"We'll See on Election Night if Stoiber is a Wolf in Sheep's Clothing"

Unemployment is the main issue preoccupying Chancellor Gerhard Schröder right now, and though he's far from satisfied with his government's record in this area, it can at least look back at some achievements. This emerges from an interview given by the Chancellor to Handelsblatt, in which he also explores Germany's relations with the European Union and his prospects for coming general elections.

"What preoccupies me the most is the unemployment figures and the question of how we can make further improvements on the jobs market," Schröder replied when asked about the series of problems that face him right now: the economy in the doldrums, the unemployment figures rising, Finance Minister Eichel facing the threat of a budget warning from Brussels and the conservative opposition in front in opinion polls.

"We still have 500,000 fewer unemployed people than we had in January 1998. I call that a success, even if it is in no way enough as far as I am concerned," the Chancellor continued. "We have tried to defeat unemployment on the primary labour market with the means we have at our disposal at national level. These include a rational tax policy on the supply side as well as on the demand side. Above all, we plan to stick to our path of budget consolidation, despite the occasional criticism from the opposition."

When he came to power in 1998, Schröder famously set the target of 3.5 million unemployed. With unemployment now just below 4.3 million in election year, he was asked whether he would set that target now if he had his time again. "That target was set within very precise framework conditions, i.e. a strong economic upswing had been forecast," he replied. "Knowing all that we now know, we can say that the target was unreachable. This is because of the global economic downturn and the events in the United States – factors whose effects cannot be offset with the use of means available to us at the level of national government."

Confronted with the charge that Germany's record on employment is the worst in Europe, the Chancellor went on the defensive. "It is simply not true that jobs have been lost in Germany," the Chancellor argued. "Since 1998, some 1.2 million jobs have been created in this country."

The meaning of ‘modernisation’

But many observers are perplexed as to why Schröder, with his reputation as a moderniser, does not heed the calls for deregulation of the labour market. "Let's talk about concrete matters here," he said when asked about this. "The complaint is always levelled at German regulations governing working hours that they are too inflexible. But you won't hear the complaint of a lack of flexibility coming from anyone who has taken a fair look at some of the many innovative work-time models that have been introduced, let alone anyone who has been able to take advantage of them."

Schröder does not agree that Germany's complicated laws on job protection are an obstacle to employment. "We enjoy a measure of job protection that creates a sensible balance between workers' need for security and companies' need for flexibility," he said. "Now one can be of the opinion held by many in the opposition that job protection should be dismantled. I don't share this opinion. The last government reduced job protection, but didn't manage to increase employment – quite the contrary. There's no empirical evidence to back up the thesis that the easier it is to get rid of workers, the easier it is to hire them."

In this respect, the Chancellor is not convinced by the example of the United States. "You cannot translate American conditions to Germany. And the point of a social democratic government is to stop German workers from being turned in to a mass that is at anyone's disposal."

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The campaign ahead

Asked about the message he will take into this September's election campaign, the Chancellor said that his government could point to its successes in breaking the reform deadlock that marked the last years of the Kohl government. "There's been real movement in the past three years. We inherited a debt mountain of DM1.5 trillion (750 billion euros). So there's no alternative. We will remain on our consolidation course, incur no new debts, present no new credit-financed economic programs, while also refraining from any tax-hikes, because these would be damaging to the economy."

Schröder's chances of winning the elections have been looking less favourable since the conservative opposition chose Bavarian premier Edmund Stoiber as its Chancellor candidate. When Stoiber was first chosen, his record as an arch-conservative led the government to present him as somebody who would divide the opposition. But since then, Stoiber has appealed to the centre ground – successfully, the opinion polls, would suggest. Schröder is not convinced of his opponent's move to the centre: "We'll see on election night whether he's a wolf in sheep's clothing."

If the government's arguments prove sufficiently compelling to return a Schröder-led government to power in September, the new administration's priority will be budget reform, specifically to reorder the financial relations among the different levels of government – federal, state and municipality, as well as reform of the system of unemployment benefits and welfare.

