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Time for Merkel to get serious

Published in The Australian (Sydney), 29 September 2009

ANGELA Merkel’s confirmation as Chancellor could at first look like a sign of political continuity. But the Christian Democrats’ switch of coalition partner from the Social to the Free Democrats is more than an exchange of adjectives. For Merkel and her party, this is the now-or-never chance to get serious with economic modernisation.

The strong showing of the pro-market Free Democrats in Sunday’s elections is one of the greatest shifts in Germany’s political tectonics the country has experienced. The tremors will be felt for years, across all Europe.

To understand the significance of this election, we need to go back about a decade when international commentators agreed that Germany, the world’s fourth-largest economy, was the sick man of Europe. Paralysed by an over-regulated labour market, stymied by a complex tax bureaucracy, and suffering from a bloated welfare state, the country was a shadow of the economic miracle years of the 1950s and 1960s. Unemployment, budget deficits and economic stagnation had become the harsh reality.

Germany’s years of discontent began early this century when then Social Democrat chancellor Gerhard Schroeder led a centre-left coalition with the Greens. Jobless numbers had temporarily crossed the five million mark, and intellectuals such as historian Arnulf Baring wondered how long it would take the Germans to go to the barricades. A whiff of revolution was in the air.

In this dire situation, Schroeder began an agenda of reforms to lift the millstones from Germany’s neck. To his credit, the welfare reforms he initiated – timid and incomplete as they were – delivered the desired effect. But before Schroeder could claim the political dividend for his courage, the voters ousted him from the chancellery.

Schroeder’s reforms had made him and his whole party deeply unpopular. “Reform” became the dirty word of German politics. No one knows this better than Schroeder’s successor.

When Merkel first campaigned for the top job in German politics, she believed Schroeder’s modernisation did not go far enough. She accused him of shying away from the big reforms and argued for several radical policies, especially on tax and healthcare.

At first, her campaign strategy seemed to work well. So well, in fact, that some opinion polls showed her party close to an absolute majority. But thanks to Schroeder’s skilful and often ruthless campaigning, the final election result of 2005 ended all of Merkel’s reformist ambitions. Instead of forming a modernising government with her preferred partner, the pro-business Free Democrats, her own party’s disastrous showing at the polls left her with only one choice: to form a coalition with arch-rival, the Social Democrats.

Until last Sunday, this Grand Coalition governed Germany. There was not much grand about this arrangement, though. The Social Democrats remained scarred by their attempts to reform Germany. A new populist left-wing party, formed by disgruntled trade unionists and East German ex-communists, threatened them on their home turf of welfare policy.

Meanwhile, Merkel and her Christian Democrats drew their own conclusions from the political near-death experience of the 2005 election. Burying the zeal for modernisation and change, they presented themselves as the “nicer” social democrats – much to the dismay of the real Social Democrats, who got squeezed between left-wing populists and Merkel’s touchy-feely Christian Democrats.

If there was one casualty of four years of Grand Coalition government, it was economic reform. Reform in tax, health, bureaucracy and education remained permanently suspended. Neither coalition partner had the will, or maybe the courage, to dare any change. “Steady as she goes” was the unofficial motto of both parties.

The global financial crisis mercilessly revealed the damage caused by this apathy. By any accounts, Germany’s fiscal situation is dire. According to research institute I.W. Koeln, Germany’s state deficit will approach E136 billion ($230bn) next year – that’s 5.5 per cent of GDP. This comes on top of Germany’s existing debt pile. Official forecasts predict that by the end of this year, Germany’s total public debt will exceed E1.7 trillion, or 74 per cent of GDP. Add to this staggering figure the effects of a fast-ageing population, rising unemployment and yet-unknown liabilities for state and public sector pensions and you get a rough idea of the task that lies ahead.

Given these unsolved problems, economic reform could hardly be more urgent. This is why Sunday’s election is such a significant event because the big winners of the election were the Free Democrats. In Germany’s political landscape, they were the only party to resist the general shift to the Left. They stood by their earlier commitment to economic modernisation, which made them attractive to everyone who opposed the standstill of the Grand Coalition years. Their reward was the best election result in the Free Democrats’ history.

In the new centre-right government, Merkel will remain at the wheel. But instead of a stuttering Social Democrat steam engine under the bonnet, the voters have given her a powerful, new machine. She must use it to complete the modernisation process that her predecessor Schroeder had begun and she couldn’t continue. Merkel’s window of opportunity is narrow: for a limited time, she will command a majority in both houses of parliament. If she hesitates now, she may never again get the chance.

It is going to be tough for Merkel’s new government. Waiting in the wings are the bruised and beaten Social Democrats, the Greens and the populist ex-communists. If they work together, they could become a fierce opponent.

Germany’s neighbours certainly must hope Merkel will be successful. The country may be a struggling giant with a bag full of problems, but it is still the European economy’s heavyweight. On the Merkel government’s shoulders rests nothing less than the future of Europe as a place to do business. Is it a weight she can finally carry?

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