Schroder defends job policies against Duisenberg criticism

It seemed almost like old times in Frankfurt last week as the President of the European Central Bank (ECB), Mr Wim Duisenberg, accused the German government of upsetting the financial markets with dangerously left-wing, economic policies. A year ago, Mr Duisenberg's monthly press conferences were dominated by the public feud between the ECB and Germany's firebrand former finance minister, Mr Oskar Lafontaine.

Now, nine months after Mr Lafontaine's abrupt resignation appeared to have restored harmony to relations between the Bank and Mr Gerhard Schroder's centre-left government, here they were bickering again.

As the euro sank below the dollar, Mr Duisenberg appeared to blame Mr Schroder's decision to bail out the bankrupt construction firm, Phillip Holzmann AG, for the currency's troubles.

"It does not enhance the image we want to have of being an increasingly market-driven economy throughout Europe," he snapped.

The ECB president's irritation may have been sharpened by the Chancellor's public opposition to Vodafone Airtouch's bid for the Mannesmann telecommunications giant - a stance many conservative commentators interpreted as inconsistent with a commitment to the free market.

Mr Duisenberg's outburst is unsurprising in view of his own, evangelical commitment to the righteousness of market forces but, not for the first time, he has shown a tin ear for the political mood.

After a succession of humiliating defeats in state elections and in advance of a crucial party conference, Mr Schroder had little option but to intervene in the Holzmann debacle. With almost 70,000 jobs at stake - mostly in small and medium-sized businesses supplying the construction firm - three out of four Germans supported the Chancellor's move.

Mr Schroder's personal popularity shot up after the intervention and his hitherto sulky Social Democrats rewarded him with an 86.3 per cent vote of confidence at this week's conference in Berlin.

Moreover, few Germans appear to blame their government for the euro's weakness and Mr Duisenberg's public clash with the popular Chancellor is unlikely to endear the central banker to the public. Surrounded by like-minded ideologues, Mr Duisenberg may have forgotten that, although German voters do not warm to zealots such as Mr Lafontaine, they heartily approve of pragmatic leaders like Mr Schroder who defy the prevailing wisdom to promote the common good.

There is no evidence that Germans are concerned by the fall in the euro's value, perhaps because - with most imports coming from other parts of the euro zone - it makes little difference to consumers. Insofar as a weak euro affects exporters, it is a boon - making German goods more competitive in overseas markets.

Mr Schroder sought to reassure his critics this week by reaffirming at his party conference that he remained committed to business-friendly policies.

"I want to end this superficial debate about the difference between demand-side and supplyside economic policy. We need both. Globalisation and digitalisation have taken some of the instruments out of our hands. The old formula of more growth plus more redistribution equals full employment doesn't add up any more. That is why we must link social fairness with innovation," he said. In the debate on economic policy on Wednesday, the Finance Minister, Mr Hans Eichel, was even more forthright - defending his huge cuts in public spending and telling the party to stop demanding new taxes on the rich.

Figures released this week show that Mr Eichel has much to be pleased about, as Germany's economic recovery continues to strengthen and unemployment falls. Most of his spending cuts have already passed through parliament and a meeting with opposition leaders next week could produce an agreement on a reform of pensions - one of the most incendiary issues in German politics.

Although exports remain the motor of Germany's recovery, domestic demand is picking up and, as unemployment falls, consumers will have more money to spend in the shops. Mr Schroder promised this week that the next meeting of his Alliance for Jobs - a round table of employers, unions and the government - would produce concrete results.

Unlike Mr Duisenberg, the Chancellor needs the backing of public opinion to pursue his reforms and Germany's federal system puts its politicians to the test with brutal frequency. Mr Schroder faces a crucial test next May when North Rhine Westphalia, Germany's most popular state, elects a new state parliament.

If the government parties fare badly, Mr Schroder's coalition of Social Democrats and Greens could collapse, plunging Germany into a political crisis. Now that would really give Mr Duisenberg and the financial markets something to worry about.