In the last 15 years Germany has been ruled by a non-declared "grand coalition of indecisiveness," formed by two social democratic parties, one of the left, one of the right. By making this grand coalition explicit, the recent election result in Germany may not turn out to have been the disaster it was widely portrayed as in Britain.
A combination of proportional representation (and thus coalition government), a powerful second chamber representing the states and a strong constitutional court has left Germany with relatively weak central government. Moreover, thanks to their permanent control of certain key states, neither of the two big parties—SPD and CDU/CSU—has ever been completely out of power and thus able to renew itself in the way that the Labour party did under Tony Blair.
All these factors have made reforming the German model a tough job. But there now seems to be sufficient agreement in the coalition on both constitutional and socioeconomic reform to give the reform process a decisive push.
The priority for constitutional reform is to reduce the power of the second chamber, the Bundesrat, so that at least one of the significant vetos in the system is less easy to wield. There is already a fair amount of agreement on this between the two main parties.
Economic reform means only one thing—making the German economy more employment-friendly. The industrial sector, particularly the export sector, is as strong as it has been in 20 years. Exports are booming, profits are at record levels, wages have been stagnant. German exporters have been forced by their high wage costs and the arrival of the euro to sharply improve their productivity. (Germany went into the euro with a deutschmark over-valued in comparison with the other main currencies by 10 to 15 per cent.) As a result, industry is shedding labour, despite Germany being the world's top exporter. The country's problem is that the service sector does not step in to employ the people who can no longer get jobs in industry. There are deep reasons for this embedded in German attitudes and the education system, but there are also more superficial explanations to do with costs and regulations, which a reforming coalition can deal with. For example, it takes more than twice as long and is 50 per cent more expensive to create a new business in Germany than in Britain.
Reforms to tax, red tape and labour costs can largely be focused on smaller service companies, leaving the unionised industrial sector to carry on more or less as it is. But even such service sector reforms may be resisted by the SPD under the banner of "social justice."And it will not be completely wrong, by its own lights, because service sector reform does mean a larger lower-wage sector than Germany has been used to in the past few decades.
The key here is to adapt British reforms, such as the New Deal on jobs and tax credits, in which the state tops up the pay of low paid workers. The SPD has already done some of the tough work in this area of labour market reform, sharply cutting unemployment benefit for some groups, so providing state support for those on low wages should be easy by comparison.
Success for the coalition is not guaranteed. Many of Merkel's CDU rivals are hoping for her to fail, and an SPD consumed by a left/right battle will not make a reliable coalition partner.
The market will continue to force reform at least in the trading part of the economy—perhaps even more aggressively if there is global downturn. But the market will not automatically create more jobs in the service sector unless the rules are adjusted to make it easier. The best hope is that the electorate does grudgingly accept the need for reform, as most opinion polls suggest. And once voters see that reform is possible without destroying the social fabric, it will become easier to give the German model the overhaul it needs.
One political shadow hanging over the grand coalition is the depressingly strong performance of the demagogic, anti-reform, Left party, led by Oskar Lafontaine, which won nearly 9 per cent of the national vote. During the last grand coalition, from 1966-69, the far right enjoyed a brief surge in support. It may be that the Left party will benefit from the perceived failures of the grand coalition this time around and will attract high levels of support in the polls. Although the SPD has for now ruled out a coalition with the Left party, with Schröder (and perhaps Lafontaine) gone, some sort of coalition may be imaginable in the future. A combination of the SPD, Green and Left parties would today have a clear majority of seats in the Bundestag. The possibility of a return to power via alliance with the Left party must be attractive to many on the left of the SPD, and may give the party an excuse for a faint-hearted commitment to making Merkel's grand coalition a success.
But that is a problem for the future. For now, the initiative is with a moderate, reformist grand coalition that may be just what Germany needs.
