Behind 500-year-old walls of the former stables in Nuremberg’s imperial castle, Sigrid Natterer oversees the polished wood and sparkling designer lamps as the elite of the German Youth Hostel Association, or DJH, gather to celebrate the association, and this impressive new renovation.
“It is a great feeling to lead the most modern youth hostel in Europe,” Ms. Natterer said at the castle’s opening night.
As head of the hostel, Ms. Natterer has overseen the €20 million ($25 million) renovation. It has been subsidized by the city of Nuremberg (€5 million), the state of Bavaria (€4 million) and the federal government (€1 million). The country also was generous with the rent: less than €10,000 per month.
Just a few meters away from this fantastic castle stands the A&O hostel, housed in a former 1950s-era office building at Nuremberg’s main train station, and boasting few glamorous touches. Oliver Winter, the A&O hostel’s managing director, is leading the battle that has broken out in the the low-cost bed business.
He wants an end to the many tax privileges that the DJH has enjoyed. He insists on fair competition in the hostel business, where an overnight stay can be had for €9. Now, E.U. competition authorities want to investigate Mr. Winter’s main contention, namely that state subsidies for German youth hostels are illegal.
A German institution is at stake. The DJH, which has represented youth hostels throughout the country for years, argues that private, low-cost competitors want to thwart the association’s nonprofit status for their own advantage. Mr. Winter says that the youth hostels have long since abandoned their nonprofit missions and have become luxury hotels pampered by the state.
“The German government is acting against state aid rules. It is granting subsidies to one single big player in the market.”
The battle began 14 years ago with a chocolate bar. “The question is this: Why should I pay the whole value added tax, when I sell a Snickers – and the youth hostels pay nothing?” Mr. Winter said.
In 2000, he was a newcomer to the hostel business. Mr. Winter’s enterprise quickly flourished. He soon wanted to expand and advertised for his “youth hostel.” The DJH believed he was abusing the trademark and warned him to stop. The hostel manager from Berlin defended himself, filed against the registered trademark and won. He has been after the association ever since.
“The German government is acting against state aid rules. It is granting subsidies to one single big player in the market – and unnecessarily,” he said.
The youth hostels have distinct advantages. During class trips, guests under the age of 27 do not have to pay value added or commercial taxes. The federal government supplies direct contributions, and the states offer subsidies. Bavaria supported its youth hostels last year to the tune of about €1.5 million. Youth hostels get preferential leases and pay lower rents for public buildings. State money is available for renovations. Regional banks offer interest-free or reduced-rate loans.
The reason for these priviledges is the youth hostels nonprofit status. They are in a stronger legal situation and have been functioning like this for 105 years. However, the youth-hostel world has changed.
The DJH estimated that 4.7 million student overnight stays occurred in 2002. The total dropped to 4 million by 2012. Class trips made up only 40 percent of the total stays at the association’s 513 hostels. Families (1.9 million overnights), other leisure groups (1.8 million) and conference guests (1.3 million) accounted for the rest.
In response, the DJH has begun to change its hostels. For example, in Neuharlingersiel, a town bordering the North Sea, the first “club-youth hostel” in the world has been established, to attract the fitness crowd. The place offers wellness activities, sports and “culinary delights,” the hostel says. The “Alpine lodge” south of Munich offers something similar. In Schillinghoern to the east of Neuharlingersiel, the first “team-youth hostel” in the country serves international clients with staff from 18 countries. In Augustusburg, a town in the eastern state of Saxony, the first wedding suite has been created.
All that is great and welcome news for the overnight guests. But does it necessitate special subsidies from the state?
It is certainly not possible to find such accommodation in the same price category from private competitors. In Nuremberg, Mr. Winter builds blue-steel rod bunk beds himself. He buys inexpensive furnishings. “That saves on costs,” he said.
In 2006, a Federal Ministry of Finance advisory board cast doubt on tax privileges for so-called nonprofit organizations such as youth hostels. In a report, researchers came to the conclusion that although established law might be in step with economic rationales, the law “grants tax privileges that are too generous.”
Mr. Winter has complained to Brussels, too. The European Commission’s office for competition will investigate the case starting this Monday in a private hearing. The subject: “Supposed state subsidies to the advantage of the DJH.” Representatives of the Federal Ministry of Economy, Family and Youth have been invited.
“There is huge legal complexity. It is not easy to decide. I cannot say at all what will come out of this,” said Eckhart-Georg Miehle, Mr. Winter’s lawyer. The E.U. competition authorities refused to comment.
Massimo Bognanni joined Handelsblatt’s investigative team at the beginning of this year, Simon Book joined Handelsblatt’s reports team in may 2013. To reach the authors: firstname.lastname@example.org or email@example.com