has been provided.





DER SPIEGEL

Graphic: Product discrepancies between the East and West.

Instead, many companies prefer to hide behind formulaic statements and continue to reject all accusations of any wrongdoing. Industry lobbying groups have likewise sought to cast doubt on the studies that have found recipe discrepancies.

But Bahlsen, the manufacturer of the popular sweet biscuits under the Leibniz brand, has taken a different tack. Recently, the company fixed a discrepancy between the recipe it was using in Germany and the recipe it was using in Poland. Company spokesman Christian Bahlmann says that he began suspecting an approaching PR disaster for the company in summer 2016. “It began relatively quietly on social media channels,” he says. Customers were asking why Leibniz biscuits baked in the company’s Polish factory contained less butter and more palm oil than those produced in Germany. And the company did not have a satisfactory answer.

Bahlmann realized that it could become a problem for the brand. After all, the recipe for the sweet biscuits had been around since 1891. Suddenly diluting it with palm oil looked extremely suspicious. But in July, Bahlsen reversed course and has been using exclusively butter since then — in its Polish factory as well.

Cheaper Production

Another company that has elected to buck the industry-wide trend of denial is Frosta, a Hamburg-based frozen food company. Felix Ahlers, whose family runs the company, has chosen not to try to use the “national preferences” excuse cited by Iglo, its main competitor. “There is only one reason to use less fish,” Ahlers says. “To make production cheaper.”

For years, Frosta fish sticks produced in Poland were wrapped in a much thicker layer of breading. But the company fixed the inconsistency a year and a half ago. In contrast to Germany and Austria, there are no laws in Poland that required Frosta to make the change, but Ahlers says it was an issue of credibility. “The argument about regional tastes is nonsense,” he says. It isn’t difficult, he says, to condition children to prefer more breading. “But really, everybody wants more fish in their product,” he says. And tests undertaken by Frosta, he says, have shown that Polish consumers prefer the new recipe.

Still, many companies continue to insist that it makes sense to have different recipes for different countries. A spokeswoman for the SPAR supermarket chain in Austria made clear that the company doesn’t believe products should contain exactly the same ingredients across Europe. The yoghurt sold by SPAR in Eastern Europe, for example, has less fruit in it than the same yoghurt — packaged under a virtually identical label – sold in Austria, according to a test performed by the Slovenian consumer protection organization ZPS. Furthermore, the fish sticks sold under SPAR’s own brand name are fattier and more expensive in Eastern Europe.

The spokeswoman justified the discrepancies by citing alleged differences in taste – and by reviving a few outmoded, postwar clichés. Hungarians, she claimed, demand “rather fatty meat.” That, she continued, is something known by all industry experts. “It’s not something you need a study for.”

The company also seems rather flexible on other issues as well. In 2011, the company set a goal for itself of only using fish from sustainable sources and catch methods starting in 2013. But that doesn’t seem to apply to Eastern Europe. Indeed, the Marine Stewardship Council certification seal is missing from many of the company’s fish products in the region. In Slovenia, the spokeswoman said, most consumers aren’t particularly concerned about sustainability.

Ripping Them Off?

The American consumer goods corporation Procter & Gamble — which owns the brands Gillette, Lenor and Pampers, among many others — is much more rigorous when it comes to determining the predilections of its customers, with a company spokeswoman claiming that it performs 20,000 studies each year. One finding she mentioned as an example is that Poles prefer squirting dishwashing liquid directly onto the sponge rather than using a sink filled with soapy water, as the Germans prefer.

So is the company giving Poles what they want by using a more diluted mixture than that sold in Germany? Or is it simply ripping them off?

Tests that are pointed to as proof of alleged national differences are often commissioned from the Appliance Technology department at the University of Bonn. One of the studies undertaken by the department is called “Washing-up Behaviour and Techniques in Europe,” and as part of the study, 11 test subjects from Poland and the Czech Republic were questioned, apparently by telephone. Hardly a representative study.

Chocolate multinational Ferrero likewise serves up some rather strange answers when questioned about the different recipes for its famous hazelnut-chocolate spread Nutella. Tests have determined that Ferrero uses less cocoa powder in Hungary than it does in Germany and the company has sought to justify the discrepancy with “the availability of resources.” The explanation makes it sound like cocoa is first delivered to Germany and then Hungary has to make due with whatever is left over. But Ferrero also points to “national regulations,” even though there is no regulation anywhere in Eastern Europe that requires the company to use less cocoa in Nutella sold there.

