Germany calling

The tempo of the German election is increasing, with the screening of a 90-minute television debate yesterday, aired on all four main German TV channels. By one account, challenger Angela Merkel did quite well, getting the better of Schröder on the vital issue of the economy.

With Schröder's Social Democrats trailing the opposition Christian Democrats by around 11 per cent in the polls, the odds seem very much in favour of Merkel. However, between a third and a half of German voters are said to remain undecided as to how they will vote on 18 Sept, so it would seem that the contest could go either way.

What to make of the article by Ambrose Evans Pritchard today in The Daily Telegraph? He paints a rosy picture of the German economy, reporting that Germany has overtaken America to become the world's biggest single exporter. Its trade surplus is now greater than that of China, Japan and India combined, reaching a staggering 16.8 billion euros in June alone. The profits made by German companies are running at over 33 per cent of national income, the highest in 40 years.

Deutschland AG has knuckled down, he writes, and it is now up to the German state. Should Merkel win the election, her putative finance minister, Paul Kirchoff, wants a 25 per cent flat tax and calls for the abolition of 90,000 tax rules.

Ambrose makes the point that, compared with an apparent resurgence of Germany, Britian is looking lacklustry, with our state taking 45 per cent of GDP by 2006, against 46 per cent for Germany, on OECD data. It does not take much extrapolation, he writes, to see that Britain could soon be Europe's sick man again, gasping and choking with the worst of the big-government sclerotics. Writes Ambrose:

I am not sure that Britain's debate on Europe has quite caught up with fast-moving events on the ground. We love to hate the Franco-German axis, but it did deliver the stabilising compromises that held the EU's north and south together. The task of holding Europe together may now fall to Britain, since no other EU state can possibly do it. Or Britain could opt for the entirely different strategy of Anglo-German condominium, creating a fresh EU axis, this time run on free-trading, pro-American lines - and let the Latin chips fall where they may. Unwise perhaps, but very tempting.

This analysis is interesting, but I am not sure it goes far enough. The profitability of German firms has largely been through buying up – or setting up – enterprises in the cheaper central and east European states, at the expense of jobs in Germany. In the UK, the government has been able to keep employment buoyant largely through a massive recruitment in the state sector, on the back of increasing income from financial services, which now account for nearly a third of the economy.

Germany does not have this resource to fall back on and the Merkel recipe will be viewed as bringing more job cuts in the short-term, and reduction in state benefits, without any immediate prospect of relief. What is not possibly realised abroad is quite how much Schröder’s Social Democrats are playing the anti-American card, to which we to which we referred to earlier, but a graphic illustration of this can be seen from this picture of a recent election rally – redolant more of a third world country, like Iran, than a supposedly civilised country like Germany.

With the New Orleans debacle being milked for all its anti-American potential – as living demonstation of how the US "capitalist model" fails - the Schröder line may have more resonance than has been anticipated. He may give Merkel a run for her money. On that basis, we could see Britain facing a stronger anti-American alliance on the Continent, being drawn further away from the special relationship but with very little chance of dominating the EU agenda.

This notwithstanding, the British economy certainly gives the impression of being built on "funny money", but, unlike Ambrose, I do not see any possibility of an "Anglo-German condominium". We may be on our way to becoming the "sick man of Europe" again, but never as sick (I hope) as the strand of German politics exemplified by the picture above.

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