Britain needs a strong Germany to help to pull us out of recession. On September 27 we shall discover whether we will get a Germany capable of such powerful growth. It is certain that Angela Merkel will be re-elected Chancellor of Germany on that day. The only real question is whether Germany will get a government prepared for a shot of energising reform or whether it will be more of the same — will she govern with the free-market Free Democrats (FDP) or, once more, with the Social Democrats (SPD)?
Ms Merkel’s election in 2005 replaced the opportunist and increasingly antagonistic Gerhard Schröder with a sensible pragmatist, with a human touch. Like Schröder, she enjoys a glass of wine. Unlike him, she is seen as calm and straight: what you see is what you get. One needs to look no farther than this to see why she is so much more popular in Germany than Gordon Brown is in Britain.
In foreign affairs, she has stood for closer links to the US, a warier relationship with Russia and a competitive, liberal and outward- looking Europe. Her antipathy to Nicolas Sarkozy is one reason why the former Franco-German motor has given way to a more co-operative relationship with the UK. She has been a good partner to us. Whoever she governs with after the election, foreign policy will not change significantly. The key question is what will happen to the economy.
I first met Ms Merkel in 2003. She told me that unless Germany grasped the nettle of reform, its economic pre-eminence could be undermined. Germany, not Britain, was the sick man of Europe then. No growth, more than five million unemployed and per capita income, which had been double that of the UK, reduced to 10 per cent less than Britain’s. She wanted to liberalise the labour market, cut taxes, overhaul the pension and health systems and reduce the overpowerful trade unions.
She made the mistake of spelling much of this out in the 2005 election campaign. This frightened voters. As Helmut Kohl told me at the time: “You don’t win elections by putting the instruments of torture on display.” Ms Merkel’s unassailable lead of the campaign all but vanished. Unable to form a government with the FDP, she was forced into partnership with the SPD. As a result, the reform agenda has been on hold for the past four years. The election will determine whether it can be reactivated.
It will not be easy. Last month Forbes Magazine, for the fourth time, declared Ms Merkel the most powerful woman in the world. She is not. The postwar constitution is designed to prevent any chancellor from acquiring too much power. Ms Merkel is no Maggie; and her Christian Democrats are not the Conservatives. They are more a social democratic party for white-collar workers. If she is re-elected with the FDP, she will face opposition from the left wing of her party. To complicate life further, she lost her majority in the upper house (Bundesrat) at the regional elections last week.
Given the trauma of 2005, Ms Merkel is not talking about reform this time. But the need for reform has not gone away. Germany may so far have weathered the recession better than expected. But it still has the youngest pensioners, the oldest students, the shortest working week, the longest holidays, a tax system of Byzantine complexity, overregulation, non-wage labour costs of more than 40 per cent and hourly wage rates many times higher than in the ten newest EU member states. No wonder jobs have been haemorrhaging out of Germany. German workers are among the most productive in the world. With handicaps like these, they need to be.
The German economy is also overdependent on exports. As the recession forces Britain and America to cut their deficits, Germany will see demand for its exports fall. Domestic demand will have to increase.
Few Germans, least of all Ms Merkel, accept this. They regard the country’s status as export world champion as a sign of strength. Ms Merkel seems intent on sitting out the recession, waiting for exports to return to previous levels, while dishing out aid to companies like car manufacturers. The collapse of German banks, exports and growth earlier this year imply such a policy to be unrealistic.
Even so, the crisis has not hit the ordinary German. Unemployment has not so far risen significantly — thanks in part to government stimulus and to government pressure on companies to keep workers on part-time rather than get rid of them. Germany’s generous unemployment benefits have shielded those who have lost their jobs. The destruction of personal wealth has been less marked than in the UK. Germans have traditionally avoided investing in the stock market and tend to rent rather than own their own homes. This has worked to Ms Merkel’s advantage. She is seen to have steered Germany through the recession in relatively good shape, as her personal approval ratings of more than 60 per cent show.
Current polls suggest that her Christian Democrats will get enough votes with the FDP to form a government. Failing that, Ms Merkel will govern again with the SPD: no recipe for reform, but unlikely to make things much worse. The horror scenario would be a coalition between the SPD, the Greens and the new Left party. The latter is a mixture of the loony left in the old West Germany and the former communists in the old GDR. Fortunately, despite their success in recent regional elections, they will not be part of a coalition at national level owing to antagonism between the leadership of the SPD and the new Left.
Britain needs a strong and vibrant German economy. Germany is our second-most important export market, and more than 350,000 jobs in Britain depend on German investments. That’s why we should hope for a Ms Merkel government with the Free Democrats to emerge later this month.
Peter Torry. Sir Peter Torry was British Ambassador to Germany from 2003 to 2007.