An environmentally friendly packaging law has left German consumers with an almighty hangover, writes Derek Scally in Berlin.

Christmas came early in Germany last year. A week before the big day Aldi and Lidl, the discount supermarket chains, sold off their stock of beer for as little as 5 cent a can. They were anxious to empty their shelves before a law came into effect in the new year that put a deposit on cans and obliged retailers who sold them to take the empties back. "Germany foams over with joy!" is how one newspaper announced the bargain. But the mood has darkened, and now the humble drinks can is on the verge of extinction.

An almighty row has blown up between retailers, the drinks industry and the government, with the German consumer stuck in the middle and the European Commission in Brussels foaming at the mouth in the wings.

The new deposit sounded like a good idea when it was announced: since January 1st, retailers have had to charge a deposit of between 25 and 50 cent on cans and plastic bottles for beer, mineral water and soft drinks. Despite the hassle, Germans are an environmentally conscious lot and were happy to accept the deposit and return their cans and plastic bottles, just as they have returned or recycled glass bottles for more than a decade.

But what seemed simple enough resulted in chaos: retailers began distributing extra receipts with cans and bottles and customers could reclaim their deposits only from the same stores where they bought their drink. That annoyed everyone, particularly people travelling cross-country: someone who bought a can in Munich before boarding a flight to Berlin, for example, had no chance to reclaim the deposit.

By October German retailers will have pocketed an estimated €400 million in unclaimed deposits. Despite the windfall, they say they have no money to invest in the €30,000 machines needed to process the cans and bottles in supermarkets. Aldi, Lidl and other German retailers are a tough bunch and have stood firm despite angry customers and an infuriated government, which accused them of trying to create public opposition to the law.

To be honest, the law is doing a good job of that by itself. A can or bottle of Bacardi and cola has a deposit but a can or bottle of whiskey and cola doesn't, because it is more than 15 per cent proof. Cans of carbonated drinks such as cola have a deposit, but containers of still drinks such as iced tea do not. Containers for dairy products have a deposit only when they contain less than 50 per cent milk. The deposit law is enough to drive you to drink.

The legislation, in the pipeline for more than a decade, has just been disowned by the woman who drafted it, Dr Angela Merkel, then environment minister under Chancellor Helmut Kohl and now leader of the opposition Christian Democratic Union. She dismissed the deposit law as "boundless stupidity".

Rather than try to understand the maze of rules and drinks definitions, people have stopped buying altogether. Brewers, bottlers, petrol stations and supermarkets have seen sales plunge by up to 80 per cent. The Holsten brewery in Hamburg has seen a 70 per cent drop in sales, or more than 300 million cans. The company has let go 150 workers and the situation is the same with the competition. "Take it from me, in Germany at least, the can is dead," says Andreas Rost of Holsten. Retail traders have warned that the law could see well-known foreign-produced drinks vanishing from German shelves.

The spectre of unfair competition in the largest market in Europe aroused the interest of the European Commission. The commission's president, Romano Prodi, wrote to Chancellor Gerhard Schröder demanding that Berlin introduce a can collection system or face legal proceedings for breaching EU laws.

Jürgen Trittin, the go-ahead environment minister, is determined to stand by the new law. To calm consumers he has promised simplified regulations from next month. But it might be too late for the can: most German supermarket chains have already removed cans from their inventories rather than have to take back smelly empties.

Trittin, a member of the Green Party, sees this as a victory in his strategy to reduce the number of unrecyclable drink containers in circulation in Germany. He will face a final showdown ahead of an October 1st deadline for retailers to introduce a unified returns system. One thing is for sure in this battle, though: nobody in Germany wants to be the one left carrying the can.