Germany: For Schroder, It's Reform Or Bust

It has been a difficult few weeks for German Chancellor Gerhard Schroder. Two Cabinet members were forced to resign in January after mishandling the government's response to public fears over mad cow disease. The conservative opposition is demanding that Foreign Minister Joschka Fischer, once a radical activist, follow suit after news broke that he wounded a policeman during a street demonstration in the early 1970s. Finance Minister Hans Eichel is under attack for allegedly using official planes for private trips. As if that were not enough, Labor Minister Walter Riester is facing criticism for his lackluster performance in recent debates in parliament.

Are all these mishaps putting Schroder on the defensive? Not at all. In fact, his government's political woes have spurred him to launch a blitzkrieg of reforms--many of them controversial. In recent weeks, his Social Democrat-Green coalition has pushed through the lower house of parliament the biggest overhaul of the country's generous pension system for 120 years--shrinking the state burden and encouraging private pensions for the first time. The government has also unveiled plans to merge the three agencies that regulate the financial markets and to streamline and cut jobs at Deutsche Bundesbank, the once mighty central bank whose power has shrunk following the creation of the European Central Bank.

FASTER PACE. Schroder is even going after the arcane discount law, which limits the freedom of shops to cut prices. And he wants to slim down and restructure the army, a move that could cost 25,000 jobs. Says Finance Minister Eichel: "We['re] deflect[ing] the opposition's attacks on us with forward-looking policies."

There is more to Schroder's moves than political maneuvering. The Chancellor is eager to go down in history as a reformer. But since the next general election must be held by the fall of 2002, he doesn't have much more than a year to ram through major legislation. So Schroder is stepping up the pace to get reforms on the books before running for reelection and leading his party in a push for more seats in parliament.

Schroder is also hurrying to take advantage of disarray in the opposition Christian Democratic Union (CDU), still recovering from a campaign finance scandal. With a 41% popularity rating compared with CDU leader Angela Merkel's 38%, Schroder is seen by most analysts as likely to win a second term. Big tax cuts coming this year and next should further bolster his rating. "[Schroder] is in a good position to force through change," says Johannes Reich, head of equity research at Bank Metzler in Frankfurt. By pushing market-friendly reforms, Schroder is making it harder for the CDU to fashion its own platform.

Of course, the wily, 56-year-old Chancellor will still have to use all of his political skills to get his proposals turned into law. Some German states oppose his planned Bundesbank reform because it will reduce the influence of the nine regional central banks on the bank's governing council. Schroder may have to make concessions. And he may have to throw a bone to Bavaria, which will be hurt most by cutbacks in Army garrisons. But Schroder has shown he can cut backroom deals. He won labor union support for pension reform by privately promising he wouldn't touch laws that make it hard to hire and fire workers. Some analysts, though, think Schroder may be saving labor deregulation for his second term--especially if unemployment, now 8.8%, continues to decline.

In his bid to become known as a great reformer, Schroder may yet stumble. By attempting many initiatives at once, he risks stretching his government too thin. But Schroder clearly has decided it's better to try and fail than play it safe.

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