The German Mess
September 19, 2005; Page A16
A week after Japanese voters dared to take a bet on economic reform, Germans went to the polls yesterday and failed even to elect a government. Now only one thing is clear: Germany faces weeks in limbo just when it badly needs strong political leadership to fix the world's third-biggest, but gravely ailing, economy.
The election results show a Germany almost evenly split on the central issue of the campaign: how to best deal with the country's most pressing economic problems. Chancellor Gerhard Schröder's Red-Green coalition was denied an outright third term, while the favorite, a conservative-liberal block led by Angela Merkel, fell well short of a majority needed to govern on its own.
No one questions the diagnosis of Germany's ill health. For more than a decade, Germany has suffered from low growth, high unemployment and a welfare system sinking deeper into debt. Rarely before had the two largest political parties presented such clearly differing cures for Germany's ills.
Ms. Merkel, a physicist raised behind the old Iron Curtain in East Germany, ran as a market reformer in the tradition of Margaret Thatcher and Ronald Reagan who wanted to revive friendly ties with America. Her speeches emphasized individual responsibility, economic freedom and a slimmer state. She called for looser labor laws, the weakening of the unions' grip on the economy and far-reaching deregulation. She appointed a flat-tax proponent, Paul Kirchhof, as shadow finance minister.
Mr. Schröder called snap elections in May claiming his Social Democratic Party no longer stood behind his "reform" policy. Certainly many Social Democrats resented his move to cut unemployment benefits and raise the pressure on the jobless to take up work. It was a major reform for Germany but still a half-measure. Without an accompanying liberalization of the labor market, the Schröder reforms couldn't stop the jobless rate from rising -- to 11.4% today. (The U.S. rate is 4.9%.) Only weeks before yesterday's elections the Social Democrats looked like goners in the opinion polls.
But no one ever accused Mr. Schröder of being an untalented politician. In the space of a few weeks, he clawed his way back in part using foreign policy, portraying himself as a great statesman who made Germany a "peace power" in opposing the Iraq war. He also regained momentum by arguing that only the Social Democrats could save Germany's "social market economy" and attacked the Merkel-Kirchhof tax ideas as threatening "social justice."
Germany is now entering what could be an extended period of political confusion. Arithmetically, a number of constellations could produce a majority. Even a radical-left government led by former Finance Minister Oskar Lafontaine is not entirely out of the question.
Most likely, however, is a grand coalition between Mr. Schröder's Social Democrats and Ms. Merkel's Christian Democrats. In this scenario, Ms. Merkel, the leader of the stronger party (if the current results hold), would become Chancellor. Mr. Schröder said last night that he expects to keep his job, setting the stage for an interesting confrontation or perhaps new elections.
A grand coalition worries the markets and Germany's business community. It would be a lowest common denominator government -- and with the Social Democrats turning hard left in the campaign it is hard to imagine this government getting anything done. The economic programs of the two parties are entirely incompatible, and neither party would really be committed to the success of such a coalition. Seeing it only as a stop gap, both sides would try to position themselves for the next elections or a different coalition.
Many Germans tell pollsters that they want a grand coalition -- a preference that reflects a deeply rooted desire for so-called harmony. With aversion to serious change so strong, no wonder the country isn't growing.
If this sounds familiar, consider that Japan, the economic giant of the 1980s, had been talking about reform for years before finally handing a clear mandate to Prime Minister Junichiro Koizumi in last week's elections. But if Japan may finally be pulling out of its economic crisis, Germany appears on its way to replacing that Asian country as the sick man of the global economy. Germans woke up today realizing that yesterday's vote only increased their current political and economic malaise.
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JOHN FUND ON THE TRAIL
Der Stillstand
German voters get a chance for reform but choose gridlock instead.
Monday, September 19, 2005 12:01 a.m.
BERLIN--It was a bad omen when Angela Merkel, the candidate of the conservative Christian Democratic Union chose the Rolling Stones' "Angie" as her campaign theme song. It is actually a sad song about a breakup. "All the dreams we held so close seemed to all go up in smoke" goes one line--and that's pretty much what happened to the CDU in yesterday's elections, as Social Democrat Gerhard Schroeder, who has served as Germany's Bill Clinton-like Chancellor for the last seven years, staged a remarkable comeback.
The muddled result, with neither major party able to form a stable parliamentary majority, means that Germany will not be taking decisive action anytime soon to reform its unwieldy welfare state, which has helped bring it 11% unemployment and zero economic growth That will not be good for the world. ,Germany, the third-largest economy in the world, represents 30% of the output of the European Union. The "sick man of Europe" is likely to remain bedridden for a while longer
Most voters and nearly all of the business community wanted a decisive result. Instead the peculiarities of Germany's parliamentary system delivered a complete mess with the most likely government an unwieldy "grand coalition" of the conservative Christian Democrats and the left-wing Social Democrats. Yoking two such bitter rivals together will likely lead to gridlock, confrontation and ultimately new elections within two years. "If you mix cold water and hot water you get lukewarm water no one really likes," says Wilfried Prewo, the head of the chamber of commerce in Hannover.
