The stage is set for Merkel to try again
October 1, 2009
By Matthew Lynn
Not many politicians get a dress rehearsal for government. German Chancellor Angela Merkel is one of them. In retrospect, the first four years of Merkel's time in office might well prove to be a trial run.
Now, with a successful campaign for re-election behind her, and at the head of a centre-right government rather than the uneasy "grand coalition" with Social Democrats of her first term, she has a chance to show what she is genuinely made of.
In her next term, she has the opportunity to be what she promised four years ago: a reforming, pro-business leader in the style of Margaret Thatcher two decades ago. Germany needs it. So does Europe.
The pace of change in Germany has been glacial. It needs a dynamic liberalising of its market to unleash the kind of entrepreneurial vigour that transformed its economy in the 1950s.
The eurozone economy needs one country to lead it. France under President Nicolas Sarkozy appears to have lost interest in economic progress. The UK looks set to spend a decade dealing with the mess created by the credit crunch. Spain is in an even worse mess. If any country is going to have the capacity to lead Europe out of this recession, it can only be Germany.
Will it happen? The opportunity is there.
The German elections held over the weekend turned into an easy victory for the centre-right. Instead of having to govern in coalition with the Social Democrats, the way is clear for Merkel to form a coalition with the pro-market Free Democratic Party (FDP). The pressure on the new state will be coming from the right, not the left.
Moreover, the left now looks to be permanently fractured. The Social Democrats scored a dismal 23 percent of the vote.
That wasn't so much because Germans drifted right as because the left split. The anti-capitalist Left Party won 11.9 percent while the Greens scored 10.7 percent. That matters. With the left broken into three parties, it's unlikely it can win power again for years. Merkel, with the FDP, now can shift Germany in a pro-market direction.
That doesn't mean it will happen. The markets were deflated by Merkel's first term. After campaigning on a radical platform, prompting hopes among investors, she turned into a traditional German consensus politician. Maybe as she was hemmed in by a coalition with the Social Democrats. It might be because those are her core beliefs. We're about to find out.
It is unlikely Merkel will allow her partners in state to push through anything too radical. Even so, the stage does seem set for a tax-cutting administration, one more willing to take on the entrenched power of the trade unions. After all, the Free Democrats actually upped their votes in the election. That gives them power and momentum, the two crucial factors in politics.
There is little debate about the kind of reform that Germany needs.
Its big-company, export-led, manufacturing-dominated economy must be reinvented. It needs small firms that concentrate as much on design and marketing as on precision engineering; more flexible employment rules to create jobs as fast as it axes old ones; a financial sector that can deliver plenty of capital to entrepreneurs; a retail sector that gets Germans shopping again; and a tax system that rewards work and success, instead of punishing it.
The world views Germany as intensively conservative, wedded to its social market model. But in the 1950s it was one of the most creatively entrepreneurial countries in the world. With the right policies it can be again. Merkel and allies must deliver.
Matthew Lynn is a Bloomberg columnist. The opinions expressed are his own
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