New Times column, April 1999

It is still too early to say what the implications will be of the forced resignation of German finance minister Oskar Lafontaine last month.

In the days immediately after Lafontaine’s spectacular departure – still not fully explained as New Times went to press – chancellor Gerhard Schroder was at pains to emphasise that the policies of his Social Democrat-Green coalition government would remain the same.

It is just possible that they will. But it is more likely that Lafontaine’s successor as finance minister, Hans Eichel, will take a much more business-friendly approach to tax policy at home and a much less critical line on European macroeconomic policy. And it could be that Lafontaine’s demise is the harbinger of a changed ruling coalition in Germany.

Eichel is outgoing state premier in Hesse, where his SPD-Green coalition government suffered a humiliating electoral defeat in February after a campaign in which the opposition Christian Democrats played the race card against the Bonn government’s plans for liberalising Germany’s citizenship laws.

He does not have Lafontaine’s clout nor his charisma. His reputation is for solid pragmatism rather than flamboyant radicalism. Crucially, unlike Lafontaine, who was SPD chairman and the darling of the party’s rank-and-file, he has no independent power base in the SPD and owes his position solely to Schroder, whose policy disagreements with Lafontaine had been barely concealed for months before their final bust-up.

Lafontaine’s plans to shift the burden of taxation from workers and families to business, with income tax cuts paid for by increased corporate taxes, had business leaders up in arms. So too did his public support for trade union wage demands and his scepticism about the need for greater labour market flexibility and other supply-side measures to make Germany more competitive. On all these issues, Schroder had indicated his sympathy with employers.

To Schroder’s embarrassment, Lafontaine’s attacks on the European Central Bank for its refusal to cut interest rates to boost demand in the depressed euro-zone led to opposition accusations that the finance minister was undermining Germany’s culture of financial stability. Lafontaine caused consternation in the US by demanding exchange rate target zones for the world’s major currencies and upset the British government by calling for rapid tax harmonisation across the EU.

Lafontaine also found himself in hot water with Schroder when he suggested closer co-operation between the SPD and the Party of Democratic Socialism, the former East German communists, and when he semi-publicly criticised the chaotic style of his own government.

But Lafontaine did have significant strengths, even if diplomatic tact was not one of them. His arguments for a demand-led macroeconomic policy at European level were sound, as indeed was his case for tax harmonisation. His departure is a blow to hopes of developing a countervailing force to the ECB’s exclusive concern with low inflation.

In German politics, Lafontaine was crucial to holding the SPD-Green coalition together. Now he is gone, there is a real possibility that it will fragment. Schroder and the Greens have already clashed over nuclear power and citizenship law reform, and last month’s Green party conference was notably cool about the government’s record. The next few weeks could be extremely rocky.

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