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Moment of Decision for Germany in Struggle for Economic Growth

Chancellor Angela Merkel may have to make politically risky moves to realize her vision of the future.

April 02, 2006|Jeffrey Fleishman | Times Staff Writer

BERLIN — His delivery trucks parked like a tiny army in waiting, Klaus Wiedemann pondered nut bread and the ever-infuriating German economy.

He's the fourth generation of a family of bakers who survived two world wars and a city split by decades of communism. These days, he says, it's social programs and binders of government regulations that thwart medium-sized businesses like his from competing in an economy weakened by years of wavering consumer spending and flat growth.

"There are too many rules. Labor costs are too high. Two to three million jobs have vanished in the last 10 years, which means fewer people are working to fund the social system," said Wiedemann, sitting in his office beneath his great-grandfather's baker's diploma. "Big corporations can move jobs overseas to escape this. But companies like mine can't do this. I can't bake cakes in China and ship them to Germany."

The German economy is the third-largest in the world and the muscle of Europe. Business confidence is up and car manufacturing has turned the nation into the globe's leading exporter of goods. But these strengths are offset by high labor costs and a welfare state that accounts for 48% of the federal budget. The German public's vision of social democracy and its entitlements have for decades hindered changes that might have spurred economic growth.

"The main disease is that Germans want to hold on to what they have," Wiedemann said. "They don't want to give up six weeks of paid vacation, 35-hour work weeks. And if you don't want to give anything away, how can you compete in the bigger world?"

During last summer's election campaign, Wiedemann was hopeful of a solution when Angela Merkel and her conservative Christian Democrats were well ahead of incumbent Chancellor Gerhard Schroeder and his left-leaning Social Democrats. But Merkel managed only a slim victory, forcing a coalition government that is unlikely to support the changes and cuts the new chancellor had envisioned.

"Merkel has all the right capabilities to take Germany into a promising future," said Wiedemann, who has 27 bakeries and 240 employees in Berlin. "But she's caught in the tight corset of this coalition."

A physicist, Merkel has surprised much of the country since taking office in November. Her international trips and studious, hardworking nature won her an 80% approval rating -- the highest of any postwar chancellor.

The economy has shown stirrings of revival and is expected this year to grow 1.5% to 2%. But her government has yet to focus on reducing 12% unemployment, shrinking the welfare state and loosening labor laws.

"If we are not successful in making the labor market work, then all the other reforms will be marginal and won't have a big impact on the economy," said Thomas Straubhaar, president of the Hamburg Institute of International Economics. "Right now there's no momentum in the government at all for this, and there's no hope structural market reforms will start in the near future."

The suntanned Wiedemann sat in his office on a recent cold afternoon. His delivery trucks would be silent until the hours before dawn, when they would rumble across the city to markets and bakeries. Bread has been rising in the family's ovens since 1985. The business consisted of two shops 20 years ago, when Wiedemann began expanding and innovating by adding products, such as nut and bran breads and Valentine's Day rolls shaped like hearts.

"It comes down to a simple baker man creating an idea suitable for the world," he said. "We need more ingenuity. I think there's too much negativity in Germany. We need some positive stories.... The German consumer is insecure and irritated because he's worried that his job might vanish. He's saving his money, not spending it."

Apprehension over jobs and savings accounts has been hovering since Schroeder pushed some limited measures during his last term, including rolling back some labor protection and trimming unemployment compensation. The moves outraged unions and cost Schroeder politically. But they psychologically prepared Germans for the prospect of change spurred by global competition.

Raised in what was communist East Germany, Merkel faces a similar choice. Will she risk her political good fortune to champion a painful overhaul? Merkel often sounds at odds with herself over how to reinvent the social state. "We want to secure the future of the social market economy," she said recently. "But we realize that with globalization, certain basic conditions have changed."

This attempt to placate both sides underscores her need to hold together a fragile coalition. "Merkel is extremely loved by the German population, so why should she risk change?" Straubhaar said. "Why should she do something against all the confidence Germans have given her?"

Frank Becker doesn't think Merkel will jeopardize it either.

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