Schroeder turns gaze from reform to re-election battle

By Alastair Macdonald

BERLIN (Reuters): It's only half-time but already the Germans think the game's all over -- Chancellor Gerhard Schroeder's economic reform program is fast coming to an end as he concentrates on a re-election battle still two years away.

Privately, government officials agree with outraged opponents and business leaders that Europe's sluggish lead economy still needs further urgent surgery. But, having ended 16 years in opposition in 1998, they are not going to push their luck in making voters swallow painful new measures.

"We have achieved a great deal, cutting the budget deficit, tax cuts, pension reform and so on," one senior political source said. "But we have to be realistic. The closer we get to an election, the harder it is to get anything through parliament."

A dearth of big reform bills on the center-left government's agenda -- beyond a long overdue reform of the pension system that it hopes parliament will pass early in the new year -- has irritated even Schroeder's junior coalition partners.

"The government will be making a huge mistake if it now hits the 'pause' button on reforms," Fritz Kuhn, co-leader of the environmentalist Greens party, said recently. His party wants to see more liberalization of the labor market and immigration to foster economic growth and investment in new technology.

But Schroeder was nearly ousted a year ago by left-wingers in his Social Democrats (SPD) before he had even begun to impose his pro-business, free-market agenda. His aides admit their fear that loosening labor laws or cutting the ballooning costs of state health care could only risk defeat in mid-2002.

"Some of the (SPD) comrades are relaxing again and calling a half-time break," Hans-Olaf Henkel, head of the Federation of German Industry (BDI), said recently. "We run the risk that the government's will to reform will run into the sand again."

The influential liberal news magazine Der Spiegel this week published a lengthy list of reforms still pending, ranging from foreign policy and health care to education and immigration.

"Germany cannot wait any longer," it said.

But Juergen Turek of the business-funded Center for Applied Political Research in Munich said: "The real will for reform has dissipated for now. It's regrettable. But there's a conflict here between understandable political expediency and the urgent need for really far-reaching reforms in Germany."

The chancellor himself is anxious to keep the shine on his modernizing image and will tolerate no talk of a new "reform bottleneck", the main criticism he used to great effect to unseat his conservative predecessor, Helmut Kohl.

"People are wrong to say we are not pushing hard to realize our reform goals. The opposite is true," he told business leaders on Tuesday. "I think it has become clear that no one can talk about us easing back on our goals."

To be fair, his government does have a clutch of plans for the coming year, though on one of the central issues for the budget -- the rising cost of health care -- stiff opposition from vested interests ranging from doctors and health insurers to millions of voter-patients has seen a major review shelved.

"Once we get the pension reform through, we certainly do have other plans: on health, the labor market, immigration, transport, education and so on," the political source said.

"But, yes, we have to say it's nothing too ambitious."

"We want to concentrate more now on winning popular acceptance for what we have already done," the source said, noting voters would only feel the effects of, for example, step-by-step cuts in taxation in the coming year or two.

Among reforms that investors say are vital to boost German growth and end the dismal slide of Europe's new common currency, the euro, are those which would cut non-wage labor costs and give employers a freer hand on wages.

But Schroeder has quietly dropped a pledge to cut payroll taxes below 40 percent of wages as welfare costs have overshot.

And the latest, rather limited, piece of labor legislation expected to be presented next month has business up in arms, complaining that minor reforms to employees' rights to take part in corporate decision-making may increase bureaucratic burdens.

"For the first time a Social Democrat government has been credited with more economic competence than the conservatives," the business daily Handelsblatt said on Wednesday.

"But it is doing its best to fritter this credit away."

Schroeder's limited room for maneuver was highlighted this week when one trade union quit a government-sponsored forum, accusing the chancellor of pandering to big business.

The government finds itself in an unprecedentedly strong position in opinion polls at mid-term, thanks partly to a financial scandal surrounding Kohl that has damaged the opposition, and partly to growing signs of its own competence.

While few analysts give the Christian Democrats much chance of recovery, government officials are conscious that much may change in two years and are anxious to consolidate their gains.

Some, however, warn that doing nothing could be just as fatal to Schroeder's government.

"They're like rabbits caught in the headlights of the election in autumn 2002," wrote commentator Thomas Wittke in the General Anzeiger newspaper. "The chancellor must be careful that he's not leading a government that has its honeymoon in mid-term and has to fight for survival at the end of it."