Letter from Germany

	Professor Christoph Strünck

On October 29th re-elected chancellor Gerhard Schröder delivered his state of the union address. Many pundits expected Schröder to turn up with a "blood, sweat and tears" speech. But once again, even government-friendly media were left disappointed by the "weak, clueless and fainthearted" words. Contrary to Schröder's first address in 1998, after defeating long time conservative chancellor Helmut Kohl, a crucial message was missing. Back in 1998, everything congealed into the sound bite "new middle [class]". This was supposed to underscore Schröder's willingness to remodel redistribution as we know it. Those days, he appeared to be in line with Tony Blair's project. Blair had paved the way to a less state-centered approach of the British labor party. These days, Schröder's social democratic party seems to resort to tax raises and new regulations to cope with Germany's massive budgetary deficit. Because of that, there have been voices that think Schröder will brush aside fiscal conservatism and reinvent old school thinking. And there has been collateral damage. Finance minister Hans Eichel who used to be a widely respected watchdog has lost a good deal of power and reputation.

The heat is being turned up. Media and policy experts have pointed out flaws and severe shortcomings in the coalition contract. In fact, government officials have put more emphasis on justice and sustainability than on economic growth. The latter, though, is considered to be the core issue by many. Besides, the government appears to have given in to trade unions who strongly backed the chancellor in the election campaign. Their leaders have suggested that the government raise national debt in favor of investments in infrastructure. So is it really about bringing social democracy back in? Was the "end of ideologies" too hasty a conclusion?

Of course, a coalition contract and a speech are just a starting point, not a manual for the whole term. And consultants with close ties to Schröder highlight an important psychological factor. Conservative candidate Edmund Stoiber was endorsed by all-important employers' associations during the election campaign. The Chancellor is still mad at these interest groups that had backed most of his policies in the first term.

Schröder has often been labeled as an instinctive politician who lacks a cause, let alone a conviction. However, left-wingers from his own party had steadily complained about Schröder's alleged market liberal creed. Now that Schröder has appeased them is he turning left? The market liberal image has always been misleading. With almost every decision in the past Schröder has proven his leftist critics wrong, ranging from the "green card" over several bailouts to rows with the European commission. Schröder does not have a consistent approach towards economic policy. There has never been a shift to supply-side policies, so there will not be a shift to demand-side policies, either.

	Chancellor Gerhard Schröder

Muddling through notwithstanding, there is something like a core creed, though. And that is the crucial problem, not the ill prepared coalition talks. Compared with the Green party, social democrats still stick to the world of industrial order. They are used to deal with huge trade unions and peak associations. They also believe in a welfare state that is based on regular, life long labor contracts. None of these aspects represents the German economy anymore. But it is much easier to address centralized institutions than to communicate with the heterogeneous "Mittelstand" and its employees. However important small and medium sized firms, this realm does not translate into a true constituency, unlike corporate Germany.

Many social democrats may still be deaf to the Mittelstand but a strong new voice could open their ears. An unprecedented "super-minister" has been sworn in to crack down on regulation. Wolfgang Clement, a leading social democrat, will be in charge of economic and labor market issues. This is the first time since 1918 that Germany does not have a separate department of labor. Trade unions are fuming because they feel stripped of exclusive ties with their "captured" department. Obviously, not everything looks like Old Labor.

Clement, previously prime minister of Germany's largest state Northrhine-Westphalia, is said to be a pragmatic, business-oriented Social Democrat. His record in Northrhine-Westphalia gives this description an ambiguous twist, though. Clement's favorite tool is subsidies, not the provision of infrastructure like education or venture capital. As prime minister he recently dumped plans to set up infrastructure for biotech firms. But billions of Euros are being poured into the still starving coal industry, backed by Clement. Most of the subsidized new media outlets have turned into flops. When it comes to the role of the state Clement much more resembles a traditional social democrat than New Labor, despite his public image. So the new ministry and his minister come both with chances and risks. Blending labor market and economic policy is overdue. It might trigger a new understanding of social policy. On the other hand, the delicate merger can easily end up in a stalemate bureaucracy.

It will be interesting to see what the Green party is up to. By and large, they have been more willing to push through economic reforms than social democrats. Not only in this respect have the Greens contested traditional market liberals like the Free Democratic Party. And it was the Greens that saved the coalition. With their growing share of the vote they turned out to be the only true winner, led by Germany's most popular politician Joschka Fischer. If the Greens and super-minister Clement get along, this might open new windows of opportunity. But it is not only "the economy, stupid."

As for Fischer, he has succeeded the previous German representative on the European convent. This is all the more interesting because Joschka Fischer will be one of the rare secretaries of state who join this committee. In terms of domestic politics this underlines that he is determined to defend his turf against Schröder's chancellery. On that job Fischer can draw on his famous speech in Berlin two years ago that was meant to draw a broad picture of Europe's constitutional future. Above all, it looks like the enlargement process turns out to be the most important project in the next years. Many analysts expect Germany to gain political weight due to its cultural and economic links with East European countries. Both Fischer and Schröder have also managed to stick with their strict position on Iraq. They will not engage in any war activities. But the ongoing tax debate is towering above this peculiar issue that helped sweep Schröder to power again.

It is not yet clear what this power will be used for. Will Schröder pull up on the road that is leading away from corporatism? His political leadership has been shaped by a couple of commissions he launched. The so-called "Hartz commission" issued a report that will be the blueprint for reforms on the labor market. The new thing about these commissions is that their members do not serve as mere consultants. They also help to get the legislative process started. This style of governing might further scale back parliament's influence. But it could also provide tools to dodge the rocks of traditional veto players. In his speech Schröder followed up on the stereotype that Germans know best why not to do something (and was promptly ridiculed as "Kennedy from Hannover" by opposition leader Angela Merkel). The next weeks will reveal whether the country's government is better at knowing what to do than its citizens.