Stoiber Vs. Schröder: Does it Matter?

Germany’s disappointing economic performance — 0.6% GDP growth last year and 1.5% a year during the last 10 years — cannot be blamed on an unfavourable external economic environment. Instead, it reflects the German economy’s inability to generate robust internal growth.

That makes the fall 2002 elections such a potentially important event. They will provide an opportunity to overcome some of the key problems causing economic weakness in what — over two decades ago — used to be called “Europe’s economic locomotive.”

The first key issue is the economic policy mistakes made at unification. These failures have resulted in eastern Germany becoming a drag on the nation’s entire economy. The second challenge is Germany’s failure to adjust its economic policies to a rapidly changing external and internal economic environment.

Unfortunately, this second failure reflects many years of policy paralysis — starting with Helmut Kohl’s government. This stagnation of Germany’s economic policy continued through both the initial mistakes of the Gerhard Schröder/Oskar Lafontaine government, and Chancellor Schröder’s timid reforms since 1999.

As a result, to avoid continuing economic decline relative to its peers, Germany needs comprehensive reforms of the tax, regulatory, social security and education systems. It also needs labor market deregulation. These reforms will only be successful if they allow market forces to play a much greater role in all areas of the economy.

Both the incumbent Chancellor and his challenger are keenly interested in strengthening the economy through structural reforms — or so they profess. But what about their respective economic policy track records? Do they show clear-cut differences — and perhaps point to who is better qualified to lead Germany for the next four years?

Unfortunately, both candidates — regardless of their party stripes — show a significant leaning towards interventionist industrial policies and a rather conservative approach to social policy and labour market reforms.

For instance, Chancellor Schröder recently helped to avoid the closure of a railcar company — a subsidiary of Bombardier — in the state of Sachsen-Anhalt. Strangely enough, elections are coming up soon in that particular Land. At the beginning of his term as Chancellor, Mr. Schröder also participated in the rescue of Phillip Holzmann — a bankrupt construction company which continues to struggle.

During his term as Governor of the state of Lower Saxony, Mr. Schröder prevented the sale of Preussag-Stahl, a steel company, to a foreign investor by taking over 51% of the company’s shares.

He has also helped to fend off a take-over of Continental, a tire producer, by its Italian competitor, Pirelli, and, even, de-facto, nationalised a subsidiary of DASA, the aerospace company — which was to be shut down.

At the same time, the Chancellor has defended Germany’s tight labor market regulations and the role of unions in the wage bargaining process. Following his re-election, Mr. Schröder would probably favor a continuation of the gradual and cautious reform process, avoiding any confrontation with the labor unions.

Mr. Schröder’s opponent, Bavarian Prime Minister Stoiber, can point to a fairly similar — but not at all market-friendly — economic policy track record. Among other things, Mr. Stoiber — or his economics minister — supported the Kirch media group in raising fresh funds for investment, leaving the Bavarian Landesbank rather exposed to this borrower.

One quite successful policy during Mr. Stoiber’s tenure has been the Bavarian government’s sale of three billion euros in government-owned companies. The proceeds of this sell-off were invested in upgrading research-and-development infrastructure and creating high-tech start-up companies.

This policy has been quite successful. In fact, a major cluster of biotech firms has grown around the Max Planck institute for Bio-Chemistry and the medical department at the University of Munich.

Yet, the Bavarian prime minister has also shown great determination in protecting Germany’s elaborate social safety net. Mr. Stoiber opposed the government’s recent pension reform, but for all the wrong reasons. He resisted the plan on the grounds that it reduced benefits for widows — and not because the reform did not go far enough in strengthening private pension savings.

At the moment, Mr. Stoiber has not made clear whether he would reduce the tax burden earlier — or by more — than envisaged in the government’s tax reform. He also has not signalled whether he would push for a more comprehensive pension reform — or whether he would be willing to take on the unions on labour market reform (though he seems more inclined to do so than Schröder).

All in all, however, it seems that a “Chancellor Stoiber” would also prefer a course of gradual and limited reforms to more radical surgery.

It appears that the two contenders’ middle-of-the-road, gradualist approach to economic policy reform is targeted directly at the average German voter’s preferences. These voters want a better economic performance, but they are loath to give up their accustomed social benefits.

Thus, a more radical approach to economic reform can only be expected if smaller parties committed to market-liberal policies succeed in exerting considerable influence over any future coalition government.

Among the smaller parties, the Free Democratic Party (FDP) seems to favour the most rigorous market-oriented economic reforms. The strong influence of this party — on either a Schröder or Stoiber government — will help quicken the pace of more comprehensive economic reforms after the elections.

Which is why, even though media attention is focusing on the battle of the two top contenders, I believe it is more important to watch the poll ratings of the FDP very closely. A rising share in total votes of this party would improve the outlook for economic reform with, among other things, positive consequences for the euro vis a vis the dollar.