Mittelstand businesses fret as germany shifts left

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* Business laments demise of free-market FDP* Leftist parties have narrow majority in new parliament* Mittelstand worries centre on tax hikes, minimum wageBy Sarah Marsh and Michelle MartinBERLIN, Sept 26 The shock ejection of the Free Democrats (FDP) from parliament in a German election on Sunday has been greeted with a fair amount of "Schadenfreude" in Berlin political circles. But there is one group that is not celebrating - the small and medium-sized businesses, known as the Mittelstand, that form the backbone of the German economy and employ two of every three workers in the country. They fear tax hikes, wage increases and more red tape from a new German government that is expected to include either the centre-left Social Democrats or environmentalist Greens. The expulsion of the business-friendly FDP has left the Mittelstand without a champion in the Bundestag to lobby against such policies for the first time in the post-war era. Chancellor Angela Merkel's Christian Democrats (CDU) have long been seen as a defender of the Mittelstand, but she has pulled her party to the left in recent years, often angering the business wing of her party. Apart from Merkel's CDU and its Bavarian sister party, the new German parliament will be composed exclusively of left-of-centre parties, which pushed for higher taxes, a nationwide minimum wage and tighter regulation during the campaign.

The radical "Linke", or Left party, which includes former communists from East Germany, may end up as the biggest opposition force, a position that by tradition would allow them to run the influential budget committee"The FDP was the one party that fought vehemently against tax hikes and it has now exited parliament," said Hermann Sturm, president of the UMU Mittelstand association. "The last (free market) corrective has disappeared."The prospect of income tax hikes is particularly worrying for Mittelstand firms, many of which are family-owned, with blurred lines between personal and company assets. They say such hikes could erode liquidity and reserves, forcing investment cuts. Both the SPD and Greens proposed raising the top income tax rate to 49 percent from 42 percent, and introducing a separate wealth tax, during the campaign. On Wednesday, senior figures in Merkel's party signalled they were open to tax increases as part of a coalition deal, even though they ruled them out during the election campaign.

WILL FIRMS CUT JOBS? "As an entrepreneur you start considering whether you can still afford jobs, and what you can still do on investment if taxes rise," said Lencke Wischhusen, manager of a family-owned packaging firm and head of a young entrepreneurs association. Some economists believe the worries are overdone. Carsten Brzeski at ING, for example, says a grand coalition could lead to a rise in investment, for example in decaying public infrastructure, which would benefit the Mittelstand.

A survey by the German chambers of commerce and industry this week showed three times as many firms see a need for urgent action to improve transport infrastructure than did so in 2009. Some observers argue that a grand coalition, with a big majority in parliament, could push through economic policy changes far more easily than the outgoing government with the FDP, which has been criticised for its lack of reforms. It might also be in a better position to lower energy costs, another key concern of business. Battles between the CDU and FDP in the outgoing government led to inertia on the energy front. But business counters that the risks of a grand coalition outweigh the benefits. A survey published by the BVMW Mittelstand association before the election found that 57 percent of firms favoured a continuation of Merkel's coalition with the FDP, against just 17 percent who preferred a partnership with the SPD. Among the top concerns is a minimum wage. During the campaign, the SPD and Greens both promised to introduce a nationwide minimum wage of 8.5 euros. And this is expected to be a key demand in any coalition talks with Merkel's conservatives, who may try to water it down but are unlikely to block it completely."We are very worried that if it comes to a grand coalition, the conservatives will give in to the SPD's demand for a unified minimum wage," said BVMW head Mario Ohoven. "That would massively damage the competitiveness of our economy."