The fact that Europe's biggest car maker Volkswagen is a famed practitioner of the Mitbestimmung system of co-operation between managers and workers, a high percentage of its workers are unionised, Germany's chancellor, Gerhard Schröder, is a former member of its supervisory board and the government of the state of Lower Saxony is its biggest shareholder, making it the most politically sensitive of the country's corporations, has led to the excitement currently gripping Germany over an unfolding bribery scandal at VW, according to The Economist.

The magazine said many of the details are still uncertain, but the allegations of fraud and improper deals between representatives of management and workers to secure union support for cost-cutting and other unpopular measures seem grave enough for many Germans to lose any remaining faith in co-determination - already badly shaken by the country's economic woes.

The Economist said that, last week, the Brunswick state prosecutor announced an investigation into whether Helmuth Schuster, an ex-head of personnel at VW's Skoda unit who unexpectedly quit last month, and another unnamed employee, were involved in fraud. Schuster reportedly was an adviser to Peter Hartz, VW's personnel chief, and a business partner of Klaus Volkert, VW's powerful works council chief.

Late last week, Volkert quit amid allegations of wrongdoing connected to Schuster and VW called in KPMG to look afresh at its books, the report said.

According to the Economist, The story then took a political turn. On July 5th, Schröder defended Hartz by praising the reform of Germany's labour-market laws that bears his name. On the same day, Hartz and VW's works council denied newspaper reports that VW managers had bought off senior union leaders, for instance with trips to Brazil.

The Economist said that, under German law, workers can form a works council that has a role in management decision-making. Worker and union representatives are entitled to half of the seats on the supervisory board - which oversees the management board - in corporations with over 2,000 employees and to one-third of supervisory board seats in firms with 500-2,000 workers.

The magazine noted that critics argue that this co-determination discourages management from taking tough measures that might annoy the board's labour representatives, slows decision-making, tends to deter foreign investors and it may also tempt managers to buy labour's support. "The more influential the works council, the stronger the temptation to make some arrangement with labour," Peter von Blomberg of Transparency International, an anti-corruption group, told the Economist.

However, the magazine added, some executives, including DaimlerChrysler head Jürgen Schrempp, like the system. Workers accept tough measures more readily if they are part of the decision-making, they reportedly say.

The Economist said the German government is now forming a committee to examine reform of co-determination while, last year, the Confederation of German Employers demanded change.

Martin Höpner, of the Max Planck Institute for the Study of Societies in Cologne, told the Economist that, although it was expected to call for the end of co-determination, in the end its main demands were for smaller supervisory boards and for firms of all sizes to be able to decide on the number of their board seats allocated to unions.

According to the Economist, the scandal may have a silver lining for VW. Bernd Pischetsrieder, the chief executive, and his ally, Wolfgang Bernhard, are trying to make the firm more "Anglo-Saxon", with more focus on performance. Thanks to labour's power within the firm, VW workers earn about 20% more than the average salary of workers in German car firms.

Bernhard, who recently joined VW from DaimlerChrysler, reportedly is putting the finishing touches on another round of cost-cutting.

Adam Jonas, an analyst at Morgan Stanley, told the Economist the alleged scandal may be just what the management needs to be able to push through the changes it wants.

"How convenient", the Economist commented.