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Now, Merkel Is In Her Element


Throughout her career, Angela Merkel has often beat expectations. No one predicted that the 36-year-old East German physicist who joined the Christian Democratic Union (CDU) in 1990 would, only a decade later, become the center-right party's chairman. Just a few weeks ago many doubted that Merkel, now 51, could hold on to the party's top post after she blew a 20-point lead over Chancellor Gerhard Schr?der's Social Democrats (SPD) in an error-prone campaign. The CDU won over the SPD by just 35% to 34% in Sept. 18 voting, forcing the parties into an uneasy "Grand Coalition."

Yet Merkel silenced internal critics and faced down Schr?der in coalition talks. Now she is set to become Germany's first female Chancellor. Can she defy conventional wisdom again by delivering a more stable, reform-oriented government than pundits expect? "I'm in a good mood and determined to get something done," Merkel told reporters on Oct. 10.

A growing school of thought says that she can succeed. According to this argument, Merkel was a lousy campaigner next to the seasoned Schr?der. But now that the action has shifted to the corridors of the Reichstag, she is back in her element. She can once again show off the tactical acumen that, in years past, allowed her to outmaneuver even former Chancellor Helmut Kohl. Backed by a solid majority in the Bundesrat, the Parliament's upper house, Merkel will be able to herd her SPD partners into line. "She didn't get to the top of the party without being able to get her way," says Carsten Klude, economist at Hamburg private bank M.M. Warburg & Co.

There is a good chance the CDU and SPD can make progress on some needed reforms. Both parties have agreed in principle on simplifying income taxes and eliminating loopholes. They will probably agree on cost-cutting at the Federal Labor Agency to finance lower corporate unemployment insurance contributions -- a move to reduce the cost of labor. It's also likely the parties will decentralize government decision-making, giving states more power over areas such as higher education.

REVOLUTION POSTPONED?

As she governs, Merkel can draw on a de facto majority in favor of reform in the Bundestag, the lower house. While not part of the government, the pro-business Free Democrats, traditional CDU coalition partners, will support reform-oriented legislation. Even some members of the SPD and Green Party back economic reform. The outgoing SPD-Green government made changes to labor rules that put more pressure on unemployed people to find work and lowered the threshold at which the economy creates jobs from 2% or more economic growth to 1%.

But a Margaret Thatcher-like revolution is not in the cards. Politicians from both parties read the election result as a sign that voters don't want a sharp reduction of the welfare state. And the CDU had to compromise on its program. For instance, the CDU and its partner, the Christian Social Union (CSU), promised not to meddle with the collective bargaining system that lets unions and employer associations set industry-wide wage deals. A major overhaul of job protection rules, which contribute to 11.2% unemployment, is thus unlikely. In addition, Merkel had to cede key Cabinet posts including the Foreign, Finance, and Labor Ministries to the SPD -- although the center-right kept the Economics Ministry.

Clues to the durability of this political shotgun marriage will emerge when coalition talks conclude in mid-November. Even a modest reform program, including a slight easing of job protections, could deliver growth of more than 2%, Dresdner Bank figures. For Germany, whose 2005 growth will be about 1%, that's torrid. "The chances Germany can move out of last place [in Europe] in economic performance are better than they have been in a long time," says Dresdner's chief economist, Michael Heise. Germany has a long way to go. But the political future looks brighter than just a few weeks ago.

By Jack Ewing in Frankfurt


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