Jürgen Peters, vice-president of the IG Metall steel and auto workers union, warned Chancellor Gerhard Schröder last year that his cozy relationship with business wouldn't last. Today, Peters feels vindicated. "I prophesized this," he says, jabbing a finger and raising his voice. Now, adds Peters with a smile, Schröder knows who his real friends are.
In fact, the goateed Peters, known as one of Germany's most militant labor leaders, may have a point. Just a few months ago, business was hailing Schröder as a champion of reform. They loved his tax cuts and applauded steps to encourage Germans to take more responsibility for their own pensions. But then Schröder, leader of the center-left Social Democrats, decided not to test voter tolerance any further ahead of elections in a little over a year. The new initiatives have all but stopped.
Now, business leaders are complaining bitterly about their onetime hero. True, Schröder is still helping companies here and there: Witness the recent deal he brokered to let Volkswagen hire new workers at lower pay scales. But overall, Schröder's government has put the brakes on reform just as growth has slowed to zero and aggressive measures are needed. "We're definitely not happy," says Karl-Josef Neukirchen, CEO of MG Technologies, the Frankfurt engineering and chemical company formerly known as Metallgesellschaft. Says another chief executive: Schröder "has gone too early into campaign mode."
On a political level, Schröder's decision to shelve reforms looks justified. In every poll, he still beats his two most likely opponents from the opposition Christian Democrats, party Chairman Angela Merkel and Edmund Stoiber, prime minister of Bavaria. But a year is an eternity in politics. German middle-class voters, who have switched back and forth between the major parties, may yet turn on Schröder if the economic malaise deepens. German growth stagnated in the second quarter, and unemployment rose to 9.2% in July from 8.9% in June.
What's more, Schröder now runs the risk of permanently alienating the corporate lobby, which represents not only the major companies but Germany's influential Mittelstand--the small and midsize companies that make up the backbone of the economy. The Christian Democrats are already making a bid to regain their place as the party of business. On Aug. 27, the center-right party unveiled a draft economic plan. One key feature: a proposal to loosen Germany's job-protection law, which makes it difficult and expensive for companies to lay off workers. That answers demands by business for a more flexible labor market, and puts pressure on Schröder to respond.
Trouble is, he probably can't: German unions are unalterably opposed to anything that would make it easier for members to lose their jobs. Besides, unions claim they've already made enough concessions by allowing companies to hire temporary workers. "How can anybody say the system is inflexible," says IG Metall's Peters, whose union represents 3 million workers. That's more votes than any business group can mobilize.
AT BOTTOM? For now, Schröder's strategy seems to be to wait for the economy to pick up on its own, relieving him of the need to push through draconian measures. There are hopeful signs. In July, the IFO Institute survey of business confidence rose for the first time since January. Consumer spending has improved, fueled by income-tax cuts. And data on inventories show that German companies are working off excess stock faster than expected. Still, no one knows whether the economy has touched bottom or is simply pausing before heading south again. Schröder is likely to latch on to the more optimistic scenario, encouraging him to take a passive approach. "The readiness to reform has gone now," says Hubertus Schmoldt, president of the Industrial Union for Mining, Chemicals & Energy.
In fact, in some ways Schröder has backtracked on economic change. For example, he supported a law that bolsters the power of worker councils to influence company policy. Detractors say the law, a pre-election gift to labor unions, boosts bureaucracy and costs, especially for the hard-pressed Mittelstand. Such backpedaling has lowered economists' appraisal of Schröder. "What we've seen is a little improvement [here] and there, but not a consistent strategy to improve the economy," says Jürgen von Hagen of the Bonn-based Center for European Integration Research. Von Hagen is pushing for reform of the welfare system, which pays unemployed Germans more than they would earn in a low-wage job.
Schröder, the consummate politician, could yet switch direction again. Should the opposition's economic plan prove popular, the Chancellor won't hesitate to co-opt some of its features. And while he has leaned toward labor recently, Schröder still meets from time to time with business buddies such as DaimlerChrysler CEO Jürgen E. Schrempp. "He is a man who listens," says Schrempp. "I think business should give him a chance." Right now, though, Schröder the politician has won over Schröder the reformer.
By Jack Ewing in Frankfurt
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