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13 November 1998

The German who worries new Labour

Peter Mandelson is keeping a watchful eye on Oskar Lafontaine.John Lloydexplains

By John Lloyd

The government is bending its efforts to support Gerhard Schroder, the German chancellor, against Oskar Lafontaine, his finance minister. The main agent in this intricate contest over ideology and for national interest is Peter Mandelson, the Trade and Industry Secretary.

Mandelson, in addition to his cabinet post and his overlordship of the Millennium Dome project, has added the task of conducting a dialogue on the Third Way with Bodo Hombach, chief of staff to Schroder and an architect of “die neue Mitte” (the new middle), the German chancellor’s equivalent of the Blairite Third Way.

The Trade and Industry Secretary is – in private – relatively open about the nature of his task. Last week, he told a private gathering that Schroder – whom he had met earlier in the day when the German leader visited Tony Blair – was pleased by his appointment, but that Lafontaine was not.

New Labour policy-makers, speaking anonymously, confirm that the project has as a clear but hidden agenda: the strengthening of Schroder against Lafontaine. “No one will say this, but it’s the case,” said one. “It’s seen as really quite important.”

There are two reasons why new Labour is deeply distrustful of Oskar Lafontaine – one “new” and one “old”. The “new” reason is ideological; it sees Lafontaine as a man whose enthusiasms for general reflation and “tax and spend” policies are largely untouched by the Third Way debate. He has complained that the Bundesbank is inhibiting growth and job creation by not lowering interest rates.

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Further, Lafontaine was instrumental in forcing the resignation of Jost Stollmann, the businessman whom Schroder had asked to be his economics minister. Both Schroder and Stollmann favoured a grand coalition with the Christian Democrats, the main party in the previous government – and had told British ministers so before the last election. However, the SPD formed a coalition with the smaller, leftist Green Party – Lafontaine’s preference.

German commentators tend to see Lafontaine as a simple leftist. Werner Funk, a columnist for Stern, described him as “an unreconstructed social democrat”. But the left-leaning Spiegel, in an interview with Lafontaine, discovered a man full of ideas not normally associated with the left, such as transforming the unemployment benefit from a cover-all system to one targeted towards the needs of the poor.

New Labourites are also divided, sometimes within themselves. “He is a tax and spender . . . I think,” said one researcher in a think-tank close to the government. A No 10 aide said that “no one quite knows where the Germans are coming from yet. At one extreme Lafontaine is being presented as a leftist Keynesian – but so far he has only wanted the Bundesbank to lower its interest rates.”

Richard Portes, head of the Centre for Economic Policy Research (CEPR), says: “I don’t think there are many differences between new Labour and Lafontaine on the international economic agenda; there, the great issue is that most of Europe is inside the single currency and Britain is not. The differences will come on the domestic agendas.” But, as Portes acknowledges, domestic agendas cannot now be separated from international ones within the European Union.

At least as important as the differences on economic policy, however, is the perception that Lafontaine – a fluent French speaker from the extreme west of the country on the French border – will strengthen the already strong Franco-German link, and beat back Britain’s efforts to be one of the leaders of Europe. This is the “old” reason for new Labour’s distrust. Schroder, by contrast, is seen as pro-British.

Lafontaine shares the French view that the European Central Bank must have a strong political input to counterbalance its strict mandate to ensure low inflation and stable prices. He is also likely to wish to strengthen the “Euro X” committee – the group of finance ministers from the 11 European member states which are part of the single currency. Britain, in spite of protests, is firmly excluded from Euro X.

The Franco-German desire to strengthen this is no secret, but it received a significant boost earlier this week from a speech in London by Dominique Strauss-Kahn, the French finance minister.

Strauss-Kahn, speaking to mark the CEPR’s 15th anniversary, noted that he and Lafontaine had launched a joint paper on reforming the International Monetary Fund which called for the Euro X group to elect a president and vice-president – one of whom would always be from France, Germany or Italy. “This,” he said, “would ensure that one of the European members of the G7 has the authority to speak for the euro zone in international economic affairs.”

This proposal would see the emergence of a powerful figure who would, in effect, be the European finance minister – and who would conduct a dialogue with the central bank. Strauss-Kahn believes that the Euro X and bank presidents should be in constant touch, as Robert Rubin, the US treasury secretary, and Alan Greenspan, chairman of the Federal Reserve Board, are at their weekly breakfasts.

Britain, however, will be outside this group for some years – possibly until 2005, according to some calculations. The consequences for Britain and for sterling could be severe – especially if the Euro X group succeeds in reaching agreed decisions on a routine basis.

Hence the anxiety in No 10, and hence the importance attached to Mandelson’s discussions with Hombach. In a Financial Times interview earlier this week, Hombach described his and Schroder’s conception of the “new middle” as “a middle way between a purely liberal economic process without state influence and a dirigiste politics”. Would Lafontaine agree with this? “The conflict [between Schroder and Lafontaine] is much less than how it is described,” he claims. But new Labour is not convinced.