Germany Retreats.(International Edition)(national election influences reform in Germany)

Byline: Stefan Theil

With national elections this fall, reform has stopped, and may now start to reverse.

in germany, as in so many other countries, the biggest political casualty of the financial crisis has been the easy distinction between left and right. Since the crisis first hit Germany in the fall of 2008, Chancellor Angela Merkel's Christian Democratic Union (CDU) and her Social Democratic Party (SPD) coalition partners have moved in lockstep to pass a [euro]580 billion stimulus and bank bailout, which by some estimates could soon rise to [euro]1.5 trillion. Amid worries that social-security payouts will get hit by the crisis, they agreed on a law to ban pension cuts forever. In May, leading pols from both parties pushed forward with a [euro]1.5 billion bailout to Opel, General Motors' threatened subsidiary. In fact, it's as though the start of the financial crisis marked not the beginning of the debate over the proper balance between government and markets but the end.

Just a few years ago, Germany's main political protagonists agreed that the country's high-wage economy and elaborate welfare system were getting undercut by an aging population, global competition and a dysfunctional educational system. Years of debate led to some often painful reforms, mainly under Merkel's SPD predecessor, Gerhard Schroder, that Germany's politicians almost unanimously agreed could only be the start. Now the new zeitgeist of state intervention seems to have erased the need for such messy debates. While both parties imply they have a vision of what a post-crisis Germany will look like--Merkel calls for a "renewal" of Germany's "social-market economy"; the SPD talks about a "new start"--their proposals seem to come straight from the old, pre-reform textbooks: higher benefits here, more labor-union powers there, or a few more industrial subsidies. Thomas Petersen, a political analyst at the Allensbach polling institute, says the very idea of reform has become just about as badly discredited as what German commentators call "American casino capitalism."

The political calculus is easy to understand. With the campaign just beginning for national elections in September, neither party wants to be blamed for job losses and benefit cuts. Merkel, especially, doesn't want to risk her big lead in the polls by being branded as a heartless "reformer" or "market radical"--an epithet that almost cost her the 2005 election and would be even deadlier now. So both parties have reflexively gone back to pre-reform-era policies. In April, at their campaign-kickoff convention in Berlin, the Social Democrats unveiled an election platform that included a long list of higher benefits, a sales tax on financial-market transactions and a new 47.5 percent income-tax rate for "the rich" (defined as anyone earning more than [euro]125,000 a year). Merkel has yet to unveil her platform, but it's unlikely she'll revive ...