Investors Shudder at German Chancellor's Interventionist Moves

Do Schroeder's actions on Vodafone AirTouch and Holzmann suggest a parting from the moderate center?
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BERLIN -- German Chancellor

Gerhard Schroeder's

apparent newfound proclivity for state intervention has given the markets plenty to fret over recently.

His public opposition to British wireless firm

Vodafone AirTouch's

(VOD) - Get Report

hostile bid for German rival

Mannesmann

(MNNSY)

worried many that Europe's largest economy was tilting toward protectionism. And his decision to bail out construction giant

Holzmann

with public funds is seen as having contributed to the euro's slide below parity with the U.S. dollar last week.

Now, with Schroeder's center-left

Social Democrats

meeting in Berlin for a two-day party congress, traders and investors are trying to decipher if the leader has truly parted ways with the moderate center that elected him, or whether his recent actions are political theater aimed at bolstering support of his party's left. His ploy appears to have worked: He was re-elected chairman by a wider margin than last spring.

Opposing Vodafone and bailing out Holzmann certainly sent a shudder through most ardent free-marketeers, but the chancellor's moves less likely represent a return to old-school leftism, but rather suggest a shrewd demonstration of political savvy. Rather than representing a reversion to interventionist habits, the moves underscore a German cultural preference for consensual governance.

In his keynote address to the party congress, Schroeder defended his intervention on Holzmann. But he also asserted that the market should first be allowed to resolve such matters if it can. "Intervention should not become doctrine," he said.

Of course, were Schroeder to continue to appease left-wingers with a decidedly consequences-be-damned approach, business sentiment and the investment climate in Germany could be detrimentally affected. The more likely scenario, however, is to see Schroeder swing back to the political middle after key regional elections in SPD-held states next spring.

Many observers would agree that, even with Schroeder's latest left-leaning dalliances, his administration remains decidedly more business friendly than a few months back when unrepentant socialist

Oskar Lafontaine

headed up the finance ministry. Even as Schroeder was addressing the party faithful on Tuesday, there were rumblings from government quarters that proposed income tax cuts might possibly be implemented sooner than earlier suggested and corporate tax cuts could be larger than had been previously planned.

"Look at the direction of macro policy ever since the departure of Lafontaine, and it's all stuff you can live with," says Josh May, managing director for Europe at

Medley Global Advisors

in New York. "It may not be textbook

Adam Smith

, but find me a country where it is."

The stock market certainly hasn't appeared to mind, with investors driving the

Dax

in Frankfurt to new highs in recent days. Indeed, the weak euro Schroeder is partly blamed for creating should increase foreign demand for German assets as they become cheaper for those with strong dollars and yen to invest.

Looking further afield, an occasional swing to the left is a pattern not likely to change for quite some time, especially in a country that has a major political party, the

PDS

, which descends from the former East German Communists. In recent regional elections, the hard left has been all too happy to present itself as a true socialist alternative to Schroeder's ailing SPD. That means as long as the PDS continues to gain credibility by harping on favorite leftist chestnuts, Schroeder or anybody else heading the SPD will at the very least have to pay lip service to them as well.