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Drozdiak: Upcoming German Election, ‘Most Important’ in Nearly Forty Years

Interviewer: Bernard Gwertzman, Consulting Editor
Interviewee: William Drozdiak, President, American Council on Germany
September 12, 2005

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William Drozdiak, president of the American Council on Germany, and a former foreign editor of the Washington Post, says this Sunday’s parliamentary election in Germany “is probably the most important election in Germany in nearly four decades.” He says that although Angela Merkel, head of the conservative Christian Democratic Union (CDU) had been leading the polls by a significant margin, her opponent, Chancellor Gerhard Schroeder, head of the Social Democratic Party (SPD), has recently narrowed the gap.

This raises many possibilities, says Drozdiak, including a forced “grand coalition” that could paralyze efforts to overcome the significant social and economic issues facing Germany today.

He was interviewed by Bernard Gwertzman, consulting editor for cfr.org, on September 12, 2005.

Germans go to the polls on Sunday to choose a new government. The polls for a long time had shown the conservatives—led by the Christian Democratic Union (CDU)—way ahead, but now they seem to show a narrowing. Can you give us the lay of the land right now?

Well, I’ve just spent close to two weeks in Germany and there’s no question, this is probably the most important election in Germany in nearly four decades. The fate of Germany’s effort to modernize its economy really hangs in the balance. What Angela Merkel, the leader of the CDU, has been proposing is a radical restructuring of the economy to prepare Germany for the pressures of globalization.

Her opponent and leader of the Social Democratic Party (SPD), Chancellor Gerhard Schroeder, has been warning the electorate that this election could transform Germany’s social-welfare system and that clearly seems to be having an effect lately. He’s tightened up the race considerably. Just a few weeks ago, polls had Merkel’s CDU party with close to 44 percent and it looked like she would rule in tandem with the smaller pro-business party, the Free Democrats, which had about 7 [percent], possibly 8 percent.

Now it shows both the Christian Democrats and the Free Democrats sliding a bit because the public is clearly getting very nervous in the wake of Schroeder’s warnings about the pain of reforms. And with unemployment already more than five million, people fear a conservative government under Merkel would be just too much to bear. It’s important to note the most striking statistic today is that, in a country of 82 million people, only 26 million are working now. And the reason that the social-welfare system is under such pressure is that you have only one out of three people working to sustain this system, and that’s why it just simply can’t go on like this much longer.

How does that compare with other industrialized states?

That’s a proportion far lower than any other Western country.

And they’re not working because they’re on pensions?

Germany, for about the last twenty-five years, has had one of the world’s lowest birth rates. So, with people retiring as early as the age of fifty, you’re now reaching a state where nearly one out of two people is retired, on a fairly generous pension. Coupled with women and children, and others who may not be in the workforce, you have a lower rate of people working now than ever before in German society.

These figures are just Germans, distinct from Germany’s Turkish population?

That’s right, German citizens. There are about 7 million foreigners inside Germany, of which about 3 million are Turks.

And they’re working?

Most of them, yes—a large of percentage of them, probably a higher proportion of them than Germans working.

Let’s talk about Angela Merkel, who’s not very well known, here. What is her background? Is she much of a campaigner, and how did she do in the televised September 4 debate with Schroeder? Is that what’s causing her problems?

She’s distinctive in a couple of ways. One: She would become the first woman to be chancellor in German history. Secondly, she’s also from the East. She grew up in what was Communist East Germany, so she has a unique perspective on the capitalist society and the West. One of the big changes she would bring to foreign policy is a more skeptical attitude towards President Vladimir Putin of Russia. Under Schroeder, Germany and Russia have become very close. Schroeder has even proposed a strategic partnership with Russia, particularly since Russia now supplies much of Germany’s oil and natural gas. Given Merkel’s experience with Communist society and her skepticism about Putin’s authoritarian ways, she’s liable to put much more of a distance from Russia, and she clearly wants to improve the tone of relations with Washington.

How is she as a campaigner?

