German elections: Exit Schröder, enter Merkel?

Surprise: voters don't like pain without gain

GERHARD SCHÖRDER, the German chancellor, certainly retains a capacity to surprise. Almost everybody expected his Social Democrats (SPD) to lose the election in North Rhine-Westphalia on May 22nd, which they duly did, pushing them out of power in their heartland state for the first time in 39 years. But almost nobody predicted Mr Schroder's response: to advance the elections to the Bundestag, the lower house of parliament, from autumn 2006. Calling an early election is not straightforward in Germany, but it seems likely that Mr Schroder will get his way, and that the poll will be held in mid-September. Undeniably, it is a bold stroke. But all the signs are that the ruling SPD-Green coalition will be hammered, losing power to the Christian Democrats (CDU), probably under the leadership of Angela Merkel, who has led the party in opposition for five years.

If so, Ms Merkel would become not only Germany's first-ever female chancellor, but also the first post-war chancellor from the former East Germany. She is inexperienced and largely untested. Yet, subject to a few caveats, a government led by her has every chance of being an improvement on the present one led by Mr Schroder.

Her foreign policy is not yet set in stone, but Ms Merkel would be more Atlanticist. She was critical of Mr Schroder's alliance with France's Jacques Chirac in opposing the American-led war in Iraq, even if she would be unlikely now to help more, for example by sending troops. She would be less likely to put the Franco-German relationship ahead of other bilateral links: she would be keener than Mr Schroder to reach out to the British and the Americans. She would also be less forgiving of Russia's Vladimir Putin, whom Mr Schroder has been too reluctant to criticise. The one fly in the ointment on foreign policy is that Ms Merkel is against Turkish membership of the European Union. If she became chancellor in September, her new allies would have to persuade her not to block accession talks with Turkey in October - on the basis that such talks will anyway last a decade or more.

It is however domestic policy that will be the biggest challenge for a new chancellor. Mr Schroder's loss of popularity can be directly linked to the economy's persistent slow growth and, in particular, his failure to cut unemployment. When he was first elected in 1998, he declared rashly that, if his government did not cut unemployment below 3.5m, it would not deserve to be re-elected. Seven years on, German unemployment stands just below 5m, the highest level since the early 1930s. It is unlikely to come down unless and until Germany brings in more substantial economic reforms.

In 2003, Mr Schroder belatedly embraced this cause with, first, his Agenda 2010 public-pension, health-care and benefit changes and, second, the Hartz IV labour-market reforms. Many in the SPD now say it was these reforms, which seem to have brought plenty of pain but no gain, that lost them the elections in North Rhine-Westphalia and in other states. Even within the opposition, plenty of voices are heard arguing that German voters simply will not accept big reforms.

The price of delay

Yet a more compelling case is that Mr Schroder's mistake was to start reforming too late, and then to do too little. Nowhere in Europe has economic reform been easy; many places endured pain for years before the benefits in lower unemployment and higher growth came through. Germany's love of consensus and its federal system both make changes unusually hard to deliver. Even so, there are now quite a few examples - such as Britain and the Netherlands in the 1980s, or Finland and Sweden in the 1990s - of European countries that have managed the process in spite of the pain.

Could a CDU-led government under Ms Merkel do such a job? She would, unusually, have a substantial majority in both houses of parliament, as well as in most German states. The trouble is that Ms Merkel's CDU is by no means a radical, free-market party. Its Bavarian sister, the Christian Social Union, is even keener than the CDU on preserving Germany's much-vaunted social model. Both parties are also strangely stuck in the past on issues such as civil rights, education and immigration. So far, moreover, Ms Merkel has not developed any concrete plans for the big changes needed to the tax system, health-care financing, public pensions and the like.

This is a worry, because even if she is elected in September the window of opportunity is small and she will need to move fast. As early as next March there will be three major regional elections (and in 2008 another three), which will limit the zeal for tough reforms. The odds are that if she became chancellor Ms Merkel would make a better fist of reform than Mr Schroder did. That might still not be enough.