Chancellor at last, Merkel constrained by coalition

Angela Merkel's rapid rise from East German physicist to political heavyweight will reach a pinnacle Tuesday when parliament officially votes her in as the Germany's eighth postwar chancellor.

The famously cool Ms. Merkel won't take much time out, however, to celebrate her double coup as Germany's first female chancellor and its first from the eastern part of the country. The enormous challenge of reforming Europe's largest economy to meet the demands of globalization has infused Berlin with sober pragmatism.

"We want to instill trust in the people," Merkel said at the signing Friday of the agreement between her conservative Christian Democratic Union, ally Edmund Stoiber's Christian Social Union, and the center-left Social Democratic Party that paved the way for Tuesday's vote.

The coalition's pitch to win that trust is mapped out in an agreement that calls for cutting government spending, raising taxes, and stimulating the job market. But critics say the deal lacks the ambitious reform that economists had hoped for.

"The coalition was built on the realization that nobody was going to be able to fix things alone," says Susan Neiman, author of a recent book on German self-perception. "Indeed, the problems Germany faces ... can't be solved by one party. There have to be sacrifices on everybody's part."

While the coalition gives Merkel's new government an overwhelming majority in parliament, many say the compromises she had to accept will make it difficult to implement her plans for economic reform. Still, the improving economic forecast predicted by many financial houses could give her government a much-needed cushion in the coming months.

"The [agreement] will not yet free up the economy, and won't create new jobs immediately," said Jürgen Thumann, president of Germany's industry association, last week. "But it offers some indication that things can get better overall for our country in the coming legislative period."

Thumann's mixed reaction is typical of Germany's reform advocates. Coalition measures that inspire optimism - like the plan to reduce the deficit by 35 billion euros to comply with EU regulations - are offset by frustration that Merkel is unlikely to be able to make the sweeping changes she proposed while campaigning: rehauling strict job protection laws, tackling the costly government-subsidized healthcare system, and reducing union power.

"The question is not what the economy does in the next year, but whether the structures are there for long-term growth," says Friedrich Heinemann, head of the Centre for European Economic Research's public-finance department. "And in that regard I'm more pessimistic."

By far the biggest criticism has been reserved for the decision to help balance the budget by raising the value-added tax, a type of sales tax, to 19 percent from 16 percent in 2007. The hope is that spendthrift Germans will shell out more money in 2006 before the anticipated tax increase in 2007, thus boosting domestic demand in the short term.

"The value-added tax is problematic because it hits the consumers and little people," says Tobias Krier, part owner of a Berlin cafe. "I will definitely feel the impact of it."

But a little optimism and initiative on the part of Germans would go a long way toward helping their country reform, says Neiman, who believes the country's postwar aversion to patriotism has spawned a self-image problem that is hindering an economic turnaround.

"What needs to happen is a bootstrapping thing, where the government provides some orientation ... and the people have to realize that it's not up to the government to solve their problems," says Neiman.

Merkel's ability to provide that leadership, especially after weeks of political wrangling in coalition negotiations, will be among the biggest challenges facing her administration in the coming months. But a majority of Germans said in a recent poll that she would make a strong chancellor.

"I don't like Merkel as a person," says Krier. "But the fact that a woman from the east could make it as far as she has indicates that she's got something."