For years, Germany's center-right Christian Democratic Union (CDU) has pressured Social Democratic Chancellor Gerhard Schr?der to bite the bullet and move ahead with crucial labor-market, public-pension, and unemployment-benefit reforms -- despite the opposition of his union supporters. Now that Schr?der is finally building momentum for a reform package known as Agenda 2010, the CDU under the leadership of Angela Merkel is poised to play a pivotal role when the German Parliament votes on the measures later this year, since the CDU controls the upper house. If the Christian Democrats actually help Schr?der push the package through, Germany might have a shot at fixing its structural problems, and the psychological impact on Europe could be dramatic as well.
Yet in the past few weeks, the CDU has been facing a backlash in its own ranks to rival anything mounted by the unions against Schr?der. The issue is the country's 5 million tradespeople, or Handwerker, from bakers to carpenters to hairdressers and other service providers, who account for 10% of gross domestic product. Protected from competition by almost medieval German traditions of apprenticeship and licensing, they rival the unions in their rigidity and opposition to change. Yet they represent a powerful and loyal constituency for the CDU and its Bavaria-based sister party, the Christian Social Union (CSU). That's posing a dilemma for conservative proponents of reform, led by Merkel.
Besides loosening job protections, Schr?der and his Green Party coalition partners want to dismantle regulations that require Germans to earn the title of Meister before they can be self-employed in any of 94 licensed trades. It takes years of schooling and apprenticeship to become a Meister. Economists agree that the rules can artificially raise prices to outrageous levels and discourage job creation. Indeed, the regulations are one reason the self-employment rate in Germany, at 9.3% of the workforce, lags the European rate of 12.3%.
The question now is whether Merkel and other CDU leaders will put the national interest over the demands of the Handwerker. It's a tough call. On June 3, Merkel appeared before a crowded gathering of Handwerker in Berlin and promised to stand by them. That's a good short-term policy for maintaining their votes -- and it could help Merkel as she tries to gain support to be the party's candidate against Schr?der in the next election in 2006.
But if Merkel gives in to the Handwerker and blocks the proposed deregulation, she could undermine the whole reform process -- dealing the German economy another body blow. "This is a very bad sign," says Thomas Mayer, chief European economist at Deutsche Bank (DB), speaking of the CDU's opposition to Handwerker reform. Merkel could also open the CDU to demands from other special interests that resist liberalization -- such as lawyers, doctors, and accountants, whose clout is enormous. Special-interest politics "will slow down the whole reform process," predicts Carsten Klude, chief economist at Hamburg-based private bank M.M. Warburg.
More delay is the last thing Germany needs. The budget shortfall is growing by the day, and unemployment, now almost 11%, is still on an upward trend. Analysts say Schr?der's government probably won't survive unless it can claim some credible reforms by yearend. But German voters may not want to reward the CDU if it seems to be playing the role of spoiler. Schr?der has one tough job: reforming Germany. Merkel's job may be even tougher: deciding whether to defy her constituents and aid her political enemy. Italian Prime Minister Silvio Berlusconi's three-year-old trial on corruption charges was frozen on June 18 when the lower house of Parliament passed a bill granting immunity to Italy's top five government officials. The last-minute vote spares Berlusconi the embarrassment of being prosecuted or convicted while Italy serves its six-month term in the rotating European Union presidency starting on July 1.
But the embattled media magnate's troubles may not be over. Although Berlusconi is immune from prosecution while in office, magistrates are free to investigate him. They are currently probing suspicions of alleged tax fraud and false accounting by Berlusconi's broadcasting company, Mediaset, in the mid-1990s. Berlusconi and his lawyers have repeatedly denied that he committed any offense in either the corruption or fraud cases, and charge the magistrates with seeking to ruin his political career.
The billionaire businessman-turned-Prime Minister could face his share of political battles over the next six months, too. Foreign policy is one issue likely to split Berlusconi and his EU counterparts. He recently infuriated diplomats by refusing to meet Palestinian leader Yassir Arafat while on a trip to the Middle East -- a break with EU policy. Meanwhile, at home, pressure is rising for a shake-up within Berlusconi's House of Liberties coalition after a poor showing in recent local elections. Any blunders at the EU level could send his coalition into paralyzing internal conflict -- testing Berlusconi's political savvy yet again.