Germany's new start (not)

Europe's largest economy - and the world's third largest - opens a new chapter in history Tuesday. Angela Merkel becomes Germany's first female chancellor, and its first from the former communist East Germany. But these firsts won't be enough.

Ms. Merkel likens the job of reviving and reforming her country's moribund, welfare-burdened economy to the task of rebuilding Germany after World War II.

Certainly, the citizens of Germany, idled with a jobless rate of 11 percent and discouraged by a forecast economic growth rate of a tepid 1 percent, want Ms. Merkel to succeed. And so do neighbors such as France, itself struggling with high unemployment that's helped to fuel a social explosion in its largely Muslim community.

And yet, it's hard to see how no-nonsense Merkel can get the job done based on the policy plan her party agreed to with its rival - now turned coalition partner.

In Germany, there's no more urgent task than revving up the economy. Basic economics would prescribe two ways of doing that. Depending on ideological preference, the government could choose to invest in job creation (a "New Deal" approach), or it could stimulate growth by cutting taxes (à la Ronald Reagan and George W. Bush). These are stimulants that, in Germany's case, would have to be accompanied by major reform to its bloated welfare system and inflexible labor market.

Stunningly, the two parties in Germany's new coalition government chose none of the above. Instead, they opted for an overarching goal of fiscal discipline, bringing Germany's budget deficit to heel so that it falls within agreed upon guidelines that govern Europe's single currency, the euro.

No one will argue that Germany's fiscal house couldn't use the same order that has its train system running on time. But this is hardly a top priority, and the way it's to be accomplished - raising taxes - could actually serve as a brake on the economy.

In the name of deficit reduction, Germany will raise its value added tax (like a sales tax) from 16 to 19 percent in 2007. It will raise the tax burden on the highest earners from 42 to 45 percent. That's anathema to many economists, who say this hurts the very people Germany needs - consumers. After several years of corporate cost cutting, exports are moving along nicely, but the domestic market is tied up like a pretzel. Nervous consumers can't bear to part with savings. The average age of cars on the autobahn is seven years - unheard of since the 1950s.

Why did Germany's leaders arrive at such a perplexing strategy? Because of lowest-common- denominator politics. September elections produced a virtual tie between the country's two main rivals, Merkel's conservative Christian Democratic Union, and the incumbents to the left, the Social Democratic Party. To rule jointly, controlling the deficit was what they could agree on.

A few hopeful welfare-reform measures will be taken, including raising the retirement age and lowering payroll taxes. But it looks as if Germany's leaders will merely turn a page in history, not write a new chapter - a reflection, perhaps, of the conflict within a country that knows it must reform, but can't fully face it yet.

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