The results mean that in retrospect Germany might have passed a tipping point about the time the country unified with its lost eastern states in 1990 after the collapse of communism. One out of five people in the new Germany now lives in the east, a region that massive subsidies and government intervention have failed to revive. The angry and frustrated voters there make different political choices than their western counterparts.
The Left Party, an amalgam of former East German Communists and erstwhile Social Democrats disaffected by Mr. Schroeder's tentative reforms of the welfare state, won over a quarter of the vote in eastern Germany. But neither major party is willing to go into coalition with them. So the nationwide showing of 8.5% by the Left Party has created the gridlock that leaves neither party able to form a coherent parliamentary majority to pursue its program. Without the votes cast in eastern Germany, the conservative coalition of the CDU and the pro-market Free Democrats would have won a clear majority.
The Christian Democrats thought they might appeal to easterners by putting forward Angela Merkel, a former physicist who grew up in East Germany and then became the rare outsider to climb to the top of national politics when much of the rest of her party's leadership was discredited in a campaign finance scandal in the late 1990s. But it turned out that many easterners viewed "Angie" not as the hometown girl made good but as a traitor for wanting to free up the country's barriers to laying off workers and also offering incentives to long-term unemployed workers who take low-paying jobs.
Wolf Donath, a retired teacher who had taught Ms. Merkel math and Russian as a child, was proud of her accomplishments but bluntly told reporters he would not vote for her. But Ms. Merkel also had trouble convincing reform-minded voters that she was offering the right medicine. Because she lacks a real power base within the CDU, she had to make compromises with the powerful leaders of states like Bavaria, Hesse and Lower Saxony, who were suspicious of her calls for more-dramatic reforms. The final election program of the CDU was a tepid affair that proposed to cut the top rate of German income tax to 39% from 42%. But what really got negative publicity was the CDU's decision to more than balance that with an increase in the nationwide value-added tax to 18% from 16%. In other words, Ms. Merkel was forced to go into an election campaign promising an overall increase in taxes.
"Merkel wanted to make sure the tax hike was balanced out by tax reductions, but the CDU barons wanted a cut of the new revenue and forced her into a tax increase," Marcus Pindur, a correspondent with German Public Radio, told me. The new tax increase became an albatross. "It is not a good idea to propose a new government for a faltering economy and have its first act to be a tax increase," says Martin Biesel , chief of staff to Guido Westervelle, head of the pro-market Free Democrats.
Confusion about whether or not Ms Merkel was proposing a flat tax for Germany also did not help. Two weeks ago, Mr. Schroeder sprang his trap. In the only live televised debate between the two candidates, he accused her of having a hidden agenda to scrap the country's progressive income-tax system in favor of the kind of flat tax that many Eastern European countries, such as Slovakia and Russia, have successfully adopted. A flat tax was not part of the CDU's platform, but Mr. Schroeder noted that the party's shadow finance minister, Paul Kirchhof, was a proponent of a 25% flat tax "A nurse would pay more than a millionaire," Schroeder growled, ignoring the fact that Mr. Kirchhoff envisioned generous exemptions that would mean a family of four would pay tax only on its portion of income that was over $42,000 a year.
The flat tax proved to be a distraction in the campaign as the Social Democrats launched a withering attack on Mr. Kirchhoff--constantly referred to as "the professor from Heidelberg"--that often made it seem as if he and not Ms. Merkel were the CDU candidate for chancellor. "The result was not pretty," says Henning Krumrez, an editor with Focus magazine. "Merkel could not defend the flat tax because it was not part of her program, but she was tied to it through Kirchhoff, who foolishly gave interviews about his personal tax proposal rather than sticking to the specifics of the CDU's actual program."
The result was a qualified disaster for the CDU. The Free Democrats, who did indeed advocate flatter tax with three rates of 15%, 25% and 35%, won their best result ever, taking 10% of the vote. But undecided voters swung away from Ms. Merkel. No poll during the campaign had had her party winning less than 41% of the vote, but the CDU wound up with only 35%, three points less than it had won in its losing 2002 race. It squeezed out the Social Democrats for the spot as the largest party only because the SDP lost even more votes to the splinter Left Party. The end result was no clear mandate for any party.
German voters may not again get quite as good a shot at installing a government that can bring about real economic reforms. Voters balked at real change at the last minute. In the words of economist Norbert Walter, "they wanted someone to wash their fur, but at the same time not get it wet." Most Germans understand that their country has to modernize in the long run, but, says Thomas Kielinger, a writer for the newspaper Die Welt, "when push comes to shove many are reluctant to go for the candidate who tells it like it is."
The late economist Mancur Olson argued that the downfall of democracy would be its tendency to calcify into special-interest gridlock. Germany's extensive welfare state has created millions of voters who fear the loss of any benefits. Combine that with voters in eastern Germany who cling to outmoded notions of state support and you have an formidable challenge to bring about real reform.
"The lesson for America is do not go down the road as far as Germany has," says Horst Schakat, a German who created a series of successful businesses in California for 30 years but retired to his native land in 2001. "You may find yourself unable to go down a different but correct path once too many people have become dependent on the state." |