Ferrero executives have presented an additional curious explanation to European commissioner Jourová. The amount of cocoa used in Germany, they said, is slightly higher to make the consistency of the Nutella sold there thicker because Germans tend to use denser, whole-grain breads. Ferrero has yet to submit a study to back up the claim.

Destroying Brands

It is enough to make one wonder what such companies are thinking. They are, it would seem, putting the reputation of their most important brand names at stake.

“It is astounding how amateurishly these multinationals are acting,” says Achim Feige from BrandTrust, a brand consultancy. At a time when brand loyalty is eroding and store brands are on the rise, Feige says, a product must be extremely reliable, like a good friend, and guarantee transparency and verifiable sustainability. “These executives are doing the opposite: They are destroying a brand from the inside out by using inferior, cheaper versions for other countries and by relying on even less convincing excuses. They are allowing for fraud. And they are sacrificing the idea of a united Europe to the greed for profits.”

Nowhere is the problem more visible than at Danone, the Paris-based food-products corporation (sold as Dannon in the United States). For years, the company has been severely criticized for high sugar content in its products, among other shortcomings. Recently though, the company has sought to demonstrate responsiveness to such concerns and in June, CEO Emmanuel Faber called for a “food revolution” at an industry conference.

Faber failed to clarify exactly what role his company planned to play in this revolution. He did, however, mention “social responsibility” and unveiled the company’s new logo: “One Planet. One Health.”

But his company’s commitment to social responsibility doesn’t seem to extend into Eastern Europe. Danone’s bestselling Activia brand, sold in the same packaging worldwide since 2016, tastes quite a bit different in the region when compared to the same product sold further to the west. And a test conducted in Lithuania shows why that is: The amount of fruit used in the product was quite a bit lower than in Western Europe. And the strawberry yogurt also contained a thickener.

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Business

Inquality and Wealth Distribution in Germany

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The gathering of global political and industrial leaders in Davos each year leads many observers to wonder: Who benefits in the long term from economic growth and corporate profits? Society as a whole or just a select few at the very top? One way to approach that question is by looking at how the entire wealth of a given society is distributed among individual members of that society.

The problem, though, is that it isn’t so easy to calculate that distribution. Official data does, of course, exist. In Germany it is compiled by the Federal Statistical Office, and the European Central Bank (ECB) has been doing the same for the eurozone over the last few years. That data shows an extremely unequal wealth distribution.

But in reality, wealth is even more concentrated than the data shows, because the statistics have a blind spot: The superrich and their assets are consistently underestimated. This is because, on the one hand, there are so few of them that they aren’t adequately accounted for in randomized surveys. On the other hand, the statistics are based on voluntary responses – and willingness to participate demonstrably sinks as wealth among respondents increases.

When it comes to the superrich, however, there are relatively reliable estimates in the form of lists of the world’s wealthiest people, with the one compiled by the US business magazine Forbes leading the way. A similar list is compiled in Germany by manager magazin. A team of tax experts led by Stefan Bach of the German Institute for Economic Research (DIW) has examined the wealth statistics compiled by the ECB and augmented them with lists identifying the ultrarich. And the team did so for three countries: Germany, France and Spain.

The result: The 45 richest households in Germany own as much wealth as the bottom half of the population. Each group possessed a total of 214 billion euros in assets in 2014. The following graphic illustrates the distribution of wealth in Germany as it stood three years ago. The top 10 percent of the population is shaded in hues of blue while the remaining 90 percent is shaded red.

The darkest red section represents the bottom 50 percent of the German population while the darkest blue stands for the 45 wealthiest households in the country.

In compiling the more precise statistics, the DIW team adopted an approach that the ECB itself proposed as a correction to its own wealth statistics. (You can find a detailed description of the methods used and the results compiled in this English-language discussion paper released by the DIW.)

By incorporating lists of the wealthiest people in Germany, it becomes clear that wealth inequality is much greater than reflected in the official ECB numbers. According to the DIW study, the wealthiest 5 percent in Germany owned 51.1 percent of the country’s entire wealth in 2014. ECB numbers, meanwhile, held that the richest 5 percent only owned 31.5 percent of the nation’s wealth that year.

