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Commentary: Schr?der Is Waffling While Germany Burns

They were dentists, and they were mad. Joined by rows of equally angry doctors, nurses, and pharmacists, they waved placards and blew noisemakers beneath the Brandenburg Gate, within earshot of Parliament. Their gripe: proposed cuts in health-care coverage.

When dentists take to the streets of Berlin, that's a good sign that things are getting out of control. And it's not just the dentists and other health-care workers. Every interest group in Germany is determined to make sure that somebody else bears the pain of the nation's worsening budget crisis. Chancellor Gerhard Schr?der seems helpless to deal with the outcry. As proposals are floated and then quickly withdrawn, the result appears to be chaos. "It's a disaster," says Roland Flach, chief executive of WCM Beteiligungs und Grundbesitz, a Frankfurt company that buys and restructures ailing German corporations.

As economic growth grinds to a near-halt and tax receipts decline, the logical solution would be to cut government spending and reduce taxes to boost consumer spending. But Schr?der seems incapable of following such a course. Instead, he and Finance Minister Hans Eichel have proposed tax increases. Many are aimed at business, though business investment is essential to economic recovery. "In the current economic situation, tax increases are absolutely counterproductive," says Jorn Quitzau, an economist who tracks tax policy for Deutsche Bank.

Egged on by labor leaders, Schr?der is also targeting the so-called rich. In the unionists' imagination, the rich are social parasites living lives of leisure on inherited wealth. Hence a new tax on capital gains from the sale of stocks and real estate. Never mind that some 11.6 million Germans own stocks today, many of them wage earners.

At least Schr?der didn't completely ignore protests from business and investors. His government dropped a proposed seven-year limit on tax deductions for corporate losses, though he still plans to cut the allowed deduction by 50%. Schr?der also held the proposed tax on capital gains to 7.5%--less than in the U.S.

Yet his flexibility hardly inspires confidence. Rather, his government of Social Democrats and Greens seems to be making things up as it goes along, without any clear idea of the economic implications. The policymaking process is "too hectic, too complicated, and impossible to plan for," says Helmut Haussmann, a partner at consulting firm Cap Gemini Ernst & Young Deutschland and a former economics minister.

A sensible plan to tackle the country's $70 billion budget hole would have Schr?der attacking Germany's massive subsidy system. The nation shells out an astonishing 7.5% of gross domestic product in subsidies and tax breaks each year, much of it to prop up dying industries, according to the nonpartisan Kiel Institute for World Economics. Despite much talk of "social justice," most of the money benefits corporations and the middle class. Germany could easily eliminate its deficit by slashing this welfare.

That's not going to happen. The German public is only beginning to accept the idea that subsidies sap money from more productive uses, that keeping a dying industry alive only prolongs the pain. The Maxhutte steel plant in the city of Sulzbach-Rosenberg in Bavaria survived on subsidies for some 25 years before it shut down recently. If the factory had been allowed to die in the late 1970s, the region would have had a chance to recover by now.

Schr?der can be feisty and inspiring but has been neither recently. Instead, he's been pummeled in the press and has seen his public approval plunge. He has a history of appearing lost amid a crisis, though, only to find an inner reserve of leadership at the last moment, as he did in the recent election campaign.

Can Schr?der once again summon his decisive side? Deep down, he's a fighter. The son of a widowed cleaning lady, he's a man who had to work at construction jobs to get through law school, yet climbed to the top of German politics. Now, though, he's acting like a guy who's scared of a bunch of dentists. By Jack Ewing

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