ANALYSIS-Germany seen keeping tax pressure on Switzerland

BERLIN/ZURICH, Sept 21 - Germany is likely to keep pressuring Switzerland over tax evasion after Sunday's federal election, but it may pursue the matter less aggressively if Chancellor Angela Merkel can form a centre-right government.

Germany has repeatedly accused its Alpine neighbour of helping Germans cheat on tax, with the strongest attacks coming from Merkel's coalition partners and rivals, the centre-left Social Democrats (SPD), who control the Finance Ministry.

SPD Finance Minister Peer Steinbruck was likened to a Nazi by one Swiss parliamentarian after he called for a "carrot and stick" approach with tax havens like Switzerland and likened Swiss politicians to "Indians" running scared from the cavalry.

Despite Steinbruck's popular rhetoric against tax havens, the SPD has been trailing Merkel's conservatives by at least 10 points in most recent polls, raising the prospect she may succeed in forming a coalition with the market liberal Free Democrats (FDP).

Gerd Langguth, a political scientist from the University of Bonn and a biographer of Merkel, said she was unlikely to change tack on tax havens irrespective of her coalition partner.

"Even with the FDP I think they'll pursue the same policy, albeit perhaps less theatrically. I think Merkel appreciates that if she didn't, her popularity would very soon suffer."

"Apart from that, as far as I can tell, this subject has been dealt with to a large degree: the Swiss have made concessions, the Austrians have made concessions, and Liechtenstein and Luxembourg have too," he added.

Liechtenstein's biggest bank, LGT, became the target of a German probe after Berlin paid a former employee to access client names. Former Deutsche Post chief Klaus Zumwinkel, whose Liechtenstein trust was uncovered in the process, admitted tax dodging in a highly-publicised court case.

But a new coalition may take a more diplomatic approach to addressing tax issues than the one taken by Steinbrueck, a senior Swiss private banker who declined to be named said.

The FDP, which aims to lower taxes if elected, has lambasted Steinbrueck for his clashes with Switzerland, and argues that Germany's complex tax laws are partly to blame for tax evasion.

PROGRESS MADE

Under pressure from the Group of 20 nations, Switzerland promised in March to relax bank secrecy and to embrace the Organisation for Economic Cooperation and Development's (OECD) tax standards. It has started negotiations to sign new tax treaties with more than a dozen countries, including Germany.

Swiss President Hans-Rudolf Merz told a bankers' conference on Sept. 17 he was hoping Switzerland would be removed from a OECD list of tax havens by the end of this year, and possibly even by the end of this month thanks to its efforts.

His optimism was shared by Switzerland's powerful banking lobby, the Swiss Bankers' Association (SBA).

"At this point in time, Switzerland has already committed to embracing OECD standards," said SBA's Chief Executive Urs Roth.

"There is not much reason to believe Germany should continue to apply pressure against Switzerland."

But political analysts said Germany would be wary of dropping its fight against tax cheats due to popular indignation over the issue and the country's spiralling budget deficit.

Gero Neugebauer, a political scientist at Berlin's Free University, said while the FDP had criticised Steinbrueck's confrontational approach towards Switzerland, the party had not come out against the basic thrust of his argument.

"Come 2010, whoever's in government will have no choice but to pursue the same policy on tax havens given the size of the budget deficit. Once you've started build a consensus within Europe you can't just make an about turn," he said.

Those hoping for an easier ride needed to wake up, he added.

"They shouldn't deceive themselves, things have been set in motion that can't be reversed," Neugebauer said. "The public is now of the view that Steinbrueck is in the right here."

To be seen as soft on tax havens would play into the hands of those who say Merkel's Christian Democrats and the FDP are too closely aligned with the interests of the rich, he added.

"In terms of pressure, the discussion is not over yet," Alexandre Zeller, Chief Executive of HSBC Private Bank (Suisse).

"We have to remain extremely vigilant and we will have to maintain a dialogue with countries that want to discuss these issues with us."