Furthermore, the top 1 percent of German households owns a third of the country’s wealth (instead of the 23.6 percent shown by ECB statistics), and the top 0.1 percent owns 17.4 percent (instead of 6.3 percent). The richest 0.001 percent – just 400 households – own 4.7 percent of the country’s wealth, according to the DIW, which is twice as much as the roughly 20 million households that make up the poorer half of German society. In the graphic, you can also see the absolute amount of wealth each category owns.

The analysis makes clear that in comparison with other countries in Europe, the distribution of wealth in Germany is weighted particularly unfairly in favor of the superrich. That becomes obvious when an analysis of Spain and France is included. ECB data leads one to believe that wealth is more concentrated in those two countries than in Germany. But once the statistics are augmented with lists of the wealthiest households from each country, a fundamentally different image emerges. In both France and Spain, those lists show that the share of national wealth owned by the superrich is higher than indicated by ECB statistics alone, but the difference is much more pronounced in Germany.

According to DIW calculations, the poorest half of the population in Spain owns just under 12 percent of the country’s total wealth while in France, that number is slightly above 6 percent. In Germany, meanwhile, it is just 2.3 percent. The richest 10 percent of households in France and Spain own less than half of their country’s wealth, respectively. In Germany, that bracket owns close to two-thirds of the nation’s wealth.

That shows that wealth distribution in Germany is much less equal than statistics would seem to indicate – and much less equal than in other large European countries. DIW researcher Bach, though, does suggest that the consequences of inequality in Germany is likely less deleterious than it is elsewhere. His explanation is that the list of German billionaires compiled by manager magazin is largely made up of families that own successful companies, many of them typical representatives of Germany’s strong medium-sized company sector.

“They are considered the backbone of the German economy. They strengthen competition with large corporations, create jobs all over the country and usually take care of their people and their regions,” Bach says. Furthermore, the investments they make often come from their own capital reserves instead of from bank loans. All of that benefits lower income groups. In Germany, in other words, Bach believes it really is the case that the wealth belonging to the superrich also benefits society as a whole.

But Bach also sees the extreme concentration of wealth as a problem. Families that own successful companies have a particularly large influence on politics through direct access to the chancellor or state governors and by way of expensive marketing campaigns. The result is that privileges for the wealthy remain significant when it comes to inheritance tax. And Germany doesn’t have a wealth tax.

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Business

Currency War: Trump’s Games Pose Threat to European Economy

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For the past 15 years, Rolf Philipp has manufactured “bones for airplanes” in the town of Übersee on Bavaria’s Chiemsee lake. That’s what the founder and CEO of Aircraft Philipp calls the aluminum and titanium parts his company produces for the aerospace industry. His company has a combined 250 employees in Bavaria and at a second German plant in Karlsruhe — and business is going well, with the family-owned enterprise bringing in over 60 million euros in revenues last year.

Recently, though, developments overseas have been making life more difficult for Philipp. Within the past eight months, the United States dollar has lost more than 10 percent of its value, with the exchange rate now standing at $1.24 to the euro. Just one year ago, Aircraft Philipp found itself profiting from an exchange rate of under $1.10 to the euro.

Philipps’ most important customers, Airbus and Boeing, sell the majority of their aircraft in dollars, and their sheer power in the marketplace allows them to pass the currency risks on by also paying suppliers in dollars. If the dollar loses value against the euro, Aircraft Philipp’s profits also drop because the company’s costs are generated largely in euros.

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“We have a technological edge in Germany, but that doesn’t help much when the dollar falls on us like a hammer,” says Philipp. He says that if the euro exchange rate was to rise to $1.35 or higher over an extended period of time, it would become increasingly attractive for customers to make purchases elsewhere.

In principle, of course, the euro’s rise, which began around a year ago, is good news. It signifies the degree to which the economy on the Continent has recovered after years of weakness. That development has been bolstered by the growing willingness to cooperate among the European Union’s core countries that has become visible since the Brexit vote — primarily because of France’s new president. “Skepticism of Europe has disappeared since Emmanuel Macron’s election,” says David Folkerts-Landau, chief economist at Deutsche Bank. “The major investors have returned to Europe because they see that things are running again.”

Donald Trump’s Controversial Cocktail

But the European developments that have strengthened the euro represent just one side of the coin. The flip side is Donald Trump’s “America first” policies: his open interest in a weak dollar as well as a controversial cocktail of supply and demand policies — lowering taxes, rolling back regulations and the repatriation of wealth that has been parked abroad. The president’s policies are laden with enormous risks.

