Germany takes its medicine badly

Tony Blair's problems are nothing to what Chancellor Schroder faces in Berlin. His party loathes him

When you reach rock bottom the only way to go is up. Yet the way things have gone for Germany's chancellor, Gerhard Schroder, he may be excused for wondering whether his political career will defy physical laws and descend through the bedrock. Hasn't he done enough, after all, to earn more respect? In almost six years as chancellor, he has made Germans stop feeling self-conscious and freed them from always worrying about doing the wrong thing. This is a psychological breakthrough on a national scale. He has faced down President George W Bush on Iraq, a war he and his countrymen believed unjust and unjustified. Braver still, he has launched welfare and labour reforms, genuine social changes that the sit-tight conservatives who ruled before him simply never dared try on.

But politics ain't fair. Look at France. Without doing more than idly oppose the Americans on the war, Schroder's centre-left soulmates across the Rhine exulted on 28 March when a landslide victory in regional elections gave them an unprecedented clean sweep of every province in mainland France except Alsace. President Jacques Chirac and his conservative government, stymied on reforms of the kind Schroder has effected, are in a quandary over how to carry on.

Look, too, at Britain. Tony Blair is in clover compared with his fellow social democrat in Germany. Schroder has been on the brink of resigning, something Blair has not seriously contemplated, in spite of his woes over Iraq. Blair's left may irk him, but Schroder's ruling Social Democrats are in a truly foul and rebellious mood, so far behind the opposition conservatives in the polls (25 per cent against 49 per cent at one count) that the enemy is out of sight.

Each time the Germans vote in state elections, Schroder's SPD is not just corrected but thrashed: it has happened in past months in Bavaria and Hamburg, hitherto a fortress of the left. The punishment seems likely to be repeated in a series of coming state polls. The lash is applied by Christian Democrats, only too happy to stand by and see Schroder punished for reforms they didn't make but which they helped vote into being. Under Angela Merkel, an East German gradually progressing from political mouse to strongwoman, the conservatives are now ideally placed to oust Schroder without advancing a visible programme of their own.

Winning the election for chancellor in 2006 looks to be out of Schroder's reach, even if he does not step down beforehand. On 21 March, in fact, he did just that - though only from the leadership of the SPD. It was an extraordinary step for him to have to take.

To an extent, Schroder's plight mirrors Germany's. The country is in a deep sulk. It needs a vigorous pick-me-up and Schro-der, an amiable charmer-turned-irritable loser, cannot find the ingredients; instead he seems to have concocted a dissatisfaction potion. Berlin, where he rules from a futuristic chancellery, is still a very curious place: magnificent new architecture and renovation work have replaced the devastation of bombed sites and 40 years of communist construction, yet it is somehow unpeopled for a capital of its stature. Berlin has more unused office space today than it had five years ago - disheartening, considering that office rents have plunged by half. You hear of business people who are actually moving out of the shining capital.

The trouble for Schroder is that Germans still believe their system should be a model for others, a cherished notion born in the "economic miracle" of the 1950s. Alas, it is no longer so, and has not been so for some time. Europe's biggest country is still a rich one, but scarcely a model. This is demoralising. According to debatable calculations made by the Economist, income per head in Germany has fallen to 1 per cent below the EU average.

The glum feeling that Germany has somehow lost its way derives not just from the immense burden of bringing the former East Germany into the household, or from a put-upon sense of having traded in wealth and economic superiority for the badge of exemplary citizenship in a hugely expanded EU. The problem is the structure of the German economy itself, with its exceptionally high labour costs, generous welfare (overgenerous when set against financing potential) and heavy emphasis on consensus between industry, unions and government.

Unlike Blair, whose neoliberal outlook he mostly shares, though he shrinks from saying so, Schroder did not come to power as heir to a brutal domestic revolution carried out by a German Thatcher. His conservative predecessor, Helmut Kohl, was far too much a part of the consensus to try clearing the social decks. Schroder suffers because he has had to introduce the brutal stuff himself. The flak that Blair receives from the Labour left is confetti compared with the shards of resentment directed at the chancellor by the SPD left.

The reason for the resentment, and indeed for the current rise in voter anger, is Schroder's attempt to turn the economy around, which he calls Agenda 2010, a date chosen to suggest political vision. Launched a year ago and running since the New Year, the Schroder reform programme targets what ordinary Germans have found most appealing in their famous "social market" economy. No matter that they knew reforms were needed, no matter that reluctant Social Democrats helped put them through parliament: the nation is taking its medicine badly.

Agenda 2010 calls for reduced job protection through the easing of strict rules against firing, reduced unemployment benefits, an obligation on the long-term unemployed to accept jobs offered or forfeit benefits altogether, and a new health levy to keep German eyes and teeth in shape. If there is an overarching concept in all this, it is to loosen up the economy in order to make Germany responsive in the face of globalisation. Tax cuts are in place; pension reform is in store, with a plan for putting back the official retirement age from 65 to 67 and trimming state pensions, as Germans are pushed towards private insurance schemes.

The objection to Agenda 2010 from the earnest fraternity of German economists is that Schroder has not gone far enough to produce the big jolt Germany needs. The complaint from his Social Democrats and the population at large makes the opposite case, however. Germans are voting to say they are hurting and have nothing to show for it - not even any relief from 10 per cent unemployment, which is roughly twice the British rate. Party members, who have been deserting in droves, say Schroder has violated basic party principles. His response is: give my reforms time to work; I am saving the social model, not destroying it.

The chancellor decided to resign a month ago, say those who know him, but thought better of it. Instead, he chose to relinquish the party leadership, which on 21 March went virtually by acclaim to Franz Muntefering, a loyal ally and experienced party hand who can be expected to improve the party's mood and deflect loathing from the chancellor.

In fact, the SPD has never loved Schroder. It considered him too uppity and opportunist to be a true son of the left. It first accepted him as its candidate for chancellor in the 1998 general election, when his popularity in Germany seemed irresistible, and he repaid its grudging tribute by dethroning the everlasting Kohl. SPD members seemed to like him best when he handed over the leadership, telling them how he had been through "damned difficult times, with the support of those I love and those who love me". As regards mutual love, his farewell begged the truth in both directions - but it sounded good. The party's soul is now left to the good Muntefering, a backer of Agenda 2010; the job of governing Germany is left to Schroder.

If there is a way out of the hole, Schroder hasn't found it. A dramatic fall in unemployment might do it, but that would require economic growth this year of 3 per cent or so; official estimates are roughly half that. Should the SPD take a hiding in Germany's biggest state, North Rhine-Westphalia, in a pivotal election a year from now, the chancellor's number will be up. His party has held postwar Germany's old industrial heartland for ever. Its loss would give the opposition right two-thirds control of the Bundesrat, the upper house representing Germany's 16 federal states. Since the Bundesrat has formidable veto powers, a debacle of this sort would make further government impossible for Schroder.

None the less, all hope is not dead. Schroder scores well on foreign policy, even though his Iraq bonus has not run as long as he had hoped. He has taken care to mend fences with the US; the French idea of Europe as a counterweight to the US is not his. By leaning on Poland, he now seems sure of getting the EU constitution he wants. Moreover, his foreign minister, Joschka Fischer of the Green Party, not only continues to top popularity ratings but stands four-square behind the chancellor on Agenda 2010.

Schroder knows full well that he was re-elected in 2002 thanks to conveniently timed flash floods in Germany and to George Bush's fixation on Iraq. In voters' eyes, he handled both nicely. He cannot count on the heavens opening or Bush going haywire in quite so co-ordinated a manner next time. But there must be something out there waiting to happen to pick him off the floor. It would only be fair.