Merkel's difficult hand

UNEMPLOYMENT IN Germany stood at 11.2 percent when Angela Merkel was sworn in Tuesday as Germany's first woman chancellor, leading a contradictory coalition composed of her Christian Democrats and their Social Democrat rivals. Curing Germany's weak growth and moribund consumer demand ought to be Merkel's primary objective, and, indeed, she did campaign on a platform of labor market reforms and gradually reduced social welfare costs. But four weeks of hard bargaining between her party and the Social Democrats produced a government program that seems more a formula for prolonged economic stagnation than for revived growth.

Consequently, Merkel is more likely to have success in reorienting Germany's relations with the European Union and the United States than in putting Germans back to work.

Because Germany's is the third-largest economy in the world, its domestic policies can have rippling effects around the globe, much as Japan's restrictive policies in 1997 contributed to the Asian financial collapse of the late 90s. Unfortunately, the compromises reflected in the new government's program spell prolonged economic stagnation for Germany.

Germany's two main parties seem to have adopted the most unpopular campaign proposals of each. From the Christian Democrats comes a sales tax increase from 16 to 19 percent and elimination of tax incentives for first-time home buyers. These innovations threaten to further weaken two of the most vulnerable sectors of the German economy: consumer spending and the housing market. From the Social Democrats comes an increase in the rate of income tax paid by Germany's top earners: from 42 to 45 percent.

The only beneficial result of these measures is likely to be a reduction of Germany's federal deficit, which needs to shrink by more than $40 billion to get under the European Union cap of 3 percent of gross domestic product. If there is one bright spot, it is that the tax increases will be delayed until January 2007. The result may be to stimulate consumption next year. But unless European interest rates decline in the interim and the euro is devalued, the delay may lead only to a sharper decline in 2007.

Notwithstanding the iconic photo of Merkel's hand being kissed Wednesday in Paris by French President Jacques Chirac, she is determined to steer Germany to a healthy rebalancing of its relations with France, the United States, and the British government of Tony Blair. And she can also be counted on to give higher priority to relations with the nations of Central and Eastern Europe. These will be beneficial changes for Germany, even if they do not improve prospects for the 5 million Germans in need of jobs.