Even though the U.S. economy has already been growing robustly for years and, with an unemployment rate of just 4.1 percent, is approaching full employment, Trump is continuing to stimulate growth — a focus that could result in an overheated economy, which would present a danger to the entire global economy.

On the surface, everything appears to be in good shape. America, Europe and Asia alike are producing, consuming and investing more, and the International Monetary Fund just issued an upward revision of its forecast for worldwide economic growth to 3.9 percent for 2018 and for 2019.

But the speed with which euphoria can turn into panic was on full display at the beginning of last week, when fear suddenly began to spread among markets over excessive government deficits, inflation and interest rate increases, sparking the largest point loss in Wall Street history.

Even if the percentage slide on the markets was less dramatic, it is still likely that it bothered Trump a great deal. But when it comes to the weak dollar, his administration has literally talked it into existence. Trump wants to weaken the currency to promote exports, curb imports and to reduce his country’s current accounts deficit — one of the central pledges he made during the election campaign.

At the World Economic Forum in Davos, U.S. Treasury Secretary Steven Mnuchin said that a weak dollar was good for the U.S. economy. Trump himself may have sounded a little more conciliatory later on, but the genie was already out of the bottle, and Mnuchin’s verbal intervention was already having an effect. The dollar fell rapidly, and the nasty term “currency war” could suddenly be heard in the hallways of Davos.

Irritated, But Relatively Powerless

“There is no longer any doubt that the U.S. government is not only waging a currency war, but is also in the process of winning it,” Joachim Fels, chief economist at mutual funds giant Pimco, says. Trump’s policies represent a threat to Europe’s recovery, a situation that has displeased the European Central Bank (ECB). But there isn’t much the ECB can do about it.

By pursuing economic policies that ignore the needs of America’s trading partners — an approach economists refer to as “beggar-thy-neighbor” — Trump has revisited an old American tradition. In the early 1970s, it was Treasury Secretary John Connally who raised the prospect of a budget deficit of $40 billion — a massive sum at the time — and justified it as “fiscal stimulus.” In response to concerns voiced by his European counterparts, worried as they were about the weak dollar, he responded with his legendary line that the dollar “is our currency, but your problem.”

Lloyd Bentsen, treasury secretary under Bill Clinton, informed the Japanese in 1993 that he urgently desired a stronger yen in order to stem the Asian trading partner’s high export surpluses.

With “America First,” Trump has now elevated “beggar thy neighbor” to the status of administration doctrine.

The first part of Trump’s economic policy agenda envisions stimulating the economy through tax cuts and public infrastructure investments. That would help American companies, and the rest of the world could also profit initially if the U.S. economy were to grow more rapidly and companies in Europe or Asia were to receive more orders.

But it’s the second part of the Trump program that reveals the real strategic thrust. During the same weak that the treasury secretary could be heard preaching the virtues of a weak dollar, the U.S. government imposed steep import tariffs on washing machines and solar cells. The combination of a weak dollar and protectionist measures are aimed at creating a competitive advantage for American companies versus their competitors from around the world.

“The government clearly wants a weak dollar right now because inflation is moderate and a weaker dollar will make it easier for the manufacturing sector to grow,” says Barry Eichengreen, a professor for economics at the University of California at Berkeley.

Loose fiscal policy does in fact create downward pressure on the currency. If taxes are lowered and the government increases its spending, households then have more money at their disposal. Demand increases for goods from abroad, thus weakening their own currency. Domestically, higher demand drives prices upwards, especially when cheap imports are slapped with tariffs, so that the purchasing power of the dollar sinks.

Playing with Fire

Unless, of course, the Federal Reserve steps in to counter that development with higher interest rates. That would attract investors from abroad looking for better returns and the dollar would be strengthened, but it would also jeopardize the upswing. The situation in the economy and on the financial markets is so tense right now that Trump’s policies are tantamount to playing with fire.

His policies have the potential to overturn years of delicate crisis management on the part of the central banks in the U.S. and Europe and to force them into an abrupt change of course. “It’s not the right time for that kind of fiscal policy program,” says one of the world’s most influential central bank heads.

Few past upswings have been as completely dependent on low interest rate policies of the kind put in place after the global financial crisis a decade ago. In addition to getting the economy back on track, they also drove up stock and real estate prices. Indeed, astronomical prices are once again being paid for company acquisitions — prices of the kind last seen in 2007.

