- The Washington Times - Thursday, August 2, 2001

BERLIN — The U.S. economic slowdown is dragging down Europe's largest economy, making it unlikely that Chancellor Gerhard Schroeder can fulfill his pledge to reduce the country's persistently high unemployment rate before federal elections late next year.

The development is giving new hope to the opposition Christian Democrats who, troubled by a 2-year-old campaign-financing scandal, for the first time see a chance of unseating Mr. Schroeder in September 2002.

Germany, which accounts for nearly one-third of the economic activity among the 12 nations that adopted the euro as their currency in 1999, has hit the skids much harder than most economists had foreseen. The slide is largely the result of a dropoff in demand in the United States, Germany's largest overseas trading partner.

"The German economy is much more export-oriented than, say, the French economy," said Monika Wulf-Mathies, a vice president at Deutsche Post, Germany's huge postal and logistics company, which was once a state monopoly. "That means the slowdown here is much stronger than elsewhere."

Mrs. Wulf-Mathies, a former member of the European Commission in Brussels, keeps tabs on the mood in Berlin for Deutsche Post, and the mood is edgy.

Mr. Schroeder, a Social Democrat, made economic modernization and lower unemployment his top issues in the 1998 elections and will be blamed for the slowdown.

"Slowly, it is becoming clear that Germany is the sick man of Europe," said Edmund Stoiber, premier of Bavaria, chairman of the Christian Social Union and a potential challenger to Mr. Schroeder next year.

Mr. Schroeder promised during the campaign that his economic policies would reduce unemployment — about 4 million at the time — to 3.5 million, a number that then seemed realistic.

"In every scenario, the government is going to miss its target," Klaus Zimmermann, president of the Berlin-based German Institute for Economic Research, told Reuters news agency.

Mr. Zimmermann's group, which is backed by large German corporations, predicts that unemployment will be about 3.8 million next year, far more severe than Mr. Schroeder's goal.

The unemployment numbers have not been the only problem. Business confidence has been flagging as well.

The Munich-based ifo Institute concluded this summer that industry leaders' confidence in the economy has fallen to its lowest level in 10 years, resulting in widespread worries that psychology alone could drag Germany into recession.

Mr. Schroeder has resisted demands from the opposition and industry to resort to government action to boost growth, and has said very little about the economic situation.

Industry, which initially had very low hopes for Mr. Schroeder's coalition government with the ecology-minded Greens, has given the chancellor high marks for the reforms he has managed to pull off.

Most notably, he split the opposition and rammed through a tax- reform package in 2000 that will reduce the financial burden on German companies. This year, he pulled off a hard-won reform of Germany's pension system in a bid to encourage people to save for retirement.

Christian Democrats are pressing Mr. Schroeder to move up the timetable for the implementation of tax-reform plan from 2003 to next year, a move they say would inject roughly $7 billion into the economy.

But government largesse would also chisel away at another cherished accomplishment of the Schroeder government, its persistent efforts to rein in massive budget deficits caused by multitrillion-dollar transfers for the reconstruction of eastern Germany after reunification in 1990.

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