Europe Versus the Fat Cats

ELITES WITHOUT MORALS—HOW THE RICH UNDERMINE OUR SOCIETY, screamed the German weekly Stern on the cover last week. IS SUPERCAPITALISM DESTROYING DEMOCRACY? asked Manager Magazine, a business monthly, underneath the picture of a giant locust. STATE ENEMY: TAX DODGER, declared Der Spiegel next to the photo of a prominent German CEO.

Germans have been riveted by the spectacle of the biggest crackdown on tax evasion in their country's history. It all began in 2006, with a constitutionally controversial cloak-and-dagger operation, in which the country's foreign intelligence agency, the BND, gave €4.2 million, plus a new name and passport, to an employee of a secretive Liechtenstein bank in exchange for a CD containing the names, accounts and financial correspondence of 1,400 wealthy foreign clients. Two weeks ago, German investigators finally struck, conducting 120 raids based on the information, and received more than 160 confessions for a total of €29 million in recovered taxes—with the figures rising daily. The targets have included some of Germany's most prominent executives, including Deutsche Post CEO Klaus Zumwinkel. Tax authorities in Finland and Norway are now chasing their own wealthy nationals listed on the CD. About a dozen other countries, including France, Britain and the United States, have launched their own separate investigations. Only Denmark has refused to prosecute based on the Germans' "stolen goods."

Yet judging by those headlines, the "Liechtenstein Affair" is about much more than evaded taxes. Almost overnight, the case has turned into a national uproar against "the rich" and the very nature of the economic system. "The elites are destroying our system" with their "excesses," railed German Finance Minister Peer Steinbrück after the first arrests last week. The reaction is another symbol of a growing unease—in Germany, but elsewhere, too—not only about how Europe is faring in the age of globalization, but also about what's believed to be an unjust rise in the incomes of the rich as a result. Add nervousness over rising inflation and a slowing growth from a U.S. downturn, and the result is a brew of political discontent.

If Germany is the epicenter, the backlash isn't confined to it. In France, the Société Générale banking scandal has upped the level of unease with financial capitalism. Jérôme Kerviel, the rogue derivatives trader who cost SocGen €4.9 billion in January, was widely viewed not as a criminal, but as a victim or at least a cog in the wheel of l'hypercapitalisme that most French abhor. In Britain, years of simmering anger over what a recent study found to be the highest income gap since the 1940s, along with the increasingly conspicuous consumption among super-wealthy expatriates in and around an ever-more-expensive London, are now erupting out loud. The Treasury has launched a crowd-pleasing crackdown on "nondomestics"—about 120,000 foreign entrepreneurs and investors who live in Britain but are exempt from paying taxes on their earnings abroad. Fears of an exodus of wealthy residents—who have pumped their money into the City's economy—are most likely exaggerated. The story may be different, however, if the crackdown signals a larger shift away from the era of economic laissez-faire bracketed by Margaret Thatcher and Tony Blair. The swing in the mood has reached bookstores, where a new anti-rich screed by BBC economics correspondent Robert Peston, "Who Runs Britain? How the Super-Rich Are Changing Our Lives," is climbing up the best-seller list.

So far, it is in Germany where anti-capitalism has gained the most momentum as a political idea. Liechtenstein tax dodging is only the latest nail in the coffin of German economic reform. "The tax affair reinforces most Germans' very deep belief that the rich are rich only because they take away from the poor," says Thomas Petersen, a political analyst at the Allenbach polling institute. Any scandal these days is fodder for the left-leaping Zeitgeist, even if the facts are more subtle and complex. The subprime mess? An excess of casino capitalism, to be sure, but Germany's worst-hit banks by far happen to be in the dysfunctional, state-owned sector. The €1 billion Siemens bribery scandal is less a case of an out-of-control corporate elite than a company culture shaped by decades of government contracts, state-enforced monopolies and political favors. Even Germany's new poster child of hypercapitalist tax evasion, Deutsche Post's Zumwinkel, reflects a cozy mix of business and government (the head of the state-controlled company resigned last week).

That all this gets drowned out by the roar shows how powerful resentment against wealth and capitalism have become. In a regional election the Sunday before last, Hamburg became the third state in as many weeks where a conservative governor lost his majority, with a surge in votes for the radical, ex-communist Linkspartei—even though Hamburg is booming, crime is down and the governor himself is hugely popular. Also last week, Social Democrats chairman Kurt Beck officially revoked his party's previous rejection of alliances with the Linkspartei, whose platform calls for a 65 percent tax rate for the rich and a law to limit corporate salaries. The new model will be tested next week, when it's likely that the prosperous west German state of Hesse will become the first state run by an informal SPD-Linkspartei coalition; most analysts say it's only a matter of time before that could happen on a national level.

Experts are beginning to worry about growing pressure for ill-conceived regulation, such as government micromanagement of the ratings agencies, or new political protections for teetering banks like Germany's Landesbanken. Burda says that German companies can expect new minimum wages and more-aggressive demands from unions. Prodded by the Linkspartei and other politicians, the country's most powerful labor union, Verdi, last month asked for an 8 percent raise for public employees, turning away from the wage restraint that had been the hallmark of the recent German economic resurgence. Verdi is also campaigning for an 80 percent tax on corporate executives, up from today's top rate of 47 percent.

Such policies resonate strongly with equality-conscious Germans, even as their economy has been growing and creating jobs at the highest pace in more than a decade. The recent financial crisis and global slowdown, however, is a reminder not to take this economic success for granted. Even as he railed against the tax dodgers, socialist Finance Minister Steinbrück recently warned that "we cannot afford to provoke protectionist, anti-reform, and statist reflexes." If the new mood grows into a bigger anti-capitalist movement, it would threaten the very policies and reforms that have allowed Europe to prosper in the first place.