Germans face tough choice

Trench by trench, economic battle lines are being drawn for Germany's September general election as Europe's biggest economy grapples with its deepest post-war recession.

The Left wants to spend billions to rescue failing companies and keep workers in jobs. The Right wants a swift exit from crisis spending at the risk of prolonging the recession.

The rival economic approaches are designed to appeal to anxious, cautious Germans, but they strike many outsiders as a choice between plague and cholera.

In keeping with Germans' hankering for consensus, there is much common ground between the two main parties, which have governed together in a fractious "grand coalition" since 2005.

Both agree on the need for stricter financial regulation. Neither advocates a bigger fiscal stimulus to boost domestic demand, despite official forecasts that the economy will contract by 6 per cent this year and barely grow in 2010. Both believe Germany can export its way out of trouble. And both seek an early return to strict budget discipline.

Last week's European Parliament election results suggest voters put more trust in conservative Chancellor Angela Merkel to handle the crisis than in her Social Democratic partners under Foreign Minister Frank-Walter Steinmeier.

If the trend is repeated on September 27, Merkel's conservative bloc (37.9 per cent) and the liberal Free Democrats (11 per cent) may be able to form a centre-right "bourgeois coalition". But Merkel may yet be forced into another "grand coalition" if the Social Democrats (20.8 per cent) recover.

Only 43 per cent of Germans voted in the European poll, and a host of crisis-driven events could change the picture by September. The main battlegrounds are likely to be state aid to industry, taxation and a minimum wage.

In the red corner, the Social Democrats (SPD) have given top billing to the fight to save jobs by fighting for state aid to crisis-stricken firms. They also want a national minimum wage, more European economic policy coordination and the maintenance of high tax rates to avoid deeper deficits.

In the blue corner, the Christian Democrats (CDU) have promised tax cuts without saying so far which levies they would reduce or when. Playing to Germans' historically rooted fear of inflation, Merkel has criticised central banks for printing money to fight the crisis and called for an early return to "policies of reason".

"Merkel is clinging reflexively to orthodox economic policy dogma - against inflation, against stimulating demand, against excessive debt - which makes Germany's crisis response a laughing stock abroad," Henrik Enderlein, a professor of political economy at the Hertie School of Governance in Berlin, wrote in a newspaper commentary.

Unencumbered by government responsibility, the FDP has put forward a radical tax-cutting platform, aimed at simplifying and lowering income tax and easing the fiscal burden on business. It has not explained how it would pay for such cuts when the 2010 deficit is set to reach 5.9 per cent of gross domestic product.

The chancellor has sought to draw a line on bailouts. She backed a multi-billion rescue for Opel, the European arm of bankrupt US auto giant General Motors. But she rebuffed retailer Arcandor's bid for state loan guarantees to stave off collapse, saying shareholders should foot the bill. Arcandor filed for insolvency last week.

The Social Democrats have trained their fire on conservative Economics Minister Karl-Theodor zu Guttenberg, a free-marketeer who was the lone cabinet member to publicly oppose the Opel bailout. Playing up his aristocratic lineage, they brand him "the baron from Bavaria" and depict him as a heartless liquidator.

So far this tactic seems to have backfired. Guttenberg is riding high in the polls and the SPD had a disastrous score in the European Parliament election. But it is early days.

A number of crucial economic decisions have been swept under the carpet until after the general election. In particular, the key question of who foots the bill for German banks' hundreds of billions of euros in toxic assets has been fudged until after polling day.

A "bad banks" bill being rushed through parliament leaves liability for eventual losses with banks that park dodgy debts into state-backed special purpose vehicles. But the private banks are refusing to cooperate because they want the taxpayer to take more of the risk. No politician dares propose that before September 27, but a new government may have to bite the bullet once the ballot is over.