Germany's government | A coalition of the unwilling | Economist.com

Germany's government | A coalition of the unwilling | Economist.com

At half-time, the grand coalition seems subdued—maybe too much so

THE interval is over, and the actors in Germany's grand coalition have come back onstage. The script for the next two years calls for the Christian Democrats (CDU) and Social Democrats (SPD) to live together until they disband to fight each other in a federal election by September 2009. But it is between the lines that one finds the real plot: complacency and angst, meaning that the second act will hardly be action-packed (unless terrorism strikes, see article).

The government's goals, says the CDU chancellor, Angela Merkel, are to “strengthen the bases of the economic upswing” and “leave nobody behind.” Yet unlike France's president, Nicolas Sarkozy, Ms Merkel has no big plans to achieve them. Boosting long-term growth would take painful reforms that appeal to few, especially when the economy seems to be doing fine without them. There is more talk of inclusion, but the parties disagree over how to deliver it. Both are committed to eliminating the federal budget deficit by 2011, ruling out big spending. “Over the next two years there will be lots of symbolic gestures and nothing real,” predicts Klaus Zimmermann, president of DIW, an economic research institute in Berlin.

For now, symbolism may suffice. Exports are booming, unemployment is falling and the economy may grow by some 2.5% in 2007 and 2008, its best performance in years. In the first half of 2007 the public sector overall recorded a surplus for the first time since unification in 1990. Yet the mood of the three coalition partners (the CDU's Bavarian ally, the Christian Social Union, is the third) is jittery. In January their popularity will be tested in elections in two important states, Hesse and Lower Saxony. Bavaria votes in September 2008.

The SPD is especially nervous. Voters have not forgiven the party for the cuts in unemployment benefits made under Ms Merkel's predecessor, Gerhard Schröder. The Left Party, a new party formed by the ex-communists and some left-wing defectors from the SPD, is luring away traditional supporters. Further liberalising reforms would be electoral poison.

Ms Merkel's coalition-management skills create an illusion of progress. At a recent get-together in a Prussian palace, the cabinet found enough common ground to produce 12 pages of promises, but even the best are only timid steps in the right direction. For example, from November Germany will open its job market to foreign engineering students at German universities and to engineers from all 12 new members of the European Union. And the payroll tax to finance unemployment benefits will be trimmed from 4.2% to 3.9% to encourage hiring.

More might have been hoped for from a coalition with a big majority and a strong economy. The opening to foreign engineers will ease but not resolve a labour shortage that costs industry an estimated €20 billion ($27 billion) in lost output a year. All the other old EU members bar Austria have either opened their labour markets fully to easterners already, or plan to do so by 2009. Holger Schmieding, an economist at Bank of America, reckons that the government could afford to cut unemployment-insurance contributions to 3%, which might create 250,000 new jobs.

The government has bravely introduced a gradual increase in the retirement age (to 67), but it has been less bold in restructuring the health system, which threatens to gobble up an ever rising share of GDP at the expense of investment in education and infrastructure. It has no plans to tackle the network of regulations that makes it expensive to fire workers, and thus risky to hire them. A second instalment of Germany's federal redesign, which would limit states' debts but allow them to raise (or lower) taxes, may just squeak through.

In place of reform, the coalition offers comforting but vague promises. There will be help for the working poor in higher child benefits and subsidies to childless households. The number of school drop-outs will be cut by half by 2010. A bonus will be paid to firms that train more people than average. Workers in soon-to-be-liberalised postal services will get a minimum wage (which the SPD would like to extend across the economy). The government may help states to finance more crèches for children; it has mooted the idea of ten days' paid leave for workers to arrange nursing for sick parents. Such benevolence carries “clear social-democratic handwriting”, boasts the vice-chancellor (and labour minister), Franz Müntefering.

Yet to his dismay, it is Ms Merkel who gets the credit. In most polls, the CDU is ten points ahead of the hapless SPD, which remains divided over whether to defend Mr Schröder's reforms and over its own role in the coalition.

The SPD has championed the coalition's boldest policy, an “integrated energy and climate programme” aimed at cutting Germany's greenhouse-gas emissions by 40% from 1990 levels by 2020. But Ms Merkel is its most visible defender. The foreign minister, Frank-Walter Steinmeier, is from the SPD (he was Mr Schröder's chief of staff), but it was the chancellor who lectured her hosts about human rights on a trip to China last month. Such stances help to make Ms Merkel appealing to the Greens, who could yet be an alternative to the SPD as a coalition partner.

The odds remain that both the economic upswing and the coalition will survive until the 2009 election. But there are risks to both. As so often, German banks have suffered disproportionately from the subprime mortgage mess in America (see article). If the American economy buckles, Germany's export-led growth could quickly fade. And the SPD may yet be tempted to bail out of the coalition rather than go on seeing Ms Merkel gather both credit and strength.