A Talk With Gerhard Schroder

On the business climate, the euro, and the East

Gerhard Schroder, a front-runner for the Social Democratic Party's nomination to run against German Chancellor Helmut Kohl in the September, 1998, federal elections, is currently running for reelection as Prime Minister of Lower Saxony. Out on the campaign trail, over a dinner of schnitzel and french fries, he spoke with BUSINESS WEEK Frankfurt bureau chief Thane Peterson.

Q: Many executives are very unhappy with the German business climate. What can be done to improve it?

A: I think that they must understand that Germany in one respect is different from all other comparable economies: It is sending $82 billion annually to [former East Germany]. These huge transfers, which have lasted for seven years, reduce our possibilities for American-style tax reform....We [the SPD] favor step-by-step reform. We need to increase overall income to stimulate consumption.

Q: But some people say high taxes are Germany's biggest problem.

A: In recent years, we have done much to lighten the load of companies.

Q: Business would like to see cuts in the income tax rate and the capital gains tax. Would you favor that?

A: We can discuss that. But it is not possible as long as the high transfer payments are necessary. And without these transfers, the eastern economy would break down.

Q: Are you in favor of delaying the euro?

A: I believe that it makes more sense to fulfill the [Maastricht Treaty] conditions than to just meet the timetable. The criteria are more important than the timetable. Germans have received a promise of stability. That promise has to be kept. If that's not possible, the timetable must be changed.

Q: Does that mean leaving out Spain and Italy?

A: It doesn't mean that. If it's not possible to take a lot of politically important countries--and Italy and Spain are important countries--because they can't fulfill the criteria, it's better to wait than to make a quick decision. This is not about Mr. Kohl's role in European history. It's about economics.

Q: The Bundesbank is talking about raising rates. Is that reasonable right now?

A: We don't need that. Raising interest rates to stabilize the mark would be like poison to the domestic economy's development right now.

Q: Businesspeople worry that the German government will be in gridlock until the elections in September, 1998.

A: This government--and the business-people can see this--has lost its capacity to mobilize Germany's creative powers. The mood the government is creating now is negative, even though the economic data aren't so bad....When a government is in such a situation, it makes unforgivable mistakes. The quarrels between the Bundesbank and [Finance Minister Theo] Waigel, the debate about [a cabinet shuffle]--a government only does this when it is at the end of its force.

We need a change of mood. Recently, I met an executive--a typical British gentleman between 60 and 70, very conservative--and he said: "I'm behind [Tony Blair]." He had never voted Labour in his life. He'd always voted Conservative. In Britain, Blair didn't so much change the situation as the mood. That's what's missing in Germany. And Kohl can't do that.

Q: Could a Tony Blair figure be successful in Germany?

A: Blair is tied to the British phenomenon. It would be ridiculous to try to copy that directly. But we can learn from what he is doing.

Q: When you went to the U.S., you visited Bill Gates and other American businesspeople. What lessons do you feel that you learned?

A: One thing in America that might not be directly transferable to Europe but that could be useful is the dynamism, openness to experimentation, and speed of economic development in places like Silicon Valley, Seattle, and Boston. What we should not transfer is what we see in downtown Detroit. There are positives and negatives in the U.S.

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