Merkel Makes Waves at Davos

The German Chancellor uses the World Economic Forum to spell out her vision for a harder-working, less bureaucratic Europe

In astonishingly short time, German Chancellor Angela Merkel has emerged as the most dynamic leader in Europe. That at least seemed to be the verdict of the applause meter at the World Economic Forum in Davos on Jan. 25. "You have given us hope for the first time in a long time," Peter Brabeck-Letmathe, chairman and chief executive of Swiss food giant Nestlé (NSRGY ), told Merkel after she delivered the keynote address to a packed auditorium.

Merkel called for a massive reduction in bureaucracy in both Europe and Germany, and an increase in the retirement age, among other measures. "We have to be more flexible. We're holding back enormous potential," she said.

SHOW OF STATESMANSHIP. Merkel's Davos performance was only the latest in a series of coups for the Chancellor. Since she was chosen in November to lead a coalition government of her Christian Democrats and the center-left Social Democrats, Merkel has repaired relations with the U.S., strained by the Iraq war. She also has displayed a new toughness toward Russia by visiting human-rights groups during a trip in January to see Russian President Vladimir Putin.

These and other shows of statesmanship have made her Germany's most popular leader in years, banishing memories of last year's national election campaign, when she squandered a commanding lead to barely achieve a plurality against the Social Democrats. Immediately after her speech, Merkel showed she's comfortable in the world of business as well as politics, bantering on stage with members of a panel that included Michael Dell, chairman of computer retailer Dell (DELL ), and Henry McKinnell, chairman and CEO of drugmaker Pfizer (PFE ). Dell advised Merkel to cut jobless benefits to remove the incentive not to work. "Good advice," replied Merkel in English.

Merkel delivered the rest of her remarks in German, even though she speaks English well -- a sign she was aiming at a domestic audience and setting the tone for policy moves to come. In a Continent dominated by the likes of such battle-scarred political warhorses as France's Jacques Chirac and Italy's Silvio Berlusconi, Merkel is a badly needed fresh face. It's not just image. As the chancellor reminded her listeners, she grew up in Communist East Germany and has no emotional stake in the social-welfare state that holds down economic growth.

PHYSICIST OR POLITICIAN? Merkel's public statements convey that she's open to change and has acquired plenty of political capital to make change happen. In her Davos speech, she seemed to indicate that she's willing to risk doing the unpopular things that are necessary to make Europe grow faster. "By its own standards, Germany is undertaking a mini revolution," Jim O'Neill, head of global economic research at Goldman Sachs (GS ), said earlier in the day. "Germany is back to being a positive role model."

Some people who know Merkel aren't completely convinced. One senior executive at a German blue-chip company, who has met Merkel many times, praises the former physicist's ability to analyze problems and her determination in pushing through solutions. Yet, at the same time, he notes, she's a brilliant political tactician.

As much as her ideas, Merkel's political moves explain a lot of her success. Witness, for instance, the way she outmaneuvered rivals to win leadership of the coalition government in November. Plus, she has masterfully used the powers of her office to overshadow the Social Democrats, who control half the Cabinet posts.

What's still not clear to some observers is what lessons Merkel took away from the election. Her frankness about the tough measures she planned -- including an increase in the sales tax -- spooked many voters. As she governs Germany, will she be tempted to play the politician, avoiding anything that costs her popularity? Or will she be a political physicist, methodically pushing forward the policies needed to reduce unemployment and restore economic dynamism?

"ACT DECISIVELY." No doubt, a little of both. Despite some progress in reforming unemployment benefits and trimming tax rates, much remains to be done. "All the heavy lifting they think they've done is only the beginning," this German senior executive warns.

At face value, at least, Merkel's speech at Davos signals that she's determined to push forward resolutely. She acknowledged the political necessity to move "in small steps." But, asked by Nestl&eacute's Brabeth-Letmathe if such an approach will be adequate, Merkel replied that it would be, "if you don't take a zigzag course and you act decisively."

She added, "In Germany, sometimes things never get going because one doesn't know how it will work out, and maybe it's better to do nothing. That's not my maxim." She sounded like she meant it.

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Ewing is BusinessWeek's Frankfurt bureau chief

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