Germany: The Election May Sound the Death Knell for Reform

Germany's national elections are starting to look like a reality TV show where the winner is the one who staggers across the finish line with the fewest life-threatening injuries. The election is still six months away, and the two main candidates, Chancellor Gerhard Schröder and Bavarian Prime Minister Edmund Stoiber, already belong to the walking wounded. The result could be a dangerous case of policy gridlock in the next government.

Just a few months ago, Schröder looked like a shoo-in for reelection. The betting among many observers was that Schröder would use his electoral mandate to tackle tougher issues such as labor market reform, which he had set aside as the election approached. Now, any hopes for a landslide victory have evaporated. The Chancellor is under pressure for failing to deliver a promised drop in unemployment, just as his center-left party faces a campaign-financing scandal.

Stoiber is limping, too, as the financial disaster at Munich-based Kirch Group hammers his reputation for nurturing Bavaria's economy. Bayerische Landesbank, a quasi-public institution overseen by Stoiber aides, has lent Kirch billions, which will be difficult to collect. Kirch's problems "could hurt Stoiber's image as top manager of Bavaria Inc.," says Andreas Kiessling, a political scientist at the University of Munich. If elected, Stoiber was expected to parlay his record as economic policymaker into an assault on market rigidities.

Now, with both candidates facing difficulties, the likelihood is growing daily that the victor will have to form a weak coalition government just to assume power. That means four years of political stagnation, which slow-growth Germany can ill afford. "I'm fairly pessimistic on any politician doing anything [reformist]," says a leading U.S. investment banker in Germany. "They're really stuck in a trough."

Coalitions are nothing new in German politics. But whatever political alliance secures victory promises to be weak even by German standards. If the election were held today, Schröder's Social Democrats would win 34% of the vote, according to a new poll by Berlin's Forsa Institute. The conservative Christian Democratic Union and Stoiber's Christian Socialist Union, which always team up in national elections, would jointly poll 41%. Thus most analysts expect a scramble to form a coalition with the centrist Free Democratic Party, which currently enjoys 9% support. The FDP says it is ready to join either of the two major parties.

In Schröder's case, the result would be especially unnatural. He would likely have to jury-rig an alliance of the Social Democrats, the left-leaning Greens, and the FDP. Hardly a formula for vigorous policymaking. A Stoiber alliance with the FDP could be more fruitful. The FDP is calling for labor market reforms and a cut in the top income tax rate to 35% from 48.5%. But even a CDU-FDP combo would hold such a slim majority that it could be easily checked by the left. "We have no illusions about the difficulty of pushing through our program with either party," concedes Wolfgang Gerhardt, head of the FDP delegation in parliament. A final possibility is a grand coalition of the Social Democrats and Christian Democrats, which in the past has meant political paralysis.

The campaign is only getting under way. Both top candidates have time to roll out populist proposals to appeal to voters. But while the politicians maneuver, Germany, once the powerhouse of Europe, will continue to trail Continental averages for economic growth. Germany once had strong leaders and a strong economy. Now it has neither.

By Jack Ewing in Frankfurt

Edited by Rose Brady

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