The collapse of the Deutsche Bank-Dresdner Bank merger is a grave setback for Germany as it tries to adapt to globalization. The merger was supposed to create a German institution that could compete at the most sophisticated echelons of world finance. Yet the banks couldn't even manage their own merger. It was supposed to get the German public used to the idea that mergers--and job cuts--are unavoidable if German companies are to modernize. Finance Minister Hans Eichel, a centrist Social Democrat, even endorsed the deal as a way of ensuring at least one of the world's major financial institutions would be German. Now failure of the merger will bolster reactionary elements on both the Right and Left who think the nation can somehow insulate itself from the cold winds of economic change.

The repercussions could be far-reaching. Deutsche Bank's ambition to lead consolidation of European stock markets is built on Frankfurt's reputation as a leading financial center--now badly damaged. Chancellor Gerhard Schroder can't be happy either. He's in the process of pushing business-friendly tax cuts through Parliament. In large measure, the package is based on advice from Deutsche Bank CEO Rolf-Ernst Breuer and Allianz CEO Henning Schulte-Noelle. They were supposed to lead Germany Inc. out of the darkness. Now, as the people who botched the merger, their expertise is suspect. Germans support reform, polls show, but they must believe competent managers are guiding the process.

German reform will go forward, if only because the nation has no choice. But after the announcement of the merger's collapse, it will be a far more difficult and uncertain journey.

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