FRANKFURT (Reuters) -- Allegations of bribery and fraud at carmaker Volkswagen threatened on Tuesday to unsettle Germany's tradition of fraternal labor-management relations by casting a harsh light on the system's flagship firm.
What began last week as accusations that a divisional personnel manager sought kickbacks from suppliers has widened and brought into question whether there have been inappropriate ties between VW management and labor representatives.
With a German general election expected in September, the case has also assumed political overtones as charges fly between the conservative government of VW's home state of Lower Saxony -- also VW's main shareholder -- and labor leaders.
State premier Christian Wulff, who first crossed swords with VW earlier this year by demanding disclosure of remuneration to politicians employed by Volkswagen, has insisted on a full investigation even if it leads to the departure of senior executives, including group personnel chief Peter Hartz.
"If Mr. Wulff has information that justifies an attack on a member of the company's management board, then it is his duty to lay this on the table at an extraordinary supervisory board meeting," countered Juergen Peters, head of the powerful IG Metall metalworkers' union and VW's deputy chairman.
Otherwise, he added, it seemed Wulff wanted not just to clear up the suspicions but also to challenge the so-called co-determination model of labor relations that has given workers a powerful say in post-war German companies.
SCHROEDER DECLINES TO GET INVOLVED
Volkswagen marks the nexus of German business, politics and social trends and remains a corporate symbol of the country's rise as an industrial power and export juggernaut. Its labor agreements set the tone for the entire engineering sector.
It is trying to slim down the generous pay and benefits that make it an attractive employer, but with costs that are 40 percent higher than rivals', according to star manager Wolfgang Bernhard, brought in this year to whip the VW brand into shape.
German Chancellor Gerhard Schroeder, a former VW board member from his days as Lower Saxony's Social Democratic premier, refused to get involved while the VW probe continued.
Asked at a Berlin news conference whether the co-determination system had been discredited by events at Volkswagen, he said simply: "No."
But he defended Hartz, a central figure in drafting proposed reforms to shake up Germany's rigid labor market as a way to overcome stagnation and fuel growth in Europe's biggest economy.
Many business leaders complain that co-determination slows decision making and makes it hard to ensure confidentiality.
But there is little political pressure for scrapping the system, which the main parties see as a central element of Germany's social welfare-oriented market economy.
The ruling Social Democrats have strongly resisted any suggestion of change, and even the center-right Christian Democrats, who want to open up the collective wage bargaining system, see it as a guarantor of stable labor relations.
"If it has come to lapses in isolated cases -- whether at VW or elsewhere -- then this must be cleared up and put to a stop," Erich Klemm, the works council head and vice chairman at rival carmaker DaimlerChrysler, told Reuters.
"But in no event can the successful model of German co-determination be called into question. Anyone who wants to use such isolated cases to have his own way in future against workers' interests is jeopardizing social peace at companies."
Volkswagen has declined to comment on details of the investigation, which centres on whether two former staff members sought kickbacks for work in India and Angola and set up a network of front companies to get supply contracts.
It has said Hartz would remain at his post.
VW works council chief Klaus Volkert resigned abruptly last week, denying any wrongdoing but acknowledging that he expected a public debate over "apparent irregularities" in the case.
His deputy, Bernd Osterloh, is set to be confirmed as Volkert's replacement this week.
In a letter to VW workers last week, he backed a complete and thorough investigation and appealed for unity at a time of intense strains in labor relations.
He laid this at the door of those who would weaken the labour movement, "because the strength of the works council and IG Metall has long been a thorn in their side".
Germany's Sueddeutsche Zeitung cited company insiders as saying VW for years offered improper inducements to labor representatives in return for their support on key issues.