The newly strengthened chancellor was quick to deny that he had pushed Lafontaine out or that his government would undergo any radical changes. There would be no dumping the radical Greens from the ruling coalition–or, indeed, any sharp policy reversals. “There is no crisis,” Schroder said, affirming his commitment to the controversial course charted by the departed Lafontaine. But a lot of people were betting, and hoping, that he didn’t mean it. The German stock market, which has badly lagged other European markets this year, showed its delight at Lafontaine’s departure by surging 5 percent the next day. German business leaders, who had mounted an unprecedented attack on the hefty corporate-tax increases Lafontaine had pushed, immediately called for new policies. “I can only hope that the government uses this chance for real tax reform, away from income redistribution and toward more growth,” said Ulrich Hartmann, the CEO of the Dusseldorf-based Veba utilities conglomerate.
Most of Europe joined in cheering Lafontaine’s exit. WE HAF VAYS OF MAKING YOU QUIT, proclaimed the British tabloid The Sun, which had waged a virulent campaign against “the most dangerous man in Europe.” Lafontaine’s push for tax harmonization in the EU had fueled charges that he wanted to raise taxes everywhere to German levels, making him an ideal bogeyman for anti-euro crusaders. His repeated calls for the new European Central Bank to lower interest rates–which had the opposite of their desired effect–helped the euro get off to a rockier-than-expected start. Prime Minister Tony Blair will still have a tough task of selling the euro to his countrymen, who won’t vote in a referendum on the issue until 2001 at the earliest, but Lafontaine’s disappearance could help. And Blair will find it far easier to make common cause with Schroder now; in the next month, the two governments are expected to release a joint document on economic strategy. In France, Finance Minister Dominique Strauss-Kahn will be eager to prove that he can take the lead on euro-related issues without provoking the kind of backlash Lafontaine routinely did.
Schroder now faces the task of putting his government and his country back on a more stable course, avoiding the amateurish flip-flops on policy that have been the hallmarks of his first few months in office. The chancellor may be freer to pursue “the New Middle” course he promised during his election campaign. But he’ll no longer have Lafontaine around to take the blame for everything that goes wrong, playing the bad leftist cop to Schroder’s good moderate cop. “This is a huge burden he’s shouldering,” conceded one party insider. In his first move, Schroder named Hans Eichel to the Finance Ministry job. As the prime minister of Hesse, which includes the German financial capital, Frankfurt, Eichel should be a far more business-friendly, if somewhat colorless, replacement. “He doesn’t dance like Fred Astaire and doesn’t sing like Caruso,” Schroder once said of him. Butafter Lafontaine’s tenure, the financial community wasn’t looking for any more fireworks. “I know him very well, and I congratulate Germany,” said European Central Bank President Wim Duisenberg of Eichel. As for his feelings about Lafontaine’s exit, Duisenberg tersely replied: “I have no feelings.”
Not so Lafontaine, who caught virtually everyone by surprise with his announcement. Without any advance warning, he dispatched three terse letters of resignation by car from an office in Bonn early on Thursday afternoon. By the time they had reached Schroder, the party leadership and the Parliament, he was gone, retreating to his home in the Saarland. Heiner Flassbeck, his closest aide in the Finance Ministry, visibly blanched when he received the news at a meeting of G-7 deputy Finance ministers in Bonn. According to government sources, Schroder tried to reach Lafontaine by phone–with no luck. The politician who earlier this year had joked that he and Schroder were “twins” evidently didn’t feel he owed him, or his party, any explanations.
What made him do it? At a cabinet meeting a day earlier, Schroder reportedly castigated his team for policies that were discouraging investment and jeopardizing his goal of bringing down the unemployment rate. “I won’t stand for any anti-business policy with my name on it,” he said, warning that a point could come “when I can no longer bear the responsibility for such policies.” German dailies trumpeted those leaks as evidence that Schroder had blamed Lafontaine for the government’s poor performance, triggering his decision to resign. But Schroder loyalists claimed that there hadn’t been any confrontation, and that Lafontaine had agreed with Schroder’s main argument about the need to improve the business climate. Wolfgang Schuble, the leader of the opposition Christian Democrats, spoke to Lafontaine on the phone on the same day and said he sounded “very relaxed.”
The Schroder team insisted that Lafontaine had given up for very personal reasons. “It was the bashing he took for the last four to five months,” says one official, referring to the media’s relentless criticism of the Finance minister. “It’s very psychological: it was too much for him.” Among the factors, the Schroder camp suggested, was the assassination attempt against Lafontaine in 1990 and the way he was subsequently trounced by Helmut Kohl in the national elections when he made his bid to lead the country. With last year’s elections, he reached the apogee of his political career. Now that his fortunes were sliding steadily, he complained that his work wasn’t much “fun” anymore.
