Germany: Is This Schroder's Moment?

A Socialist may take the reins at a turning point for Germany

By the time the candidate arrives just after 5 on this dank evening in Frankfurt, a cold rain is falling. But the crowd gathered to rally for Gerhard Schroder, the Socialist who aims to oust Helmut Kohl as Germany's Chancellor, is unfazed. As Schroder pushes onto the stage, the applause is wild. Never mind that his speech is little more than slogans about "modernizing" the economy and ensuring "fairness" for working people. The crowd loves it. "The Socialists will take from the rich so that everyone can live," says Svenja Haeder, 18, a high-schooler who came with her parents. "That's fair. Everyone should be safe."

Meet Continental Europe's rising political star. His "New Middle" program aimed at bridging the gap between business and labor is vague, and his Social Democratic Party (SPD) may win by only a narrow margin when Germans head to the polls for parliamentary elections on Sept. 27. But this onetime radical lawyer from the state of Lower Saxony has touched a nerve with his compatriots, who after 16 years are tired of government by Kohl and his Christian Democrats--and worried about their economic future. Although Kohl has a chance to pull off a last-minute victory in the German vote, polls show that Schroder could win by at least a three-point margin. Some say the election is too close to call.

The election is a watershed event for Germany--and for Europe. If Schroder wins, the media-savvy 54-year-old will be the first representative of Germany's postwar generation to govern the country. His style of leadership would contrast with that of the 68-year-old Kohl, who has earned a place in history by shepherding grand projects such as German reunification, aimed at undoing the damage of the cold war. Most important, Schroder would take the reins at a turning point, just as Germany jettisons its beloved mark and Europe launches its single currency, the euro.

WEAK OR STRONG? How Schroder leads Germany would have a decisive impact on Europe's economic and political direction into the next century. He would not only head the largest economy but would play a key role in defining Europe's relationships with the U.S. and Asia. His policies would help determine whether Europe as a whole is competitive, whether its currency will be weak or strong, and whether its trade policies will be open or protectionist.

At the same time, though, Schroder faces unpredictable economic forces outside his control. The financial crises in Asia and Russia are threatening to slow Germany's growth and wipe out chances of cutting the 10.9% jobless rate. Deutsche Bank economists figure there's a 40% chance that the global crisis will cut Germany's economic growth from close to 3% next year to around 2%.

As Chancellor, Schroder would face a stark choice: He could cast himself as a new-style Social Democratic Chancellor and use his communication skills to convince Germans that their government must whittle away at benefits they've enjoyed since the 1960s. That would mean spurring growth with sharp cutbacks in social benefits and flexible hiring and firing rules. In essence, Schroder would try to pull left-wingers to the center, just as Britain's Labour Prime Minister Tony Blair has done. Or Schroder can cater to the core of his party, which is controlled by old-line Socialist Oskar Lafontaine. That would mean opting for populist measures such as wealth taxes.

Schroder's room to maneuver would be determined partly by the election's results. If the SPD gains a large bloc of seats, he is expected to form a government with the Green Party--giving the Socialists a majority in the Bundestag, or Lower House, which Kohl now controls, as well as in the Upper House. The other possibility is a grand coalition between the Social Democrats and the Christian Democrats, only likely if the Socialists' margin of victory is narrow. Then, Schroder would have to constantly compromise with Wolfgang Schauble, a tough, pro-business conservative. Kohl is expected to hand over leadership of the party to Schauble if his party doesn't win enough votes to form the government.

For now, Schroder, who has been Lower Saxony's prime minister since 1990, is tilting to the left. He has pledged to roll back limited reforms that Kohl implemented, such as cutbacks in sick pay. He plans only modest cuts in the top corporate and personal tax rates, which range up to 45% and 53%, respectively. He says he will not cut Germany's tax base or slash social spending. Any income tax cuts will likely be offset by hikes in the gasoline tax.

To battle unemployment, Schroder wants government, labor, and business to devise a plan that would exchange wage moderation and labor flexibility for more hiring by companies. Such an approach has cut joblessness in the Netherlands to under 5%, he points out. But many executives doubt Germany's unions will accept small wage hikes and part-time work, as the Dutch unions did. Business leaders also fiercely oppose Schroder's proposal to reinstate a wealth tax that would cover unrealized gains on shareholdings.

LIMITS. Many executives believe Germany must cut taxes, slash government spending, and revamp labor rules far more than Schroder is likely to do. Their hope is that sweeping market forces, from deregulation to the euro, will compel even a Socialist government to implement some reforms. Once the euro is introduced, the government will come under pressure to either boost productivity or cut spending to keep Germany's budget deficit within the monetary union's limit of 3% of gross national product. "The euro will lead to more deregulation, more open markets, and less bureaucracy," predicts Commerzbank CEO Martin Kohlhaussen.

In Germany, as in other leading industrialized countries, what's needed right now is a real leader. No matter how close the race, if Schroder wins, it will be because Germans believe he can finally provide jobs in a country that has been losing them for years. True to his slogans, the new Socialist Chancellor may feint left at first, but harsh realities are bound to soon limit his options. Like Lionel Jospin, France's Socialist Prime Minister, Schroder could well be forced to move toward the center even if many in his own party don't like it. How he chooses to get there could set the tone for German--and European--politics for years to come.