As the next most pressing matter that his government will need to address the Chancellor named education and the need to channel national resources into an education offensive. After that he identified a need for new legislation on immigration that would balance the demands of the economy and Germany's humanitarian obligations.

Red-Green cohesion

But if Schröder's Social Democratic Party does emerge as the largest single party in September's elections, it's not certain that they will be able to continue governing with their current junior coalition partner, the environmentalist Greens. The Greens' support is slipping in the opinion polls, and there are doubts as to whether they will secure the minimum 5 percent share of the votes required to obtain representation in parliament.

Asked about whether he will adhere to the Red-Green "project", Schröder made it clear that he has never viewed the coalition government in these terms. "Coalitions are ad hoc alliances, not relations based on love." But his preferred electoral outcome would still be one that allowed him to continue the present government. "If we win sufficient share of the vote for a Red-Green government – and I am really highly confident that we will – we will continue this alliance."

If not, though, the Chancellor stressed that he has always said there are other options. "But whether we use them is another matter." But he was adamant that the SDP will never form an alliance at national level with the post-Communist PDS, even though it has in the government for Berlin city-state.

But the question of whether Germany will end up with a coalition of the SDP and liberal FDP is one for the electorate to decide, he said. The FDP partnered the centre-right Christian Democratic Party during the Kohl era, but it was also the SPD's coalition partner in the government of Helmut Schmidt, which ended in 1982.

"We will continue the current coalition if we receive a majority from the votes. In principle, however, the democratic parties must be in a position to form a government among themselves," he summed up, pre-empting the question of whether he would be prepared to enter into a grand coalition with the CDU and possibly the FDP.

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Of deficits and diplomacy

Right now, though, one of the most pressing matters that the government has to attend to is the prospect of a budget warning from the European Union. Schröder made it clear that he does not want the debate about the issue of a warning to Germany to turn into a debate about the targets set out in the EU's Pact for Stability and Growth.

"I believe that the Stability Pact is right and reasonable, and I stand by it. But one has to look at how its used. Sanctions are to be expected by those who do not fulfill the criteria laid down in the Stability Pact or those who have pursued inappropriate stability policies. As far as we know, the Commission is not accusing us of having infringed the criteria. The Commission is expecting a German budget deficit amounting to 2.7 percent of gross domestic product; we're expecting one of 2.5 percent. Whoever's right, the 3 percent upper limit won't be exceeded."

"If we pursue the right policies and aren't failing to meet the deficit goals, where is the justification for a measure whose political effect cannot be denied?" the Chancellor concluded.

But he does not agree that the debate surrounding the threat of a budget warning amounts to electoral ammunition for the conservative opposition's Chancellor candidate in coming elections. "The opposition, and particularly Mr Stoiber, have officially made it clear that they want to incur more debts."

Defending the right flank

Reminded that Stoiber has now distanced himself from calls for tax cuts regardless of their short-term effect on budget consolidation, Schröder said he had done this "only because he doesn't yet know what he really does want. Perhaps we will find out more over the coming six months."

But the Chancellor stressed that Angela Merkel, leader of the Christian Democrats, nationally active sibling-party to Stoiber's Bavarian Christian Social Union, had said the absolute maximum use should be made of the 3 percent of GDP limit for the budget deficit – "and Mr Stoiber supported that."

Anyone who has called on the government to incur more debts can't start criticising it over matters of budget discipline, Schröder reasoned.

The Chancellor has challenged the planned budget warning at a time when he has also been highly critical of the European Commission for plans to reform the market for car sales, removing the block exemption that the automobiles industry has enjoyed from certain antitrust regulations. But in his view, the Commission has not reason to complain about Germany. "If there is a nation that has always argued for a strong commission, it is us."

At the same time, Schröder stressed that as the German Chancellor, he has a duty to stand up for German interests.

Finally, Schröder said in 1998, referring to the fact that Helmut Kohl had been Chancellor for fifteen years, that he would remain in office for two legislative periods at the most. Asked whether his view had changed, he said: " The Americans took the wise decision to limit the president's period in office to two legislative periods. As our constitution does not make it possible for any such limit to be imposed here, it is up to me to exercise my duty to take a rational approach."