Don't Worry ... Be Happy!

The Italian paparazzi had a field day. Staking out German Chancellor Angela Merkel during her Easter vacation on the island of Ischia, one of them caught her bare-bottomed as she changed into her bathing suit. In a flash, the British newspaper The Sun bought the buttocks and spread them across page two--and just as quickly, an indignant German press rushed to save Merkel's honor. The tabloid Bild, usually the lead dog in a pack of media Rottweilers, clothed the chancellor with a chaste red bar. "You whisky-bloated butt-faces! Our chancellor has a doctorate in physics and can explain Einstein!" gushed the paper in Merkel's defense.

If the German media are predictably thin-skinned when it comes to British barbs, it's Bild's glowing adulation that more tellingly reveals the national mood. Long after the pundits expected the new government's honeymoon to end, Germans are still aglow over their not-so-new-anymore chancellor. Merkel's approval rating is still at 70 percent five months after she took office, a wave of public enthusiasm no other postwar chancellor has enjoyed. The popularity of her unity government of socialists and Christian Democrats coincides with business- and consumer-confidence numbers seemingly locked in at longtime highs. Never mind that Merkel operatives leaked plans last week to add ¤15 billion to a planned ¤32 billion annual tax hike, the biggest in German history. Never mind that the IMF warned last week that the country's anemic boomlet of 1.3 percent growth in 2006 will collapse next year once those hefty taxes hit. Never mind that unemployment remains stuck at a dismal 12 percent, and that labor-market reforms to change the situation have now been put on ice. Don't worry, be happy, Germans have decided to tell themselves.

The political reasons for Merkel's popularity are easy to grasp. After the hysterics and drama of the Gerhard Schröder years, her leadership style has been refreshingly sober and professional. She's moved quickly to repair Germany's tattered foreign relations, appealing to Germans' deep longing to be respected abroad. Together, the two ruling parties unite 74 percent of German voters; instead of noisily battling in Parliament, politicians now make decisions quietly, behind closed doors. "The majority of Germans yearn for harmony," says Chris-toph Keese, editor of Welt am Sonntag. "They like the idea of two parties sharing power instead of fighting each other in public." It also helps Merkel that both camps of Germany's traditionally partisan media now find themselves "in power," so to speak, which dramatically calms the tone of debate.

But look closer, and it's not at all clear why Merkel deserves this kid-glove treatment. On the contrary, her first five months have been a great disappointment for some who once backed her. "It's astonishing and saddening how quickly and completely she's thrown overboard her plans to overhaul Germany," says Guido Westerwelle, head of the opposition Free Democrats and a onetime Merkel fan. In the campaign, Merkel promised to unleash Germany's shackled economy with more flexibility, less regulation and spending cuts that would cause, in the words of one CDU official, "great screaming and clattering of teeth."

Now--poof!--those cuts have been replaced by one tax hike after another, including a three-point rise in the value-added tax and a so-called rich people's tax, affecting higher incomes. Last week, CDU Bundestag whip Volker Kauder released details of a long-awaited reform of the country's wasteful public-health system. Instead of the promised overhaul, the plan is now to pump more money into the old system with a new "health solidarity surcharge" levied on taxpayers--a strategy of avoiding decisions and papering over conflicts with money, perfected by Merkel's mentor, Helmut Kohl. All in all, tax hikes (called "state income enhancements" in the government's Orwellian newspeak) will suck as much as ¤195 billion out of consumers' wallets over the next three years. True, Merkel has instituted some more-liberal reforms, such as raising the retirement age to 67 and implementing small cuts in welfare premiums. But how this will turn Germany into one of Europe's top three performers on growth and employment by 2015, as Merkel says she has set out to do, remains the chancellor's secret.

