Merkel under pressure from within and without

Chancellor Angela Merkel's conservative Christian Democrats will gather Monday in Stuttgart for their annual party congress. It will be far from a set-piece conference.

Merkel, after years of uncontested success, is facing massive pressure not only from other countries, but from within her own party, to beef up the German government's response to the financial crisis. She will have to give an outstanding speech to retain her reputation as a disciplined, calculating and determined leader.

"The speech is everything," said Philipp Missfelder, chairman of the Christian Democrats' young conservatives. "It does not matter what the stock markets do that day. What matters is that Merkel delivers a speech that gives Germans a perspective. The party needs it, and so does the public."

The speech Monday has become so important because Merkel has publicly shown little leadership during a crisis that seems to be turning more serious by the day. While often fiercely critical of plans by President Nicolas Sarkozy of France and other EU leaders for protecting Europe against the meltdown, she has come up with no alternative. "Madame Non," the Parisian daily Les Echos dubbed her.

Even when Germany's leading economic institutes recently predicted a sharp fall in economic growth for this year and zero growth for 2009, Merkel and Finance Minister Peer Steinbrück, a Social Democrat, remained detached from the forecasts. And when the institutes suggested that the government increase the economic stimulus package from €6 billion, or $7.8 billion, a year to at least €12 billion or consider tax cuts to fight recession and avoid increasing unemployment, they received hardly any formal response from Merkel.

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What are the reasons? Even high-ranking Christian Democrats are not sure. Some say that Merkel does not believe that the economic crisis will get much worse, so she can afford to sit it out. Certainly, she is unwilling to endorse European spending projects that could end up costing the German taxpayers far more than a national stimulus program would.

By now, others inside her party admit that Merkel was too slow to recognize that Germany could not remain insulated from the crisis, which is strange given that it is the world's biggest export-driven economy and thus highly vulnerable to external shocks. Then there are those analysts, like Stefan Schneider from Deutsche Bank Research, who say Merkel's reaction to the crisis reflects her personal convictions.

As a politician raised in Communist East Germany, Merkel believes in a laissez-faire type of economy and abhors excessive state interference. Yet she has done little to reduce the state and bureaucracy. Nor has she pushed ahead with any major tax reforms, which she once advocated during her 2005 election campaign. She learned, bitterly, that the public and large sections of her party were not prepared to discard the strong, social role of the state in favor of radical tax and economic reforms.

Yet the financial crisis shows that Merkel has not been willing either to support massive state spending or re-nationalization. She and Steinbrück have set strict conditions for distributing a €500 billion bank bailout package. Merkel is also unwilling to reward bankers or managers for their mistakes, a policy the public supports. She has refused to rush into rescuing the automobile companies, even though it could lead to a loss of jobs. She has, so far, also resisted cutting personal taxes until after next year's elections - if she wins - despite even louder calls from inside her party to do so soon. Like Steinbrück, she believes that Germans would save their tax rebates, not spend them.

Some of her advisers and colleagues deny that there is a problem of leadership. "The chancellor is not doing a bad job," said Kurt Lauk, chairman of the Christian Democrats' influential economics council. Yet he has been highly critical of Merkel's reluctance to introduce bold economic reforms.

Merkel's policy - or lack thereof - has not only puzzled her party. It has deeply disappointed the business community in one of Europe's last major manufacturing countries. Already, the big automobile manufacturers, Daimler-Benz and Volkswagen as well as BASF, the giant chemicals group, are cutting production, putting their staff on extended Christmas holidays. Many smaller companies have followed suit.

If such job losses accelerate, there will be consequences for the federal election next September. Yet curiously, despite her handling of the crisis, Merkel has been able to maintain most of her popularity lead over Frank-Walter Steinmeier, the foreign minister, who will be the Social Democrats' candidate for chancellor.

"Maybe the reason is that the Germans don't like panic, or that they don't believe the crisis is that bad, especially now that their savings are protected," said Schneider.