High Noon for Schröder

Suddenly, he's in trouble--and could lose in September

There's nothing like an election year to awaken a politician's need to be photographed with children. With a national vote less than nine months away, German Chancellor Gerhard Schröder's government on Jan. 7 announced plans to expand the number of elementary schools that offer instruction until late afternoon. That was a transparent play for the votes of working couples and single parents, who now must cope with schools that typically send children home at around 1 p.m.

To keep his job in September, though, Schröder will have to come up with more than mom-and-apple-strudel proposals. Although he's clinging to a narrow lead in the polls, Schröder faces a real chance of being unseated. Unemployment rose to 9.6% in December and is headed for the 4.3 million mark, the highest since 1998. Schröder has blamed the numbers on the global economy, but that excuse is starting to feel pretty old as jobless lines lengthen. Meanwhile, the conservative opposition has finally ended its bickering and chosen a lead candidate: Edmund Stoiber, whose home state of Bavaria prospered in his nearly nine years as Prime Minister.

The 57-year-old Chancellor appears to have made a critical miscalculation. He avoided tough economic reforms in the second half of his term, gambling that growth would pick up before the 2002 elections on Sept. 22. Now it may be too late for Schröder to do anything that will cut unemployment by then. "Schröder and the people around him didn't believe the seriousness of the downturn," says Munich management consultant Roland Berger, who has provided economic advice to Schröder.

Executives already are deserting Schröder for his rival--a bad omen for the Chancellor. Many in business once hoped that he would modernize the economy. Schröder fed expectations by cutting corporate taxes and reducing government debt. But disillusionment set in after Schröder refused to loosen up the labor market. "Except for the tax cuts, Schröder has done nothing," says Commerzbank CEO Klaus-Peter Müller. Midsize companies, which create the most jobs, feel left out. "The tax reform was good for the big corporations, but medium-size companies were forgotten," says Berthold Leibinger, president of Trumpf, a maker of machine tools in the town of Ditzingen.

Schröder is trying to answer such criticism with new initiatives. In December, he announced the expansion of a pilot program that subsidizes a company's social security costs for any long-term unemployed workers it hires. But even according to the most optimistic estimates, the plan will help barely 1% of Germany's jobless. "That's peanuts in the face of 4 million unemployed," says Jürgen von Hagen, director for economic and social issues at the Center for European Integration Studies in Bonn. "Schröder's in a very tough position." No kidding. Even a time-honored German tactic of creating make-work government jobs in an election year won't fly: As part of its agreement to provide stability for the euro, the government has agreed to sharp curbs on deficit spending.

Schröder is hardly washed up. A poll by Berlin's Forsa Institute still shows him beating Stoiber 42% to 37%. Moreover, Stoiber is enjoying a popularity bounce after the withdrawal of his main rival for the nomination, Christian Democratic Union Chairman Angela Merkel. But voters don't cast ballots for individual candidates. Schröder will be elected again only if his Social Democrats win enough votes to lead a governing coalition. There Schröder could be in trouble: The latest poll by Forsa shows the conservative coalition beating the SPD 41% to 36%. (The Christian Democratic Union and Bavaria's Christian Social Union make common cause at the national level.) "The question is whether Schröder can pull up his party--or whether it will pull him down," says Manfred Güllner, CEO of pollster Forsa. Even if the SPD gets the most votes, a weak showing could force Schröder into an unwieldy coalition with the conservatives.

Labor unions present Schröder with his biggest dilemma. They provide crucial campaign support but block efforts to reform the labor market. The general public is ready to trade some job protections for faster growth, pollster Güllner says. Even the left-leaning Greens support easing up on work rules for smaller companies. But will Schröder have the courage to confront unions? Probably not. "Schröder is a pragmatist, but he [faces] a very strong party," says Trumpf's Leibinger. Schröder must yet find a way to capture the political center without alienating his own left wing.

Stoiber, 60, must also move to the center. But his conservative record will make it tougher for him to attract women and swing voters, who were crucial to Schröder's election. Stoiber also is weak in East Germany, home turf of his former rival Merkel.

So the Bavarian, whose political antennae are on a par with Schröder's, has begun toning down his anti-immigrant rhetoric. Stoiber also can point out that freewheeling Bavaria has hardly become a police state under his rule. On the contrary: It is Germany's economic wunderland, with unemployment at a mere 5.8%. Although Stoiber can't take credit for the success of Munich auto maker BMW or for the tourist appeal of the Bavarian Alps, he does know how to promote investment. He has used cheap loans partially backed by the state to attract startups. "Bavaria is the farthest along in attracting biotech," says Bernhard Scheuble, CEO of Darmstadt drugmaker Merck. "Stoiber has shown [in Bavaria] he can do what we would like to see nationwide."

Schröder's backers counter that Stoiber is not as free-market as he may seem. He hasn't hesitated to use government power to prop up local companies such as consumer-electronics maker Grundig, based in the Bavarian city of Nuremberg. As chancellor, Stoiber would trim but not dismantle Germany's safety net. The Bavarian has also opposed some measures business wants, such as a Schröder-backed law to encourage immigration of skilled foreigners. "The government's economic policy has always followed a middle course," maintains Werner Müller, Schröder's economics minister. "Schröder's relations with business leaders on a national level are at least as good as Stoiber's."

As the campaign heats up, Schröder will point out that the last time the conservatives ruled, under Helmut Kohl, joblessness soared. Most of all, Schröder will hope that unemployment drops by September. "It will go down," promises Müller, the economics minister. But Schröder's opportunity to guarantee that probably passed a year ago.

By Jack Ewing in Frankfurt

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