TCS Daily

Germany in the Doldrums

By Jeremy Slater - May 13, 2003 12:00 AM

The way things are going, German Chancellor Gerhard Schröder would probably like to swap his fortunes with those of his country's stock exchanges. Since re-election last autumn Schröder's popularity ratings have been in a tailspin while the leading German exchanges have had something of recovery. Not that stocks have made up all the losses they suffered through the end of last year, but from the middle of March, they have rebounded by almost 25% on some bourses. And they have done this on what seems to be very little petrol in the tank.

Schröder could be forgiven for being puzzled by this state of affairs, as there is no obvious economic reason for the German markets to be going up at the moment. However, he is wrong if he thinks he can continue to benefit by doing nothing.

This pseudo-rally has occurred at a time when the German business environment is as sluggish and non-growth-friendly as it has been for the past two years. The most recent IFO survey of industrial confidence shows that German business leaders are even less optimistic than they were earlier this year.

"Sales both within Europe and to the rest of the world were reported to have remained sluggish despite the end to the war in Iraq," another report said. "Most significant was a marked increase in the rate of loss of new orders in Germany, which fell at the fastest rate since late 2001."

The survey further stated that Germany has been the weakest performing country in the zone, followed by Ireland. Unfortunately German manufacturers are being hit on both domestic and international fronts as local low economic activity was having a big impact on order books, while opportunities in foreign markets were being hurt by the strength of the euro.

For Schröder this is a testing time both economically and politically. Unemployment is still climbing toward the 5 million level and the chancellor is in the political fight of his life to force through labor market and pension reforms that he believes will help reinvigorate the German economy. Against him are the mass ranks of leftists in his Social Democratic Party (SPD) and most of Germany's trade unions. Their antipathy was demonstrated most recently at a rally to celebrate May Day (Europe's Labor Day) at which the Chancellor was explaining the need for economic reforms. He was pelted with eggs and tomatoes. Schröder, it seems, has yet to convince his people of the need to break some eggs in order to make an omelet.

The chancellor is set to face these forces of opposition at a national conference of the SPD on 1 June. He has made it clear that he expects his party to back his proposals and has gone as far as to threaten to resign if support is not forthcoming. This brinksmanship may have bought some of his troops back into line, but Schröder faces a considerable threat from his former finance minister Oskar Lafontaine, who resigned, to the surprise of many political observers, from the first Schröder government in February 1999. "Red Oskar," as he is also known, has built a considerable power base on the left of the party and has been a thorn in the side of SPD's centrists and right-wingers for over a decade. In the early 1990s he scuppered Rudolph Scharping's chances of standing as the SPD's representative against then-Chancellor Helmut Kohl. If he can organize his political base ahead of the June conference he may do to Schröder's ambitions what he did to Scharping's.

However, the current chancellor still has one or two strong hands to play. There is the fact that he should be able to command a majority in favor of his proposals, with cross-party support from the Christian Democrats and Liberals, in the German parliament. He also has garnered growing backing of business leaders who are quite willing to break with Germany's post-World War II consensual politics to get the economy moving again and boost flagging company profits.

The chancellor has a very tough fight with the unions over the next month, but if he steels himself to the task and SPD representatives start to contemplate the option of being powerless, he should not have to carry out his threat to resign. Just as turkeys rarely vote in favor of Christmas, parties in government hardly ever vote themselves out of power.

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