11 February 2004

EZA 581: Germany-Politics

Briefing Note; Germany - Schröder resignation confirms stall in reform process
Chancellor Schröder’s resignation as SPD leader – further confirmation that the German reform process has stalled, with early resumption unlikely · Investment conclusions: stalled reform process not helpful for employment or labour market. · Key electoral test for Chancellor Schroder on February 29th in Hamburg state elections – poor result would likely mean cabinet re-shuffle with Finance Minister Eichel a probable casualty · Shift away from reform programme also evident in CDU/CSU posturing Chancellor Schröder’s decision to step down as party leader of the SPD on 06Feb should be seen in the broader context of setbacks for the reform process, which started to unfold in November last year. His explanation that he wants to focus on the reform process itself and leave the task of gaining his party’s support for the so-called “agenda 2010” reform project to his deputy and floor leader, Franz Müntefering, is further confirmation that the reform process has lost steam. This became clear in a series of events following the legislation of the tax cuts – the size of which had been negotiated down by the opposition parties CDU/CSU to about half of the € 16 bn originally planned. Despite his commitment to further reforms – pension reform and another tax reform being planned as the next milestones in spring this year – Chancellor Schröder’s political power has been significantly reduced by his party’s disastrous showing (24%) in the opinion polls. The next key events will be the state elections in Hamburg 29Feb, a former stronghold of Schröder’s SPD, where the polls now suggest an absolute majority for the CDU. If Franz Müntefering, the new, but at 64, hardly youthful party champion and floor leader, fails to manage to turn the tide before Hamburg, it looks likely that Chancellor Schroder will not be able to resist the calls for a government reshuffle. It looks almost certain that finance minister Hans Eichel would be the most prominent victim. This might appease the left wing of the party, as does the nomination of Klaus Uwe Benneter, a known left-winger for the post of party whip. Mr Müntefering’s call for a social balance – for a hike in inheritance tax and a mandatory training fee for companies failing to take apprentices – could herald a new u-turn of the SPD back towards its socialist roots. But the leftwards-shift of the SPD is mirrored by similar attempts of Edmund Stoiber, CSU head, Bavarian state premier and Chancellor Schröder’s opponent in the last general election to make the CDU scale down its commitment to more market oriented reforms on taxes and health care. Also Mr Stoiber’s meeting with trade-union leader Michael Sommer in Dec03 and his wooing of the Greens can be seen as a change in tactics towards personality politics and away from a committed programme of reforms. His “unholy alliance” with the labour unions was an obvious factor in unseating the reform-minded head of the powerful German job agency, Florian Gerster on 24Jan. The CDU and CSU will meet on March 7th to thrash out a common stance on taxes and health care. But as the key proponent of a big leap year tax reform, Friedrich Merz - despite strong backing from the CDU - has had to back-peddle, the chances of sustaining reform momentum have waned significantly. Overall, the reform process appears to have stalled for now - it is not clear for how long.

SummaryOverall, the reform process appears to have stalled for now - it is not clear for how long.

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© Graham Bishop