GERMANY: Ostrich Politik; The latest unemployment numbers are nothing less than shocking--the highest joblessness since World War II. What's Germany doing about it? Not much. And that's smart politics.

Byline: Stefan Theil

A black day for Germany. So trumpeted last week's newspaper headlines. According to the latest official numbers, German unemployment is the highest it has been since the Great Depression of the 1930s--more than 5 million jobless, or 12.1 percent of the work force. Factor in millions of people in state-funded training programs and those who've given up, and the real tally exceeds 20 percent. Is it time to panic yet?

The grim news comes on the heels of an alarming report by the Chamber of Industry and Commerce, warning that German companies are outsourcing an accelerating number of research and engineering jobs to China and Eastern Europe. Fresh consumer data show that, in 2004, worried Germans cut back personal spending for the third year in a row, helping fuel a record pace of 60,000 business bankruptcies. As if adding insult to injury, even the country's favorite source of escapism--football--was mired in deepening scandal. At major-league sports clubs in several cities, police were investigating at least 25 referees and players for fixing games in cahoots with a Croatian sports-betting mafia.

If anyone seems impervious to the bad news, however, it's Chancellor Gerhard Schroder. On the campaign trail in Schleswig-Holstein, a northern state where his Social Democrats hope to win the first of two key state ballots in the run-up to next year's national election, a beaming Schroder on Wednesday talked down the unemployment numbers. The bad news wasn't really "news" at all, he insisted--just a statistical aberration. "This is the bottom of the trough," said the upbeat chancellor. It'll only be a matter of time before his economic reforms kick in.

Incredibly, voters seem to be buying those explanations. Perhaps they're simply sick of the endless stream of lousy economic news. Maybe, like the chancellor, they sense better times around the corner. Either way, there's no denying their growing faith in Schroder himself. Less than a year ago, his administration had the lowest approval rating of any postwar government--23 percent. Schroder looked almost certain to lose not only the upcoming regional elections, but also his job. Yet fresh polls last week confirmed that his SPD and its Green coalition partners were pulling ahead in both states. Ever the political phoenix, Schroder's prospects of winning a third term in 2006 now look entirely within reach.

The secret of his success? Ducking the country's most pressing problem--economic reform. After more than a decade of government talk about administering the tough medicine that Germany needs to haul itself out of the dumps--and after only two years of trying to push through even modest changes--Schroder has given up. Last year the beleaguered chancellor turned the chairmanship of his party over to a key ally, Franz Muntefering, who promptly announced a pause in the party's reform program. That meant dialing back on efforts to reduce increasingly unaffordable social and pension benefits, as well as capping plans to ease labor rules that make companies loath to hire. Voila. Almost immediately, the chancellor's polls began to rise.

Meanwhile, the opposition Christian Democrats began to implode. The reason: infighting over the same issue, pitting hard-core reformers around chairwoman Angela Merkel against powerful antireform conservatives in Bavaria and North Rhine-Westphalia. The upshot is that the CDU has now backpedaled toward the same slow-on-reform program as the SPD. The result, ironically enough, is that its support has fallen. Reason: voters no longer know what the party stands for, especially those who believe in the need for reform. The prospect for the future? Steady as she goes--which is to say, likely stagnation and ever-higher joblessness.