The crash in stock prices seen on Feb. 5 also revealed that banks and hedge funds are once again playing with risky bets on the financial markets that can magnify upheavals if the markets get spooked. So-called exchange-traded notes (ETN) valuing in the billions are a bet on calm market conditions and minimal changes in stock prices, but they suddenly lost all their value in last Monday’s turbulence and also intensified the downward market trend.


A monitor displays stock information on the floor of the New York Stock Exchange on Feb. 5, the day of the crash.


Michael Nagle/ Bloomberg/ Getty Images

A monitor displays stock information on the floor of the New York Stock Exchange on Feb. 5, the day of the crash.

Fear is now rampant that the best of all imaginable worlds for companies, governments and speculators may soon come to an end — a world of zero percent interest rates, making debt almost completely unproblematic, investments unbelievably cheap and financial investments of all kind seemingly without risk.

An Impossible Task

The volatile situation has transformed Jerome Powell into one of the most interesting appointees in Washington at the moment. His predecessor Janet Yellen has left behind an almost impossible task for the new head of the Federal Reserve.

Powell likely already sensed what he was up against on this first day of work at the massive Fed headquarters on Constitution Avenue, just four blocks from the White House. Right at the start of his new job, global stock markets collapsed. It’s possible the central banker might face the same challenges as his predecessors Alan Greenspan and Ben Bernanke did when they were appointed. Greenspan had barely been in office for two months in 1987 when he had to deal with the biggest market crash seen since 1929. In 2007, meanwhile, just a year after his appointment, Bernanke was tasked with saving the country from the consequences of the subprime mortgage crisis and the massive recession that followed.

The Fed is scheduled to make its first interest rate decision under Powell in March and it’s possible he will be forced to signal to the markets whether he expects to increase interest rates at a higher frequency than the three times that have been forecast for 2018.

“The risk of inflation in the U.S. is increasing, the interest rates for the bond markets are far too low,” says Folkerts-Landau, who regards Powell as an independent thinker. “He’s very pragmatic and is unlikely to just do what others want.”

Given the high sovereign debt level, it’s unlikely that Trump wants either higher interest rates or a stronger dollar. Experts estimate that Trump’s tax plan could increase the budget deficit over the next 10 years by an additional $1.5 trillion.

The question as to whether Trump prevails, or Powell puts up a forceful challenge to the president is also of major importance for Europe. If interest rates remain low and Trump maintains his weak dollar policy, the Europeans will have a problem.

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Business

C&A Family Member Discusses Possible Sale of Company

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Alexander Brenninkmeijer is a member of the fifth generation of one of Europe’s richest families. The 50-year-old comes from the Clemens Brenninkmeijer family line on his mother’s side and the August Brenninkmeijer line on his father’s side of the founders of the European clothing retailer giant C&A in Germany. The retailer was founded in 1841. Today, it has more than 1,500 stores in 18 European countries, making it one of the world’s largest fashion apparel retailers, with around 35,000 employees. The family’s assets are estimated to exceed more than 20 billion euros. All executive partners in the company are required to be Dutch passport holders and members of the Catholic Church. In mid-January, DER SPIEGEL reported that C&A might be sold to a Chinese investor. Alexander Brenninkmeijer is married and lives in Munich, where he is an entrepreneur.


DER SPIEGEL: Mr. Brenninkmeijer, you’re a member of one of Europe’s oldest business families. Why do you want to sell C&A, your family’s primary business?

Brenninkmeijer: If it was up to me and many other family members, we would surely not sell C&A. We would likely only make such a decision if there were no other sensible alternative.

DER SPIEGEL: What speaks against a sale?

Brenninkmeijer: We Brenninkmeijers don’t define ourselves through wealth management companies, but rather through C&A. Through the legacy of our ancestors Clemens and August Brenninkmeijer. When C&A makes headlines, positive or negative, we all have to justify it individually. To our spouses, but also to friends, neighbors and business partners. The sale of C&A would be equivalent to the sale of our very identity. If the current partners are really planning such a step, they’ll have to have valid reasons for doing so and they’ll have to explain them to us family members.

DER SPIEGEL: Who is currently pushing for the sale?

Brenninkmeijer: Apparently some within the partner structure. I’m not in a position to do so.

DER SPIEGEL: What do you mean by that?

Brenninkmeijer: Even though I am a member of the family, I do not hold a stake in the C&A company. We deal with it differently than other family owned companies. Thus far, we have made decisions according to the so-called “Sneekerkring,” or Sneeker Ring, named after the Dutch city Sneek, where our ancestors founded a textile business more than 170 years ago. This ring of decision-makers includes more than 60 partners who control the business interests of C&A. Our company holdings cannot be inherited — they must be transferred back to the company when we reach old age or if we die prematurely.

