In a bind

The grand coalition will need quite a lot of luck to make Germany work better

LAST summer Sir Peter Torry, Britain's ambassador to Berlin, asked a group of journalists which new German films he should watch. They came up with a list of titles that pretty much summed up what had been on Germany's mind in recent years: "Ways to Improve the World", "The Fat Years Are Over" and "The Great Depression".

Germans have never been wildly cheery (see chart 2, next page); explanations for the national malaise include the weather, Protestantism, philosophy and the Nazi era. But in recent years self-criticism had been veering towards self-flagellation. German self-esteem had been badly hurt by the slide from the top of the economic and social league. The feeling was fed by the media and by professional doomsayers.

Yet in the months before last September's election, people started to get fed up with despondency and started buying books that made them feel better about themselves. One of the more interesting was "Foreigners See It Differently" by Susan Neiman, an American philosopher and director of the Einstein Forum in Potsdam. She pointed to Germany's low crime rate, its admirable cultural infrastructure and its good public transport system and argued that in their self-pity, Germans tend to forget that their country is in better shape than most. What they badly need is some American can-do optimism.

Since the new government was installed in November, the mood has much improved. Polls show that people are more willing to accept change. The political constellation also appears much more favourable for reforms: the grand coalition has a two-thirds majority in the Bundestag, Germany's lower house, and also controls the Bundesrat, the upper house, albeit by a much smaller margin. Perhaps for the first time since unification, there seems to be a real opportunity for politicians to prove that they can move fast and far enough.

In the early 1980s, when America and Britain were in crisis, Germany was praised as a clockwork mechanism whose cogs meshed perfectly--rather like those well-engineered German machines that never seem to break down. The "German model", although to a large extent the result of historical accident, performed brilliantly at a time when high-quality industrial products were much in demand and the pace of economic change was still relatively slow.

The political system, in particular, had proved highly effective at delivering smooth, incremental change. It was a machine with two big wheels in the middle, the Christian Democrats (CDU) and the Social Democrats (SPD), and a small one running in coalition with either one of the larger two, the Free Democrats (FDP). Faster-turning wheels to the right and to the left never really got anywhere, partly because of Germany's experience with fascism and partly because of communist East Germany next door. Even the Greens did not disturb this arrangement much, because they quickly became simply a left-leaning alternative to the FDP.

The machine had powerful safeguards built in to keep it on track, particularly the Lander, Germany's constituent states. Via the Bundesrat, their representative body in Berlin, the Lander have a say in many key areas. The "financial constitution", a cobweb of tax-revenue equalisation and joint public spending by the different levels of government, has allowed wealth to be spread pretty evenly across the nation.

Yet it is Germany's federal structure that has increasingly jammed up the country's political machine. Through legal changes and judgments by the Federal Constitutional Court, the Lander have accumulated too many veto rights, offering many points of leverage for interest groups--and making most reform exceedingly difficult. The financial constitution, for its part, has come to discourage the states from trying new solutions.

German unification in 1990, welcome though it was, probably made reform even harder. To speed up eastern Germany's integration, vast amounts of money were pumped in (a total of euro1.3 trilllion to date), and any plans for change were put on hold. Even now, the eastern Lander receive transfers from the western ones of euro80 billion a year, or 4% of Germany's GDP.

Unification gave Helmut Kohl, the chancellor of the day, a new lease of political life, and from the mid-1990s he did try to introduce some structural reforms. But tripartite talks with trade unions and employers proved fruitless, and reforms were blocked by the SPD, which at the time controlled the Bundesrat.

Mr Kohl's successor, Gerhard Schroder, found himself in a similar bind after only one term of office. Like Mr Kohl, he tried tripartite talks. When those failed, he set up commissions to draw up reform proposals, and pushed them through as his "Agenda 2010". To the dismay of his internal opposition, the SPD's left, he operated a de facto grand coalition with the external opposition, the CDU, which had taken control of the upper house.

Predictably, the result of all this manoeuvring was a bit of a mess. Agenda 2010 tried to move in the right direction, but much of it consisted of short-term fiscal repairs mixed with political compromise. Even so, it cost the SPD one regional election after another. When the party lost power in its traditional fief of North Rhine-Westphalia in May last year, Mr Schroder realised that his method had run its course and sought new federal elections--hoping, some say, that the result would be an official grand coalition.

New brooms

Now that it has come to pass, will this new left-right alliance, led by Angela Merkel, make a better fist of resolving Germany's problems? It has certainly brought a change in style. Mr Schroder trusted his instincts and was a master at taking people by surprise. Ms Merkel, by contrast, is utterly methodical. A doctor of physics, she seems to view political challenges as a scientific experiment in which she allows the different forces to slug it out before intervening. This may be a useful qualification for heading a grand coalition, a configuration last tried, with limited success, in the late 1960s. In theory at least, she should manage to keep the two big parties together: both of them now need to be on their best behaviour, or run the risk of being punished at the next election.

Already, the thrust of German politics has changed perceptibly since the coalition was formed in November. Ms Merkel, who during the election campaign advocated rapid reforms, now talks about the need for "small steps". At times she sounds almost like a Social Democrat. Journalists have started to complain that there are not enough leaks or backstabbing, and lobbyists are finding it harder to get traction.

Yet for the new government to make a difference, it needs to win three gambles. The first is to reduce the budget deficit without killing the incipient recovery. This year it intends to spend a bit more, even if that will cause Germany once again to exceed the limit of 3% of GDP set by the EU's stability pact. Next year, however, it plans to cut subsidies and other spending and, above all, increase the value-added tax rate from 16% to 19%.

The weaker the recovery, the more difficult it will be for Ms Merkel to win the second bet: getting the coalition partners to agree to sustainable solutions to at least some of the country's structural problems. The test case will be the financing of health care, which the government intends to tackle later this year. With medical spending expected to rise steeply because of demographic factors as well as technological progress, the big question is how to keep health-care contributions from becoming a prohibitive tax on labour.

The third wager is that the Lander will do their bit to improve the way Germany is run. They have already agreed to a reform of the federal structure, which will reduce their veto rights over federal affairs, in return for gaining more local powers, notably over education. But it is quite another question whether the states will go along with a reform of Germany's "financial constitution". And Ms Merkel's rivals within the CDU, most of them state premiers, may want to keep her from becoming too successful.

Much, therefore, can still go wrong on the way to further reform. And even if Ms Merkel's "small steps" lead somewhere, they may not solve some of the biggest problems--such as education, the subject of the next article.

Article forms part of a survey of Germany. The 'Grand Coalition' will need quite a lot of luck to make Germany to work better.