[A-List] Germany: political crisis

["Michael Keaney" <michael.keaney@xxxxxx>]

Schröder and Merkel show solidarity on reform
By Haig Simonian in Berlin
Financial Times: February 12 2003

Gerhard Schröder, the German chancellor, and Angela Merkel, leader of the
opposition Christian Democrats, met for highly unusual private talks on
Tuesday in a show of solidarity to boost reform in the eurozone's biggest
economy.

The half-hour discussion, called by the chancellor, came as Mr Schröder saw
off a challenge to his economic policies this week from leftwingers and
trade union backers in his governing Social Democratic party.

Tuesday's tête à tête came as politicians geared up to debate the 2003
budget, revised drastically after last September's general elections to
reflect sharply lower growth and higher than expected unemployment.

The financial plans will go before parliament's budgetary committee on
Wednesday, before being put to the full Bundestag next week.

How the legislation fares - it is designed to reflect straitened financial
circumstances and keep Germany's deficit within the rules for the euro -
will be a crucial test of the new co-operative spirit announced by Mr
Schröder and reciprocated by Ms Merkel this month.

Their pronouncements on working together more closely followed the SPD's
crushing defeats in two regional elections, which reinforced the CDU's
majority in the Bundesrat, the second parliamentary chamber, and gave the
opposition much greater leeway in blocking legislation.

But for all the talk of working together, a summit conference of CDU leaders
last week, buttressed by subsequent meetings of the parliamentary party, has
left the opposition on a collision course with the government's budgetary
plans.

The CDU remains hostile to the tax rises, borrowing increases and spending
cuts drawn up hastily by Hans Eichel, the finance minister, to fill the
yawning gap in government finances.

For the CDU, abolishing assorted tax breaks and increasing some levies is
precisely the wrong medicine for an economy suffering from low growth and
almost static private consumption.

If the opposition remains hostile, Mr Eichel has said he will not table
alternatives, but leave it to the CDU to show how to keep this year's budget
deficit within 3 per cent of gross domestic product, the ceiling for the
European Union's stability and growth pact.

"The legislation will go to the conciliation committee of the Bundestag and
Bundesrat and it will be up to the CDU to put forward ideas," said one of
the minister's closest advisers.

This week, Mr Schröder dismissed leftwing calls for big tax cuts and public
spending rises to boost consumption.

Criticism of his plans for health, social welfare and pensions reform was
given similarly short shrift, with the chancellor playing on the tense
international environment and the SPD's current unpopularity to silence his
critics.

"The left will get lots of publicity. But it hasn't got the power to push
anything through. And the publicity will only last until people grasp its
impotence because there is no figurehead to challenge the chancellor," said
Heiko Maas, a leading reformer and SPD chairman in the Saarland.

However, Mr Schröder did concede that budgetary policy might become more
flexible in view of near-stagnant growth.

The irony would be if a conflict in Iraq provided the cover for the strongly
anti-war chancellor to find common ground with his leftwing critics in
pressing for a temporary freeze of the EU's budgetary rules.

More ironic still would be if such a move were tacitly backed by Ms Merkel,
as it would let the CDU continue to trumpet its pro-growth strategy without
having to tackle the awkward imped- iment of the EU's fiscal rules.