Q&A: A Talk with Schroder

Germany's Chancellor discusses his country's economy, the future of the European market, and U.S. relations

Europe's economy is slowing fast, its currency is near an all-time low, and its multinationals are putting much of their new investment in the U.S. Germany and France are at odds over the future development of the European Union, and unemployment is starting to rise again. But in his spartan office at the Bundestag in Berlin, Germany's Social Democratic Chancellor Gerhard Schroder is anything but downbeat. In a wide-ranging interview with BusinessWeek's Frankfurt Bureau Chief Jack Ewing and European economic correspondent David Fairlamb, Schroder confidently asserted that the German economy is fundamentally sound. He downplayed talk of a rift with French Prime Minister Lionel Jospin, who is calling for the creation of a much more socialized Europe than the Germans envision.

Schroder rejected suggestions that the gulf between Germany and France had weakened the euro, and predicted that the EU's two most powerful members would reach a compromise on the sort of Europe they want to create before the intergovernmental conference in 2004. Although Schroder supports a federal Europe with an open economy based on free trade, he stresses the need for it to have a strong social security system and solid employment rights, both of which are close to Jospin's socialist heart.

Schroder brushes aside concerns that too much capital is flowing from Germany to the U.S. He isn't fazed by the recent four-month rise in German unemployment at a time when other European countries are creating jobs. The European Central Bank and most economists say Germany could revitalize its slowing economy and create jobs by embracing structural reform and liberalizing the labor market. But it's clear Schroder--known as an opportunist and a pragmatist--has no intention of tackling such sensitive issues this side of the 2002 general election. He isn't going to alienate the unions before then.

Q: Will Europe in the future be a market open to competition, or will it be managed and socialized, as French Premier Lionel Jospin clearly wants?

A: There's no conflict between the social-welfare state and open markets. Germany is, in its own interest, very free-trade oriented.

That has nothing to do with the question of offering people security not only in old age but also in times when they're out of work. A market that's as open as possible is the precondition for a successful economy, and a successful economy is the precondition to being able to pay for social security. Where the limits lie is something that must always be debated, that's clear.

Q: In recent years German companies have invested billions in the U.S. and other foreign countries. Are you worried that investment is being relocated abroad?

A: No, absolutely not. Everything that's invested to be successful in foreign markets comes back directly or indirectly and contributes to the stability of the German economy. I don't believe the thesis that investment abroad endangers jobs at home. Just the opposite.

Q: You've put through many reforms in the last three years. What do you still want to accomplish and how quickly?

A: We made two important strategic decisions: tax reform, and the creation of the second pillar in the pension system, based on capital investment. That issue has been neglected for decades in Germany, and we confronted it.

Next, we will create a modern immigration law. We are going to have to compete with other countries to attract researchers, scientists, highly qualified workers. We're hoping to find a consensus that our society needs and that our economy needs. Whether we succeed is an open question.

Q: Do you see any need to make Germany more attractive for foreign investors?

A: We were very unattractive. But that has changed because of tax reform. We are seeing significant growth in foreign investment in Germany. We do face an important task, but it's not just a task for the government, but also for the industry associations. We have to better explain the positive side of codetermination [in which shareholders and employees are represented almost equally on companies' supervisory boards]. This [system], especially when a company is in crisis, has an extraordinarily important and stabilizing effect. But it looks different when viewed from outside. The same problem exists when one speaks of labor-market flexibility. The reality in the companies is totally different than the way it is presented in public.

Q: How is your relationship with President Bush?

A: As far as the personal relationship is concerned, we have telephoned several times. We met in March. I found him to be a very open and well-informed person. What I found to be very pleasant is that when there are differences of opinion--for example regarding the Kyoto accord--he speaks about these just as openly as when we agree. The points of agreement are far more numerous than the differences of opinion, by the way.

As far as missile defense is concerned, a very thorough consultation process is under way. The question of feasibility, the question of cost, the question of including partners elsewhere in the world, the question of the effect of this project on arms agreements--all these issues are in discussion. One effect could be that the huge atomic arsenal created in the cold war could be reduced significantly. But it would be premature to make conclusions at this point.

Q: The euro is near its lowest point ever. Is there a relationship between the euro and Europe's form of government?

A: We have made a decision, which is that monetary policy will be made by an independent European Central Bank. Any debate among politicians about monetary policy is, in regard to financial markets, counterproductive. When one looks at the prospering European economy, there's really no reason to worry about the stability of the euro. The economic power that stands behind this currency is huge. It's true that a common currency imposes on us a duty to cooperate more on policy. Indeed, the creators of the euro envisioned it as an instrument to promote political union. Whatever the details of union may be, there's no doubt we need more policy coordination in Europe.

Q: In France and some other countries, there is fear that Germany will dominate Europe.

A: Germany is in favor of integration precisely because we don't want dominance. Naturally we are aware of the strength of our economy and naturally we don't want to downplay it. Why should we? We really believe our national interests are identical with European interests. And because that's so we're fighting for more integration in Europe. No one must fear political dominance.

Q: Unemployment has begun to climb again. Does that worry you?

A: Any degree of unemployment worries me. It must. Our goal is to reduce the number of unemployed in Germany to 3.5 million [from 3.87 million in April] by the end of the legislative session [in summer 2002]. The prospects to achieve that goal are still good. We want to change the way we help unemployed people find jobs. We want to be faster and more goal oriented.

Q: Does that mean you'll put more pressure on unemployed people to find work?

A: We want to encourage those who are able to work, no question. To those who say, "We could work, we have the qualifications, but we don't want to,"...we want to say that solidarity isn't a one-way street.

Q: How is your relationship with Russian President Putin, and do you believe Russia can be integrated into a security pact with Europe and the U.S.?

A: If I correctly understand the goal of American policy, one wishes Russia to be a partner. My impression is that American policy speaks not of antagonism but rather partnership. As far as my relationship with President Putin is concerned, it's fine.

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