DER SPIEGEL: Cofra AG in Switzerland, where all the company shares are held, has neither confirmed nor denied reports about the possible sale, but has instead made rosy comments about new partnerships and possible investments in China. What’s your take on that?

Brenninkmeijer: If you look at that statement, it appears that anything is possible. In general, there is quite a bit of talking these days. It didn’t used to be like that.

DER SPIEGEL: According to that talk, you were surprised by the plans to sell the comany, weren’t you?

Brenninkmeijer: Yes. It was a shock for myself and for all the family members with whom I have spoken. We found out about it, fully unprepared, through the press. You need time to emotionally digest news like that.

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DER SPIEGEL: Couldn’t you just call up your cousin Maurice Brenninkmeijer, who was CEO of Cofra Holding and headed the Sneekerkring until recently, or his successor Martijn Brenninkmeijer, to ask what’s going on?

Brenninkmeijer: Of course, I could. I was long in close contact with Maurice. But it turned out over the years that it is often better to do so in writing. We have cut back on our direct, personal exchange. I also do not believe that he would talk to me about the sale.

DER SPIEGEL: Your family is considered to be extremely tight-lipped. It’s only very rarely that a Brenninkmeijer makes a public statement. What is your personal motive for speaking with us now?

Brenninkmeijer: In the past, openness was seen as a sign of weakness in our family. For a long time, and this is probably still the case today, my cousins did not have a relaxed relationship with the press. But it has always been easier for me. The occasion for this interview is, of course, C&A’s possible sale. But it’s also my wish to set the record straight about one thing or the other that people are reading or hearing about our family.

DER SPIEGEL: Are you worried about negative reactions from within the Brenninkmeijer family?

Brenninkmeijer: With any interview like this, there is always a risk that something won’t be conveyed the way you want it to be. But I also believe that most family members view a possible sale the same way that I do. Nevertheless, there are some partners with whom you never know how they will react. Still, a sale of C&A would spell the end of our family’s identity. We would probably just wind up being a community of heirs like so many others.

DER SPIEGEL: Industry observers consider the search for external investors to be a logical strategic step. Brick and mortar clothing chains have been in a deep state of crisis for years now. Twenty years ago, C&A was still the market leader in Europe. Today it is struggling to play catch up with competitors like Primark, but particularly with online competitors like Zalando and Amazon.

Brenninkmeijer: I don’t know in detail how bad the situation really is at C&A. Perhaps this is a tactical measure by the shareholders with regard to the family members. By painting the worst possible picture, they may be trying to prevent long-term resistance in the event that not all of C&A is sold in the future, but perhaps just part of it.

DER SPIEGEL: Who would stand to gain from a sale?

Brenninkmeijer: Actually no one. The partners aren’t permitted to just pocket the sale price. As such, they surely will have considered prior to the sale whether they would be able to reinvest the money they got from C&A more sensibly. That’s where the financial profit would lie. But nobody can know what kind of effect a sale would ultimately have on the circle of partners because, in the context of their family ties, they are currently both owners and executives in the family business. Through the sale, many executive positions would be eliminated, perhaps permanently, depending on how the money received in the sale was reinvested. That could lead to the destruction of the current structures and also the disintegration of the family.

DER SPIEGEL: As a simple family member who is not a partner in the company, would you yourself lose wealth if the business were to be sold in its entirety through, for example, the loss of dividends?

Brenninkmeijer: No, because there are no dividends. My siblings and I inherited something from our father Josef, but that’s it. That’s why things are structured so that the company can’t be bled dry by a family that is constantly growing. As such, partners for generations have always exhibited modesty, providing themselves and their children with relatively small payouts they acquired as partners. After leaving as a partner, most of the shares are given back to the company. That’s how my father, who has since passed away, and many others handled it. Against the backdrop, a sale would be breaking with past generations. That’s also why the partners have a duty to care for the other family members.

DER SPIEGEL: Do you have the feeling that the current partners are living up that duty?

Brenninkmeijer: The partners are currently seeking to increasingly release themselves from this responsibility.

DER SPIEGEL: There is concrete talk of Chinese investors. How does that jibe with your family’s strict Catholic traditions?

Brenninkmeijer: It doesn’t really. But if the statement from Cofra Holding AG about the intended sale, that such a sale or any other form of cooperation would only be executed with Catholics, people would have laughed at us.

