Merkel's German Optimism

From Bloomberg earlier in the week:

Merkel Policies Restore Rare Sense of German Economic Optimism

Aug. 3 (Bloomberg) -- Chancellor Angela Merkel has helped kick-start the German economy, not to mention her own political prospects, by pulling off the equivalent of a conjuring trick: banishing Germans' pessimism and convincing them the glass is half full.

Merkel has restored a rare sense of economic optimism, a prerequisite for corporate investment, hiring and consumer spending, economists and psychologists say. It's not so much what she's done that's important as what she hasn't done: Merkel has deliberately discontinued the unpopular economic-policy changes pioneered by her predecessor, Gerhard Schroeder. That's propelled her personal-approval rating to a record, to the consternation of her coalition partners.

``We're having a break from reforms; no drastic decisions have been made'' since Merkel took office, Peter Bofinger, a member of the government's council of economic advisers, said in an interview. ``The government did exactly what I called for on several occasions: namely restore some calm.''

Merkel is presiding over economic growth near a six-year high and the lowest unemployment rate since 1993. That's brought a political dividend for the chancellor, whose Christian Democrats are as many as 13 percentage points ahead of their Social Democrat coalition partners in polls, while helping seed confidence among consumers.

As the expansion broadens, the feel-good factor grows. Or is it the other way around?

Mastermind

Ludwig Erhard, the mastermind behind the ``economic miracle'' that pulled Germany out of its postwar depression, had an answer back in 1955. He concluded that a nation's psychological state is as important as any other measure of ``conventional economic policy.''

``If one succeeds at bringing about a change in the population's economic behavior by psychological means, then these psychological effects become an economic reality,'' the then- economy minister told parliament.

Merkel's success in restoring optimism, by creating harmony in a coalition of opposing parties and catering to Germans' longing for consensus, even has a name -- the ``Merkel effect'' - - and the Social Democrats are unsure how to respond.

With its poll ratings near a three-year low and membership declining, the party's support is being eroded by the newly formed Left Party comprising post-communists, labor-union activists -- and disaffected former Social Democrats.

`Dire State'

The Social Democrats are ``in a dire state, stuck between a beaming chancellor and a fierce Left Party,'' according to Uwe Andersen, a professor of politics at the University of Bochum in western Germany.

Merkel, 53, is easily the country's most popular politician, with an approval rating at a record 85 percent in a poll published July 20. Even Social Democrat supporters say they prefer her to their own party leader, Kurt Beck, 58.

Just two years ago, before Merkel came to power, unemployment exceeded 5 million for the first time since the end of World War II. Concerned about their economic futures, consumers squirreled away a tenth of their disposable income. Street protests rocked the country as Schroeder pushed through welfare cuts and labor-market deregulation.

Yet those same policies helped raise corporate competitiveness, laying the foundations for a rebound in hiring and, ultimately, spending. It all came a little too late to save Schroeder, though.

Economic Psychology

The coalition government of Christian and Social Democrats that came into office on Nov. 22, 2005, with Merkel at its head, ``signaled to the public that they knew the way forward,'' Erich Witte, an economic-psychology professor at Hamburg University, said in an interview. ``That leads people to have a more optimistic view of the future and, as we know, 50 percent of the economy is psychology.''

Out went contested plans to make it easier for employers to fire workers and in came home-renovation subsidies, more child- care funding and allowances for working parents -- all under Merkel's stated policy of ``small steps.''

``There is a growing understanding that if government is to preserve its ability to act, it has to win majorities and that radicalism isn't helpful'' in formulating policy, Renate Koecher, managing director at opinion researcher Allensbach, said in an interview.

`Muddle Through'

Still, Otto Kentzler, head of the ZDH association of skilled trades, said Merkel can't ``muddle through'' her four-year term without taking a stride or two.

Business leaders have urged Merkel to use the window before next year's state elections to press ahead with sweeping policy changes by cutting non-wage labor costs such as nursing-care contributions. One quarter of Germany's 16 states hold elections next year, with the national election due in 2009.

More likely, the chancellor could just wait until after 2009 -- with its prospect of a new coalition partner -- before tackling Germany's biggest long-term challenges, such as revamping health care beyond a compromise deal struck with the Social Democrats.

Merkel has already started work on measures that will preserve the feel-good factor: minimum pay to end what labor unions call ``starvation wages'' and plans to give workers a larger share in company profits.

At the national election in September 2005, the ICON consumer-confidence measure stood at 86. An index below 100 indicating pessimists outweigh optimists. Now it's at 108, the second-highest level since polls were first taken in July 1999.

``People now feel things will continue on a positive note,'' Witte said. Merkel's achievement is that ``uncertainty is gone.''