It's Back to the Economy Again

Chancellor Gerhard Schröder may be back in office, but the wafer-thin majority of his Social Democratic Party (SPD) together with the Greens has made the business community uneasy.

European bourses edged lower on Monday and Frankfurt's Dax index slipped 3.3 percent following news that the SPD-Green coalition would remain in power with a slim majority after a tight race.

In particular, traders were nervous about automobile stocks, fearing that the Green party could force through new environmental taxes. Volkswagen slipped 1.2 percent and DaimlerChrysler fell 1 percent Monday morning.

The Greens were the surprise winner on Sunday, gaining 1.9 points to 8.6 percent and saving the Red-Green coalition's majority. Schröder's SPD fell 2.4 points to 38.5 percent, while the conservatives gained 3.4 points to 38.5 percent and the liberal Free Democrats gained just 7.4 percent.

Radical change needed

Though industry leaders reacted warily about the SPD-Green government, they agreed that the government needs to act quickly to bring about a radical change in the floundering German economy.

"We need a change of policy, under whatever government," said Michael Rogowski, chairman of BDI, the German industry federation, on Sunday evening.

Rogowski said Germany has developed in the direction of a social economy for too long. "A more market-based economy and more corporate freedom" is the need of the hour, he said.

Referring to the SPD’s traditional strong links to trade unions, Rogowski said, "The SPD is so enveloped by the unions that it will be difficult for it (the party) to break free."

Werner Wenning, chief executive of Bayer, the chemicals group, said, "Instead of quick fixes, we urgently need to change the whole system."

It's the economy, stupid!

Indeed the economy poses one of the biggest challenges to a weakened SPD-Green coalition.

Reneging on promises made in 1998 when he was elected, Chancellor Schröder was unable to bring down unemployment levels that spiraled beyond the 4 million mark during his last four-year tenure.

Economic woes were compounded by a general recession in Germany and sluggish growth following the September 11 attacks and a slowdown of the world economy.

A string of high-profile corporate bankruptcies and an embarrassing labour market scandal earlier this year stepped up pressure on Schröder to urgently address economic issues.

It was hardly surprising then that the SPD-Greens plunged into the election campaign making the economy a top priority. Months before the election, Schröder set up a panel of experts headed by Volkswagen executive Peter Hartz to push through changes to Germany’s tax and benefits system.

But the focus on the economy was short-lived. Other events such as last month’s devastating floods and Schröder’s unrelenting stance against American policy towards Iraq saw economic issues sidelined in the run-up to the elections.

Economic lessons to be drawn

Employers now agree that lessons need to be learned from the mistakes of the SPD-led coalition over the past four years. "Words must now be followed by action," said Hans-Joachim Körber, chief executive of Metro, Germany’s largest retailer, after the poll results.

"Top of the list are the simplification of the tax system, a clear reduction of non-wage labour costs and reform of the over-stretched social security system, flexibility in the labour market and a qualitative improvement of our education system," he said.

Those demands were echoed across the board by heads of companies. Hans Peter Keitel, chief executive of Hochtief, the construction group, called for an acceleration in privatisations.

Plenty of hurdles for Schröder to overcome

But the going will be far from smooth for Schröder. Analysts fear that Schröder will be hindered in carrying out economic reforms by a stronger Green party, buoyed by its election result. It could push harder for further promotion of renewable energy and the "eco tax" series of fuel tax increases hated by business.

Schröder also faces an upper house of parliament, the Bundesrat, dominated by opposition parties intent on thwarting the government that narrowly robbed them of victory.

And Edmund Stoiber, the Bavarian state premier and conservative loser in Sunday's election, had an ominous prediction: "The Schröder government will only be able to govern for a very, very short time. With this Red-Green coalition, Germany won’t return to economic health."