DER SPIEGEL: But familial tradition is nevertheless a central theme for you. What is it that makes the Brenninkmeijers and C&A so special?

Brenninkmeijer: Thus far, there has always been something special about the way people treated each other and the rules that were obeyed. And of course, the Catholic faith played a major role. Our meetings in Mettingen, the hometown of our ancestors, and the get-togethers we celebrated there show us again and again what values we share. Integrity, for example.

DER SPIEGEL: At the same time, you could also look at some family values as being rather outdated. Until a few years ago, for example, all female descendants in the family were excluded from pursuing careers inside the company.

Brenninkmeijer: We could talk for hours about this inequity. It may even have led to the problems that we are now confronted with. My personal experience is that many women in the Brenninkmeijer family are particularly smart and talented. Many have a lot more going on upstairs than their brothers or cousins, who were obviously able to establish careers within the company as a matter of course, allowing them to increase their wealth. I consider that to be unfair.

DER SPIEGEL: A sale of C&A, the main business, would be a major break from your family history, but it would also have consequences for tens of thousands of employees around the world. What responsibility do you carry for these people?

Brenninkmeijer: As I said, I am not a partner and, as such, cannot carry any responsibility for C&A’s employees. But in earlier days, the Brenninkmeijer family demanded quite a lot of many of their employees. For example, employees in management positions were until recently not allowed to divorce — at least not without first consulting with the partners. If you make special demands, then you also have a special responsibility. I don’t know whether it is still that way today. If selling is the right business decision, then that will also apply to employees because the sale will then serve to save jobs.

DER SPIEGEL: Do family owned companies have a special mission?

Brenninkmeijer: “Mission” is an exaggeration. We’re talking about a comparison between family businesses and other companies that are held by investors. As such, the differences should be sought in how the companies are run. And that’s where they can be found, in my opinion, because for everyone, especially for employees and customers, there is a difference if there is still someone who personally champions the company’s activities and also takes responsibility for them. And, of course, you can’t forget the family behind the family company, because it is defined through the achievements of the company but also because the family’s lifestyle has an influence on how the company’s achievements are perceived.

DER SPIEGEL: Do these values still apply today?

Brenninkmeijer: I actually believe they are growing in importance.

DER SPIEGEL: Your family is large, now including more than 1,000 members. Who do you think belongs to the family.

Brenninkmeijer: For me, that includes everyone who shares the fundamental view that consensus and sticking together are important commodities in the Brenninkmeijer family. But I have to admit that this definition isn’t viable in practice because you’d first have to conduct a test of people’s attitudes. Surely a definition formulated by the inner circle of partners, one that reaches as far as the great grandchildren, makes more sense from a practical standpoint.

DER SPIEGEL: You also took your first steps in your career at the family business. But at 27 years of age, you grew a full beard — which was allegedly banned at C&A at the time — and abandoned this predefined path. Why?

Brenninkmeijer: At the time, I already had other ideas for the company’s future. I also left because I realized that there wasn’t really any chance of implementing those ideas. At the time, I was already starting to see that the mutual support between the members of our family working within the company was waning and that people weren’t being honest with each other. It’s not enough to constantly preach harmony — you also have to practice what you preach.

DER SPIEGEL: You’ve experienced what it can be like when such a powerful family turns against one of their own. You became self-employed with your fashion label Clemens en August in 2004. At the time, you said in an interview with SPIEGEL ONLINE that your family had given you their blessing to start the company. Only a short time later, though, a bitter legal dispute broke out over the rights to the name.

Brenninkmeijer: Yes, that was completely irrational and unforeseeable to me. I received a letter from the partner responsible for negotiating with me in which he basically wished me luck with my new label and even expressed the hope that I might one day want to sell it to the partners. I thought that letter had settled everything.

DER SPIEGEL: What happened then?

Brenninkmeijer: A few weeks after the interview, I was totally surprised to receive a written warning from the shareholders through a Swiss attorney. I immediately contacted the responsible partner. It turned out that during negotiations with me, my cousins had secretly registered my label, Clemens en August, almost worldwise in an effort to block me.

DER SPIEGEL: What was the point of doing so?

Brenninkmeijer: They wanted to prevent me from being able to continue with my label. If they had been successful, it would have led to ruin for both my company and me.

DER SPIEGEL: How did the dispute end?

