A serious split emerged on Tuesday in Germany's governing Social Democratic party just six weeks before it faces tough general elections, with public differences between Chancellor Gerhard Schröder and Hans Eichel, (pictured) his finance minister.
The divisions over a plan to grant tax evaders an amnesty if they pay up and use the extra revenue to finance new jobs, reflect growing strains in the SPD. The party is trailing its rightwing challengers in the opinion polls, and Mr Eichel's aides fear an attempt to make him a scapegoat in the event of a defeat.
The rift was exposed as the influential ZEW index of expectations among analysts and institutional investors fell much more sharply than forecast, its biggest drop in two years.
The 25.7 point plunge in the August index to 43.4 pointed to low expectations for economic recovery and added to the government's problems in fending off opposition attacks that it had failed to boost growth.
Confidence in the government's record is likely to be weakened further by the dispute over the tax amnesty. Irrespective of whether such a plan is implemented, the public airing of differences has drawn attention to a controversial election issue. The amnesty proposal has been favoured by the opposition Christian Democrats and the Free Democrats (FDP), but until recently rejected outright by the SPD.
Mr Eichel on Tuesday dismissed an amnesty, just days after the idea was floated by the chancellor as a way of financing new jobs in the economically depressed east.
"It's better to have people working in Leipzig than money sitting in Liechtenstein. That's the principle," said Mr Schröder on Monday. But Mr Eichel said the proposal, contained in the draft conclusions of the Hartz commission on labour reform to be presented on Friday, had now been dropped.
The finance minister, strongly opposed to an amnesty on ideological and practical grounds, was taken by surprise when Mr Schröder drew attention to the idea in a magazine interview on Monday. Mr Eichel has argued that an amnesty is morally questionable and raised doubts about its effectiveness elsewhere.
A recent Italian amnesty has prompted the return of about 11 per cent of funds spirited abroad, according to official statements. However, German government sources say the real figure may be about 4 per cent.
"I won't stand for the idea that people who have not paid their taxes should get special treatment and not pay as much as honest taxpayers," Mr Eichel said yesterday.
The idea of encouraging Germans to repatriate funds, held predominantly in Luxembourg, Switzerland and Austria, has been most strongly backed by the liberal FDP, widely expected to be the junior coalition partner in the next government.
Opposition politicians have argued that even achieving the return of a fraction of the €100bn-€150bn ($97bn-$146bn) estimated to have been spirited abroad would stimulate domestic investment and generate tax revenue.
Such extra receipts would be particularly welcome when tax revenues have been running below expectations because of the weak economy. They could also prove important in helping Germany overcome difficulties meeting its budgetary commitments under the European Union's stability and growth pact.