Calculating to A Fault

This summer, a remarkable survey raised eyebrows in political Berlin. The Al-Lensbach Institute, a respected arbiter of the country's mood, found that 45 percent of west Germans (and 57 percent of east Germans) consider socialism "a good idea." Only 25 percent of Germans disagreed. Despite the country's disastrous experience with 40 years of communism, socialism's "magic allure" has steadily increased over the past decade and a half, from 36 percent nationwide in 1991, says Allensbach political analyst Thomas Petersen. "The Zeitgeist," he says, "has definitely shifted left." The Germans' growing love for leftist ideals contrasts sharply with the incredible boom of Germany's (mostly) capitalist economy. Last week, new numbers showed that parts of German industry are growing at double-digit rates not seen since the go-go 1960s, thanks in part to some decidedly unsocialist economic reforms. Over the past year, an unprecedented one million Germans left the unemployment rolls, cutting the jobless rate from its all-time high of 12 percent in 2005 to less than 9 percent today. Some categories of workers who used to have little chance of ever landing a job—like workers over age 50—are now also finding employment. And once again, Germany appears to be turning into an engine of growth for Europe.

So what accounts for the strange lurch left? (On the following pages, four experts weigh in on that question.) It seems as soon as the economy perks up, the willingness to face tough economic realities is gone. Now, this mood threatens to stop—and even unravel—the very economic reforms that helped unleash the present boom. In response, both parties in Chancellor Angela Merkel's unwieldy coalition government, the center-left Social Democrats and Merkel's own center-right Christian Democrats, seem to be falling over each other with proposals to roll back reforms, while she herself remains largely out of the fray. Whether it's more generous unemployment benefits, handouts for families, or new minimum wages—"every single policy being proposed in Berlin makes an economist's hair stand on end," says Holger Schmieding, chief economist at Bank of America in London. Depending on how much of it becomes law, Schmieding says Germany's economic situation may once again darken. In any case, the brief Berlin Spring of German economic reform is over.

The shift is even more dramatic considering where Merkel came from. Born and raised in East Germany, she experienced firsthand what it means to grow up in an inefficient and unfree socialist system. In 2005 she campaigned for the chancellorship on a platform of radical economic change, promising wide-ranging deregulation and tax reform. The first two years of her tenure have produced real steps forward. Her government has lowered and simplified Germany's byzantine corporate tax, raised the retirement age from 65 to 67, and begun devolving power to Germany's 16 states. Thanks to the economic rebound—and a massive tax hike—the government expects to have a virtually balanced budget this year, for the first time since 1989. While this doesn't compare to the reform milestones under her predecessor, Gerhard Schr?der, her balance is still solidly positive, Schmieding says.

Now she seems curiously aloof as she watches her coalition associates pick apart her agenda. The Social Democrats, whose rank and file have never forgiven Schr?der for his cutbacks to their cherished welfare state, are hemorrhaging members and voters to a radical party called simply Die Linke—"The Left." Its chairman, Oskar Lafontaine, is a xenophobic populist, prone to declaring sympathy for Hugo Ch?vez and Mahmoud Ahmadinejad. The demagoguery seems to work: Die Linke now polls 11 percent, while the Social Democrats are down to 25; most of the rest of the left-wing vote goes to the Greens, at 10 percent. But a more startling indicator of the country's shifting climate is the broad support for Die Linke's policies. Two thirds of all Germans—including large swathes of Merkel's ostensibly conservative voters—agree with all or some of the party's platform, including reinstating the old retirement age, extending unemployment benefits, and pulling all German soldiers out of Afghanistan.

Indeed, it's astounding, and almost surreal, how deep the consensus against reforms has become—just at the moment when they are bearing fruit. Seventy-two percent of Germans say their government is doing too little to advance "social justice," the highest value for German voters. Eighty percent want welfare handouts raised and the retirement age lowered. Even among Merkel's conservatives, 71 percent say that companies like Deutsche Telekom or the energy utilities should be owned and run by the state. "Germans have changed their mind and want the state to regulate the economy again," says Manfred G?llner, president of the Forsa polling institute.

J?rg Lau, commentator for the weekly Die Zeit, thinks such sentiments aren't nearly as radical as they seem. They express, he says, a deeply conservative nostalgia for the security of the cradle-to-grave welfare state of the 1970s and '80s, before globalization and outsourcing began to spread insecurity deep into the middle classes. To Lau, the left-wing longings of a majority of Germans are really their retreat from what they perceive as a too-complex and hostile world. But whether radical or conservative, the trouble begins when such sentiment turns into policy. A proposed law to "protect" German companies against foreign hedge funds—fear of which the German media have done their best to fan—risks hollowing out shareholder rights, making it much harder to influence management. That would be a step backward toward the old days of "Deutschland AG," where lax governance insulated inefficient companies from meddlesome owners.

Privatization and deregulation have virtually stopped, which economists say makes it all but certain Merkel will not reach her goal of raising Germany's long-term growth. Come the next slump in growth, "it will be back to the German disease" of underperforming and overspending, says Otto Fricke, chairman of the Bundestag's budget committee, who also says both major parties have returned to their pre-Schr?der tax-and-spend reflexes.

The most fascinating question is where Merkel herself stands on all this. Her one attempt to push through a major reform, deregulation of public health insurance, ended in squabbling and failure. Since then, she's avoided risky positions. She has declared climate change as the driving issue for the remainder of her chancellorship, an easy topic for winning approval. She talks about abstract notions of fairness and justice, and also about making Germany fit for globalization—and lets her associates battle over specifics. "The basis of her popularity is that she doesn't get involved in policy," says G?llner.

What does she really want? Some consider her an opportunist who shed her reform persona the minute it was no longer expedient for keeping her in power. Others speculate she is a brilliant tactician who, given the straitjacket imposed by her coalition, is using her new green and left-of-center politics to expand support among middle-of-the-road voters in order to crush the Social Democrats in the 2009 election. The risk of Merkel's standing still is that the next economic downturn will show how skin-deep the country's first dose of reforms has been. But then, at least, we will know where she truly stands.

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