Brenninkmeijer: I won all the court cases. And I reached a deal with my cousins securing the sole rights for the use of the brand name Clemens en August for the rest of my life and, thereafter, for my children.

DER SPIEGEL: Would a possible sale of C&A also jeopardize your personal businesses?

Brenninkmeijer: It is certainly true at the moment that the rumors are creating considerable difficulties in my talks with investors, because it’s not clear to all that I hold the exclusive rights to the brand and that the label would not be affected by a possible sale of C&A.

DER SPIEGEL: What happened after the lawsuits? Were you persona non-grata?

Brenninkmeijer: No, not that. But after this rift, it was clear to me that we couldn’t just meet up again in Mettingen as if nothing had happened.

DER SPIEGEL: What do you mean by that specifically?

Brenninkmeijer: I made clear to the members of the Sneekerkring that if they wanted to make peace, then they could have it. But I also made it my goal to make sure that nothing like that could happen again to a normal family member. I will make sure of that.

DER SPIEGEL: How had such disputes been handled before?

Brenninkmeijer: The shareholders always told you what you had to do.

DER SPIEGEL: And that no longer applies today?

Brenninkmeijer: No. That’s a thing of the past. I reached a settlement in the course of my legal disputes that stipulates the creation of an internal family arbitration process. We call it the Brenninkmeijer Panel.

DER SPIEGEL: And how does this internal family arbitration board function?

Brenninkmeijer: Arbitration board is also what my cousin Maurice called it. But it is much more than that, and in that regard I want to set the record straight. The Brenninkmeijer Panel is a permanent conflict resolution panel that is engaged as a mediator, one that can make binding or nonbinding decisions. It is comprised of at least five independent and unimpeachable members who are usually lawyers. These judges aren’t allowed to have any involvement with the family.

DER SPIEGEL: Who appoints these family judges?

Brenninkmeijer: I named them together with the circle of partners. We reached a contractual agreement about this. There’s a neutral office that every member of the family can turn to. The entire procedure has to be conducted in a fully transparent way. There’s a comprehensive set of rules. I have summarized every detail in a book that is around 100 pages in length and in three languages. All family members are required to adhere to these rules, including the partners and, of course, the external judges.

DER SPIEGEL: So, you’ve agreed on your own set of Brenninkmeijer laws?

Brenninkmeijer: A familial administration of justice.

DER SPIEGEL: That also seems to fit with your family’s idiosyncratic traditions.

Brenninkmeijer: That may be the way you see it. I have spent almost 10 years working on this set of rules with experts so that the panel has the potential of gaining the trust of all family members. The aim is to open up the possibility for every Brenninkmeijer, regardless whether man or woman, regardless whether a partner or not, to assert their claims and to scrutinize things that might be going wrong. And once the panel has established itself within our family, which I fervently hope will happen, it could also provide an example for other family-owned companies.

DER SPIEGEL: Has it worked so far?

Brenninkmeijer: A panel like that can only bring peace if people mean it seriously. It can’t be a placebo, because there’s also the risk that a conflict resolution panel could ultimately also have the opposite effect.

DER SPIEGEL: Has the panel made any decisions yet?

Brenninkmeijer: Yes. For example, the panel determined that the expulsion of a partner from the inner circle because of a divorce was wrongful and likely against the law.

DER SPIEGEL: That’s is a complete break from one of your strictest family rules, which have been strongly shaped by Catholicism. Previously, all family members had to leave the inner circle of partners after a divorce.

Brenninkmeijer: Exactly. The panel made a clear judgment about that this and that cannot be concealed from family members.

DER SPIEGEL: According to that logic, would a sale of C&A not also be a potential case for the family arbitration board?

Brenninkmeijer: The panel is categorically excluded from responsibility for company policies. But if all of the partners were to move outside the structures prescribed by the founding fathers, out of self-interest, for example, it could definitely be a case for the panel. But the panel itself would ultimately also decide on that. And there would first have to be a complainant.

DER SPIEGEL: But with a potential sale this massive in scale, isn’t there definitely a threat that the current partners who are actively involved could want to make money off it?

Brenninkmeijer: That would go against every tradition. I want to make clear here once again that I would not be fundamentally opposed to a sale if that were the only correct decision. I don’t, after all, know the company’s current situation in detail. But I am of the opinion that something this existential to the family also needs to be questioned. Indeed, has to be questioned.

DER SPIEGEL: Mr. Brenninkmeijer, we thank you for this interview.

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