She has come across as fairly uncharismatic, somewhat colorless. She has tried to improve her style and make it much livelier in the last few weeks. She’s done something of a physical makeover. During the debates with Schroeder, I thought she held her own fairly well. The expectations were that she would have done much worse, but she actually did fairly well. Nonetheless, most of the polls right after the debate indicated that Schroeder, as expected, scored more points with his warnings that Merkel’s policies would bring much more pain than his reforms had so far.

Talk about the so-called “shadow finance minister” issue.

Merkel has brought a fairly controversial figure onto her team named Paul Kirchhof. He’s a former member of the Constitutional Court, Germany’s equivalent of our Supreme Court. But he’s gained a lot of notoriety because of his advocacy of a flat tax. He wants to get rid of the all of the subsidies in the German economy and cut the tax rate to a flat 25 percent.

Sounds like former U.S. presidential candidate Steve Forbes.

That’s right. It’s a variation of the Forbes claim. Now, that’s still a little higher than some countries in the East. I believe Slovakia has a 17 percent flat tax and some other states are talking about an even lower level. But he’s saying the way to simplify the tax structure and to get people to pay more into the system and to get rid of the underground economy, which is flourishing in Germany—a lot of people are doing odd jobs and not paying tax, and some have suggested it’s more than 20 percent of the real GDP [gross domestic product]—is to impose this 25 percent rule, and that has generated a lot of criticism.

What is the criticism? Most people would benefit, wouldn’t they?

He claims, of course, that it would bring more revenues in; it would make it easier for people to understand. Schroeder and other critics say this is a regressive tax. He has been scoring points with the line, “It’s not fair that a millionaire will pay the same rate as a medical nurse.” It’s seen as a regressive tax that doesn’t sit well with those who like to maintain the social-welfare state in Germany.

Has Merkel adopted Kirchhof’s proposals in her platform, or is he on his own?

On that particular policy, he’s on his own. She has carefully kept her distance. She’s said that she has brought him on as an adviser, but the party platform does not advocate a flat tax. She’s talking about reforms that would loosen up the labor market, make it less expensive for companies to hire. Currently, a portion of an employee’s wage and also the company itself has to contribute a substantial amount of money to the social-welfare system. She wants to make it easier for companies to hire and fire people, and to make up the difference, she has talked about a 2 percent increase in sales tax.

Does Germany have a VAT—value-added tax—like they do in France?

Yes. I think right now it’s 17 percent and she’s talking about raising it to 19 percent.

So it’s not like the only main tax is the income tax, as in this country?

No, they get a lot of money from sales tax, but that, too, is regressive in that poor people pay the same rate as rich people.

Talk about the unemployment situation. Does she have a plan for getting unemployed people back to work? It’s a very high figure, isn’t it?

Right. In many respects, Germany is facing a more critical situation than other countries in the West. First of all, with the expansion of the European Union toward the East, a number of countries have come into the single European market that have significantly lower wages, and as a result, the entire car industry seems to be moving to the East. In the country of Slovakia, just over the border from Germany, you now have Volkswagen, DaimlerChrysler, and BMW all building cars—even for the German market—in and around Bratislava, which is described these days as the “Detroit of Europe.” And that’s because, in order to stay competitive in the global economy with other worldwide car producers, they’ve moved to the lower wages in Slovakia—they are about one-fourth what they are in Germany. So as a result, jobs are moving to places, such as Slovakia, Poland, and the Czech Republic, where the labor costs are significantly lower.

So the German workers are not following the jobs? These are local hires?

That’s right. Currently, I think given the wage costs—that is above and beyond the hourly wage or the salary—are so high that it costs more than $30 an hour to pay for a German worker. And in the U.S., the level is at about $17 on average.

Do the two parties have differing views on how to get the unemployment rate down?

