Early Elections May Help German Economy

Many economists agree that no matter which political party forms the next government in Berlin after a vote likely to come this September, it can help the troubled German economy -- Europe's largest -- get back on track.

"It can really only get better," said Christian Jasperneite, an economist at Bankhaus M.M. Warburg. "The agony that hangs over everything at the moment has to be finally surmounted."

The economic reforms introduced by German Chancellor Gerhard Schröder remain controversial and their impact uncertain. His so-called Agenda 2010, a package of welfare cuts and labor market changes, is not completely accepted by either the German public or even Schröder's own Social Democratic Party (SPD).

And the economic policies of conservative Christian Democrats (CDU) and their leader Angela Merkel are far from fully developed. Many experts hope the early election, which Schröder proposed after the SPD suffered a stunning defeat in the state of North Rhine-Westphalia on Sunday, will force the country's politicians to state clearly how they hope to tackle Germany's high unemployment and slow growth.

"What's necessary is a coherent concept that diagnoses what's wrong and comes up with a remedy and then communicates that to the public before implementing it," Jasperneite said.

Pressure for results

At the moment, the Christian Democrats have the best chance of forming a coalition with the business-friendly Free Democrats (FDP), according to Stefan Schneider, the head of the Macro Trends department for Deutsche Bank Research. Such a constellation would eliminate the current political gridlock between the lower and upper houses of parliament.

"A Chancellor Angela Merkel would really need to take advantage of that sort of dream situation right from the start by pushing through economic reforms," Schneider said.

He said a victory for the conservatives would give them immense political capital, but the pressure for results would be equally large. A CDU-led government could count on the support of business leaders, however, an ugly clash with the trade unions could become inevitable. Still, Schneider said the depth of Germany's economy problems meant the time for cautious had passed.

"If she just follows the Schröder plan of just trying to tweak things instead of going for radical change she won't be re-elected in four years," he said.

Plenty of problems

The list of problem areas plaguing Germany is long. The labor market, fiscal policy, funding the welfare system, immigration policy all need to be overhauled, according to the experts. But even if a new government begins to quickly implement reforms right after the election, result can first be expected in three or four years.

And regardless of whether Schröder stays in office or Merkel replaces him as chancellor, Germany will still have to contend with the growing challenges of globalization of the economy. Though a more business-friendly government might help improve the investment climate somewhat, companies will still be under pressure to move jobs away from high-wage Germany to low-cost nations in Eastern Europe and Asia.

Other problems will also conspire to hamper German growth, according to economist Jasperneite. Even if Germany's export-led economy begins to boom, domestically the country's ageing population will lower the growth rate. The years of 3 percent growth were gone and in the future Germany would be lucky to expand at a rate of 1.5 percent, he said. At best, all politicians in Berlin can hope to do is to limit the damage.