She promised to curtail the power of the unions, reduce red tape for small business, and cut income taxes. Her name was Margaret Thatcher, and the year was 1979 -- soon after she was elected British Prime Minister. Thus began Britain's transformation from a sluggish welfare state to one of Europe's most flexible and dynamic economies.
Will Angela Merkel bring similarly sweeping change to the underperforming German economy? On July 11, Merkel, chairman of the center-right Christian Democratic Union and likely Chancellor, following parliamentary elections in September, unveiled a program similar to Thatcher's 1979 blueprint. It includes a plan to shift the burden of unemployment insurance from wages to the value-added tax and give companies more room to work out agreements with their employees, rather than with powerful unions. "I am convinced that in 10 years we can return to the top-performing European economies," Merkel, 51, told reporters.
To make good on that promise, Merkel will have to deliver more than she is now willing to reveal. She is a less confrontational figure than Thatcher with her iron handbag. Taken at face value, Merkel's program represents progress but not a decisive break from the status quo. Some business leaders had hoped for more forceful measures. "I am a little bit disappointed," says Diether Klingelnberg, a vice-president at the German Federation of Industry. Klingelnberg, who is also chairman of the precision gear maker that bears his name, had hoped Merkel would seek to curtail the power of organized labor more forcefully, so that it would be easier for his factories to tailor working hours to suit demand.
But reformers should not despair. Insiders say Merkel is prepared to go further once elected, and is holding back in part to allow more room for compromise with the anti-union Free Democratic Party, the Christian Democrats' traditional coalition partner. "The Christian Democrats are afraid of voter backlash if they say everything that's on their minds" before the election, says a foreign banker who is a longtime observer of German politics. "She has got a lot more ideas in the drawer." Investors seem to agree: The DAX index hit a three-year high on July 11, fueled by hopes of an economic turnaround.
A STEP IN THE RIGHT DIRECTION
The optimists see in Merkel some of Thatcher's steely resolve, a necessary trait for any woman to have come so far in a male-dominated political milieu. (The two women have something else in common: Both earned degrees in the sciences -- chemistry for Thatcher and physics for Merkel -- before dedicating themselves to politics.) "She is very tough, and she knows what she wants," says one former Merkel aide. Those who paint Merkel as a committed reformer point to her unconventional background. Unlike other top politicians, she grew up in East Germany and has less of a stake in the consensus-driven German economic model, with its emphasis on close cooperation between management and labor. That model lately has proved far too cumbersome to cope with global competition.
Merkel's 40-page election program is already a step in the right direction, economists say. They particularly applaud the move to shift some of the cost of unemployment insurance to the value-added tax, which would help lower wage costs and boost competitiveness. Although a higher sales tax might crimp retail sales, Deutsche Bank (DB) estimates that Merkel's program could add half a percentage point to Germany's growth potential, which currently stands at a meager 1.25%.
But it's in Germany's reform-resistant labor markets where Merkel can have the biggest impact. Under her stated program, workers at a company would be allowed to depart from regional union contracts, but only if two-thirds of the local shop agrees. She also has proposed tweaking Germany's job-protection law, making it easier for workers to give up some safeguards in exchange for better pay. And she wants to do away with automatic overtime pay for weekend work. Modest stuff -- but enough to prompt howls from the unions. IG Metall, the militant metal and auto workers union, is calling Merkel's program "a broad attack on workers' rights."
But the reality is that labor has its back up against the wall -- and that, post-election, Merkel can exploit these weaknesses to her advantage. Germany's co-determination system, which gives labor a big say in how companies are run, is being questioned after a corruption scandal at Volkswagen in which a top labor leader is implicated. Union power is being undermined as workers at the local level, many in East Germany, quietly deviate from their union contracts, accepting longer hours and other concessions to preserve their jobs. Even IG Metall has signed off on longer working hours for some Siemens employees and negotiated more flexible shift arrangements at a new BMW plant in Leipzig.
German labor's famous solidarity, meanwhile, is showing cracks. More moderate unions, such as IG BCE, the chemical and utility workers' union, have "seen the handwriting on the wall," one prominent business leader says; post-election negotiations with Merkel and her team are a distinct possibility. On July 6, IG BCE President Hubertus Schmoldt aimed harsh criticism not at Merkel but at left-wing leader Oskar Lafontaine, whose populism, he said, "has no place in our ranks."
The shift in mood should give Merkel room to go beyond her program by, for instance, eliminating the requirement that worker councils sign off on any changes to factory shift schedules. The candidate already has held several meetings with Michael Sommer, chairman of the German Confederation of Trade Unions, an umbrella group. And while the encounters haven't produced any deals, they're a sign that the unions are willing to talk. After the election, Merkel could start to encourage more union locals to negotiate more flexible arrangements with their bosses. And she could start stressing the need for a longer workweek, a big problem for German companies.
One reason Merkel might be playing it safe now is that her victory is not assured. Polls show the center-right alliance of the CDU and Bavaria's Christian Social Union beating the Social Democrats 46% to 27%. But the emergence of a new left-wing party led by dissident Social Democrat Lafontaine, which could draw 10% of the vote, has added a new wrinkle to the political landscape.
All in all, though, conditions for change have probably never been better. "There is a realistic chance that Germany under Merkel will see a turnaround," says Thomas Heilmann, CEO of Berlin-based ad agency Scholz & Friends and an unofficial Merkel adviser. He predicts that she "will be even more decisive" after the elections. Merkel could prove an Iron Lady after all.
By Jack Ewing in Frankfurt