I think the Social Democrats are trying to claim they would do it in a less painful way; that they would protect the safety net that enables people to collect unemployment benefits for a fairly long time; that they want to protect against what is viewed as exploitation by companies who would be tempted to fire workers summarily. Nonetheless, the pressures of the global economy are such that jobs are being shed at an alarming rate. Volkswagen just announced the other day they are cutting 10,000 people from their workforce around their headquarters in Wolfsburg. This, in fact, is in Chancellor Schroeder’s own neighborhood. It’s very serious in terms of finding a way for Germany to become more competitive.

You said at the start this is the most important election in four decades. Could you explain why?

Well, I think it’s because the reform process has been put off for so long, now. First, the election of 1990, when Chancellor [Helmut] Kohl was reelected for the third time, was shaping up as a battle over where Germany will go in the twenty-first century. Will it become a much more competitive environment? Will it lose its place as the world’s third-largest economy and the world’s biggest exporting market? That campaign was overtaken by events, namely the rush toward reunification. Since then, there has been paralysis and stalling on really coming to grips with reforms.

This time, I think, both Schroeder and Merkel realize that time is running out. Unless Germany adapts, it risks a sharp drop in terms of its competitive place in the world. And the danger is that mainstream parties, the Social Democrats and Christian Democrats, could start losing to more extremist visions of the future. Already you have a new wrinkle in this year’s campaign—a left-wing, anti-globalization party called the Left Party, which is headed by Oskar Lafontaine, a former left-wing Social Democrat who bolted the party and has set up this new party in conjunction with the former Communists of Eastern Germany. He’s fishing for votes on the far left and also the far right. He’s attacking immigrants, as well as saying, “We need to set up a more socialistic structure.” So the risk is that if the reform suggestions of the mainstream parties fail, voters will turn toward some of these more extreme visions. We all know where that led Germany in the past.

What are the chances of the vote being so close it would lead to grand coalition of the CDU and SPD?

The last few days suggest more and more that may be the case. If the Christian Democrats fail to get a majority with the Free Democrats, they will be forced to turn toward the second-biggest party, the Social Democrats, and set up a grand coalition. Right now, I believe the CDU has about 41 percent according to some polls and the Social Democrats have about 34 percent. But a lot of political commentators feel this will just be another recipe for further paralysis because their visions of the future are so much apart that they would have a hard time agreeing on a common platform. The likelihood is that this will lead to continued stagnation. The government would probably fall apart within a couple of years and we would be facing new elections and Germany would lose two years of precious time without making much progress.

At one time, there was a grand coalition in Germany, right?

Yes, from 1966-69 there was a grand coalition.

Who was the chancellor then?

The chancellor at that time was Kurt Georg Kiesinger, a conservative Christian Democrat. Willy Brandt went on to win the elections in 1969 and ushered in a long period of Social Democratic rule.

What also makes this election important is that it will set the tone and the pace for reform across Europe. France is going to the polls in 2007. [French Interior Minister] Nicholas Sarkozy, who is advocating a similar package of reforms to Merkel’s, is clearly hoping for her to win the election in the hope that this would give him boost in his fight against President Jacques Chirac and his anointed heir, Dominique de Villepin, the prime minister.

What impact will this have on U.S. relations with Germany?

As I said earlier, the desire of Merkel and her team is to restore good relations with the United States. I think she will make an early visit to Washington to meet with the President. I don’t think, however, that this is going to lead to significant change in policies. While the tone may improve, the policies won’t necessarily change and, in fact, it could lead to some further friction. For example, Merkel and the Christian Democrats do not want to see Turkey become a member of the European Union, which is contrary to the position that Schroeder and his foreign minister, Joschka Fischer, have fully embraced in harmony with Washington. The Christian Democrats will push for a special partnership between Turkey and the EU and that’s a difference in opinion with Washington.

Secondly, she certainly will not approve sending any German troops to Iraq. Germany is already the largest troop contributor to the western effort in Afghanistan, and it will continue playing a strong role there in support of the United States, as well as in the Balkans, where Germany has several thousand troops in the international peacekeeping mission. I think she will keep that going, but she certainly isn’t going to change her policies on Iraq.

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