Germany: The Woman Breathing Life Into The Christian Democrats

It has been quite a comeback. Only a few months ago, Germany's opposition Christian Democratic Union party was reeling from a campaign finance scandal involving secret bank accounts run by former Chancellor Helmut Kohl.

Enter Angela Merkel. As CDU general secretary, she was the first to split with Kohl late last year and insist the party take a hard look at its own past conduct. Revealing uncanny political instincts, she outmaneuvered the CDU old guard to win election as party chairman in April. And in her first electoral test, a mid-May ballot in North Rhine-Westphalia, the CDU scored a better-than-expected 37% share of the vote.

HALFWAY? Now, Merkel must gear up for her first big economic test: a debate and vote as early as July in the Bundesrat, or parliament's upper house, on Social Democratic Chancellor Gerhard Schroder's new tax-reform proposals. Up till now, Merkel has revealed little about her economic views. No one could be sure whether she would be a half-hearted reformer like Kohl, or seize the mantle of modernizer from Schroder. But in a May 18 interview with BUSINESS WEEK, Merkel signaled she intends to prod Schroder for deeper tax cuts and other more radical reforms than he has proposed so far. "I'm certain the CDU will put its stamp on the reform package," Merkel declares.

That's possible in the upper house, where the CDU and its sister party, the Christian Socialists, control enough seats to block Schroder on legislation. Merkel wants the maximum tax rate to be less than the 45% proposed by Schroder, compared with the current 53%. The CDU is seeking a 35% ceiling, but analysts expect a compromise at around 42%. Merkel also wants to lift the limit at which the top rate applies. Under Schroder's plan, a single taxpayer would hit the top bracket with an income of as little as $45,000 a year. The CDU wants to set the limit at $50,000, and stands a chance of success.

Although somewhat uncomfortable discussing economics--perhaps understandable for someone raised in Communist East Germany--Merkel voices other views that go beyond Schroder's. She's in favor of tax incentives to encourage citizens to invest their retirement savings. Schroder, by contrast, has been reluctant to create any more tax breaks. And Merkel wants to relax state regulations that require stores to lock their doors at 8 p.m. on weekdays and 4 p.m. on Saturdays. That puts her at odds not only with organized labor but with the Catholic majority in her own party. "We have to react to the growth of e-commerce and people's changing lifestyles," Merkel says.

How far Merkel will want to push Schroder toward faster reform is an open question. While concentrating on politics, she has allowed others to take the lead on economics--notably Friedrich Merz, who leads the opposition in parliament. "If she wants to solidify her claim to leadership, she has to be stronger on economic issues," says Eckart Tuchtfeld, a political economist at Commerzbank. Merkel also has to keep an eye on the CDU's many conservative, older voters who want a big safety net. But based on what she has said so far, chances seem good that Merkel will aim for younger, more moderate voters who are willing to pare the welfare state in return for faster growth.

That would force Schroder into a battle for what he calls the "New Middle"---a win-win situation for reform advocates. It could help the CDU win back support from business, which has been drifting toward Schroder. And it's not out of the question that Merkel, who is currently beating Schroder in the polls, could make a strong run for Chancellor when Germany holds elections in 2002. Across the political spectrum, Germans are learning they shouldn't underestimate the 45-year-old pastor's daughter from East Germany.