What's more telling than Merkel's metamorphosis from reformer to tax-and-spender, however, is how this plays with ordinary Germans. If anything, the country seems happily suspended in a warm and fuzzy state of willed disbelief. Cities across the country are gearing up for the monthlong football World Cup, when Germany will host a million foreign fans. To boost optimism and present the country's best face to its guests, the government has launched a nationwide PR campaign. In Berlin, giant public sculptures remind visitors of Germany's most famous inventions. Yet, unwittingly, the sculptures--icons of past but now lost greatness--show exactly why optimism without change is not enough. A gigantic pill of aspirin, invented by drugmaker Bayer in 1897? Today's pharmaceuticals industry has shriveled to near-oblivion. An automobile in front of the Brandenburg Gate? Volkswagen, whose main plant in Wolfsburg is now the world's most inefficient, last week laid the ax to 20,000 jobs. Einstein and relativity? The universities where he worked are now underfunded and overbureaucratized, producing too few scientists and engineers for a 21st-century economy.

Yes, Italy has superseded Germany as the sick man of Europe, and a glance at France these days makes Germany look entirely sane. But the country is still very ill indeed. The much-trumpeted recovery looks as solid as a house of cards, economists say; all the growth comes from surging exports and has not created jobs. For all its alleged resurgence, Germany still drags Europe down. (Factor it out, and EU growth would be double Germany's, at 2.6 percent.) Last week a new study by the Cologne-based German Economics Institute put forth deregulation proposals to create up to 4.9 million jobs; instead, it says, the new taxes will drop Germany back to its long-term growth rate of 1 percent or less. Does anyone care? Westerwelle's FDP had hoped to turn a March round of regional votes into a referendum on taxes and jobs. Instead, the two big parties solidified their gains. All this suggests that Merkel is popular not despite, but because, she's made her U-turn since the campaign.

Germans seem to have convinced themselves that they're better off than their compatriots in France because they've already had their round of sacrifice and are now in good hands under Merkel. Instead of the piecemeal, hectic measures under Schröder that to many Germans discredited the very word "reform," they're now confident that there won't be any nasty surprises. Given that history of failed reform and broken promises, Germans (and the French or Italians, for that matter) may not be in such denial after all when they say no to reforms that heighten their sense of insecurity while offering benefits that promise to be, at best, very far down the road.

Today a majority of Germans see reforms not as a gain in personal freedom and future prosperity but as a danger to be avoided, says Stefanie Wahl, director of the Economy and Society Institute in Bonn. Distrustful of globalization and traditionally wary of capitalism, Germans (again, like the French or Italians) more than ever equate economic flexibility with a fallback straight into Dickensian misery. "To us, economic freedom has become a threat," says Wahl. "We prefer a state that protects us from insecurity, even if that means giving up our freedoms." The flight from reality comes, she says, when Merkel talks about returning Germany to growth and competitiveness while at the same time obeying Germans' veto against change.

If that's having your cake and eating it, too, Germans don't see it that way. According to Thomas Petersen, a political analyst for the Allensbach polling institute, most Germans lack a basic awareness of the trade-offs between welfare benefits and protections, on the one hand, and the costs in taxes and growth, on the other. They see other countries--those in Scandinavia, for example--that have managed to save and even expand their welfare states without the Anglo-Saxon reforms most economists prescribe. Yet they overlook the fact that even those countries had to deregulate labor, product and service markets to create the economic growth to pay for welfare.

Germans aren't making those choices. "Preferring security over prosperity is perfectly legitimate," says Petersen, "but we don't see the trade-offs involved." In part, that's what Merkel means when she says that "Germans must learn to think in economic terms," as she recently told a German business magazine. Until then, says Petersen, "the population will still have its head in the sand." Will that change? Who knows. But if it doesn't, Germans face a very different future. "Maybe we can be like England in the 1960s and '70s and just slow down," suggests Wahl. "Instead of taking safaris in Africa, we Germans will dig out our old tweed jackets and rubber boots and hike across the fields, or get rid of our BMWs and drive around in little Minis." Whether even that is sustainable in a 21st-century, globalized economy is a matter of debate. Still, many Germans might not find it such a bad life, especially if consciously chosen. For now, they'd rather not worry about it.