Economy Set to Dominate German Election

With so much at stake -- "our future and the future of our children" was how German President Horst Köhler put it -- big promises are being made by both the governing coalition of Social Democrat (SPD) and Green parties under Chancellor Gerhard Schröder and the opposition Christian Union (CDU/CSU) parties under Angela Merkel.

But experts are skeptical that whoever wins the election on September 18 will have the courage to push through the very painful reforms needed to bring down unemployment, kick-start growth and rein in the public deficit in the euro zone's biggest economy.

"Our country is facing immense tasks," Köhler diagnosed on national television on Thursday evening.

"The federal and regional state budgets are in an unprecedentedly critical state. We have too few children and we're getting older. And we have to hold our own amid fierce global competition."

During Schröder's past two terms in office, the German jobless queues have swelled to a postwar record of five million, economic growth has been stuck close to zero and public finances, burdened by the never-ending costs of unification, have deteriorated dramatically.

But despite his disastrous showing in the polls, Schröder has vowed to win the election by sticking to his current course of -- so far unpopular -- healthcare, pension and labor market reforms.

"Germany is on the right track and more and more people are beginning to recognize that fact," he said.

Big Merkel lead

The wider population does not appear to think so.

Opinion polls show Merkel and the CDU/CSU parties 17 percentage points ahead of Schröder and the SDP, suggesting Germany is set to get its first-ever female chancellor in the autumn.

And a snap poll by ARD public television on Thursday showed that only one person in five believes that Schröder will be re-elected.

Germany's economic problems are in fact putting Schröder, nicknamed a "comrade of the bosses" for his previously centrist policies, in something of an ideological quandary.

Faced with a rebellion by the left-wing of the SPD and the creation of a separate new left-wing party that could sap vital votes, Schröder has staged a distinct shift to the left, rediscovering people's sense of "social responsibility."

His latest proposals include supplementary taxation for the super-rich; a basic mandatory health insurance for all, rich and poor alike; and maintenance of the current system of co-determination in German companies where unions have nearly equal say with management in business decisions.

Merkel has no such ideological qualms.

She has pledged to undertake "serious structural reforms, including painful shake-up of the labor markets."

Ready for serious reform?

But it is hard to imagine that an electorate angered by Schröder's attempts to shake up the economy will be any more prepared to stomach Merkel's plans for a two-percentage-point hike in value-added (or sales) tax from January 1, an easing of the labor laws that will make it easier for companies to hire and fire workers, and a flat-rate health insurance premium for all, from cleaner to company director.

Merkel has also indicated that while the taxation system would be simplified, tax cuts were not on the agenda before 2007 in view of the tight state of Germany's public finances.

Yet German business appears confident that a change in government will provide a way out of the country's current economic impasse. Sentiment among German business leaders and investors has been rising recently, as measured by the key Ifo and ZEW confidence barometers.

But voters themselves are not so sure.

In a poll carried out by the weekly Bild Woche, 75 percent of respondents, regardless of their political persuasion, said they did not expect the economic situation to improve after the elections. In eastern Germany, where unemployment is around twice as high as in the west, the ratio was as high as 87 percent.