Lafontaine had done plenty to contribute to the backlash against him. From the moment he took office, he pushed so hard and so publicly for the European Central Bank to lower interest rates that he antagonized even those who agreed with him. His calls for setting up controls on the international foreign exchange markets to avoid major fluctuations were dismissed by Washington as patently unrealistic. As with his calls for tax harmonization, he began talking more of “coordination” instead, but the damage was done. “You can’t get away with alienating your partners,” says Bonn University political scientist Ludger Kuhnhardt.
Nor could he get away with running roughshod over the German business community. Lafontaine took the lead earlier this month in pushing through the lower house of Parliament a hotly contested tax-reform package that would have given an unmarried average wage earner an extra $28 a month. While the government claimed it would also ease the tax burden on Germany’s medium-size companies, big industry screamed its protests, claiming that the closing of tax loopholes would cost it billions, and insurance and utility companies threatened to move part of their operations abroad. Business leaders were further incensed when Lafontaine backed Germany’s largest unions in a push for higher wages; the increases, they argued, would only lead to more corporate redeployment abroad. “In today’s era of highly mobile global capital and trade, business has an option to escape that it didn’t have before,” says Goldman Sachs chief economist Thomas Mayer.
The economic trends suggested that such warnings were right on target. Germany’s growth projections began to drop, while unemployment climbed above 11 percent again, reversing the modest improvement at the end of Helmut Kohl’s tenure. According to a poll last week, only 22 percent of Germans believe that the government is capable of solving the country’s economic problems. Even more disturbing were recent polls showing that Schroder’s SPD is now trailing the opposition Christian Democrats by 41 to 38 percent.
The Greens have been losing support even more rapidly, which also was bad news for Lafontaine. As chief proponent of the “Red-Green” coalition, he has shared the blame for the government’s push to implement major parts of the Greens’ agenda: the rapid closure of Germany’s 19 nuclear power plants and a sweeping liberalization of the country’s citizenship laws to allow foreigners to maintain double citizenship. The ensuing outcry led Schroder to backtrack on both issues.
For all the criticism of his leftist views, Lafontaine antagonized people with his style as much as his policies. “What’s the difference between God and Lafontaine?” his detractors joked. “God doesn’t think he’s Lafontaine.” His lieutenants in the Finance Ministry quickly won a reputation for comparable arrogance, issuing orders and expecting no questioning of their wisdom. If they had done their job well, this might have been forgiven. But to the surprise of even many of his critics, Lafontaine often showed up unprepared at meetings, with none of the mastery of detail he had been known for earlier. And he often seemed oblivious to the impact of his actions, failing to learn anything from his mistakes. Instead of trying to recast himself as a moderate, he recently launched a crusade to allow the SPD to form alliances with the ex-communists of eastern Germany.
Schroder will certainly put an end to such crusading, but heshed little light on his future plans. He defended his government’s record. “We haven’t pursued any anti-business policy,” he argued. And he backed up his assertion that the government wasn’t changing course by declaring that it wouldn’t withdraw its tax-reform package for an overhaul before passage by the up-per house. But members of his team conceded that he would have to demonstrate that he is responding to those constituencies that Lafontaine had alienated. “This will lead to policy changes,” one insider predicts.
It could mean further changes in the government as well. Before he defeated Kohl, Schroder hinted privately that he would be forced into a coalition with the Greens–but that the coalition could fall apart within a year. Last week the SPD was already making common cause with the liberal Free Democrats to pass a far more moderate version of the citizenship law than the Greens proposed, allowing double citizenship only until the age of 23. The German media were quick to speculate about a possible switching of partners. That may not happen soon, but Schroder could drop Environment Minister Jorgen Trittin, the leading radical within the cabinet, who spearheaded the anti-nuclear-energy drive. There also could be new splits within the parties. Even the Greens have more conservative young economists who quietly welcomed Lafontaine’s resignation.
As the ultimate political pragmatist, Schroder should have a compelling reason to move his government toward the center. “If he doesn’t set a more business-friendly course, all his problems will be back in a couple of months,” warns Goldman Sachs’s Mayer. Schroder’s government has largely squandered its first few months in office. If the chancellor fails to seize the opportunity presented by Lafontaine’s departure, he’s in for his first encounter with an ancient fact of political life: it’s lonely at the top.
