Smiling Schroder happy to look to future

Gerhard Schroder has a lot to smile about. Since hitting rock bottom last autumn, the popularity of the German chancellor and his Social Democratic party (SPD) has risen smartly on the back of popular measures, such as big personal and corporate tax cuts. The Red-Green coalition is working much more smoothly.

The unexpected bonus has been the sudden implosion of the Christian Democratic Union, his main opposition party, amid disclosures of financial irregularities under Helmut Kohl, the former chancellor and CDU chairman.

But he says tersely: "The government's popularity is not just because of the CDU's weakness. `We've also got better through our own efforts."

Mr Schroder unfolds no canvas of bold reforms designed merely to capitalise on the opposition's disarray. Instead, he states his priorities: innovation and social justice. "I am trying to push through a policy linked to the new realities," he says.

Innovation has come predominantly through fiscal reforms.

They have included slashing corporate tax seen as a serious impediment to Germany's competitiveness from 40 per cent to 25 per cent next year, and lowering income tax to boost demand.

But it is the government's plan to abolish capital gains tax on the sales of corporate equity stakes that the chancellor particularly stresses.

"In the tax reform, this part is especially important to me. We will mobilise the equity stakes held by banks and insurance companies and allow their tax-free sale. That's not because we want to give the banks and insurers a present, but because we are convinced that mobilising these holdings could open the way to greater economic activity."

He says he is ready to consider improvements to the draft legislation, which has been warmly welcomed by industry but could still face a tricky ride in the Bundesrat, the upper house of parliament, where the government has lost its majority. But whatever happens, he is adamant the abolition of capital gains tax will be implemented.

Such boldness contrasts with the almost furtive way the measure was announced alongside the other tax changes in December, suggesting that the reform was initially played down to avert a backlash from the SPD's powerful left wing.

The cigar-smoking Mr Schroder, once derided by leftwingers as the "buddy of the bosses", has regained credibility among the old guard after intervening to rescue the highly indebted Philipp Holzmann building group. But his relationship with party stalwarts remains fragile.

The chancellor's enthusiasm for open markets and the bourse seems to sit uneasily with his initial reservations about Vodafone's hostile takeover bid for Mannesmann. Back in November, he warned that hostile bids were inappropriate and that consensus was the only way to avoid destroying a target company's culture.

"I have never opposed foreign investment in Germany. I would never do it," he now says. "But one has to ask, how can one do it better? Daimler-Chrysler showed the way: that is the form."

Mr Schroder is creating a committee of inquiry to examine whether Germany should revise its takeover rules in the wake of the Vodafone-Mannesmann deal.

But he denies he favours restrictions. "We want to create a new share-owning culture. I belong to those who are happy when the DAX goes up."

Pension reform is also essential to his reformist agenda.

Germany, like its European neighbours, faces an over-burdened state pension system. While there is shared awareness across the political spectrum of the need for reform, legislation has proved difficult. One of the SPD's first steps on taking office in late 1998 was to freeze the tame reforms of the previous CDU government. But its own efforts ended in farce last summer when the popular press joined forces with the opposition to sink plans for compulsory private pensions alongside the creaking state scheme.

A rethink by the government, combined with the CDU's problems, has produced a non-partisan approach. "I think we can come to a compromise," Mr Schroder says.

This recurring emphasis on the need for compromise reinforces the impression that the chancellor, whom few find easy to pin down politically, is a pragmatist at heart.

He is critical, for example, of Germany's regional state premiers in their dispute with the European Commission over alleged illegal aid to the public-sector Landesbanks.

"As a former Land premier, I have personal experience of the Landesbanks. So I can understand that the Lander want their banks to emerge undamaged. But the real structural interest is in the savings banks. One should talk to the Commission about the possibilities of a compromise. I would advise thinking along these lines, not all or nothing."

for a plant and the electricity companies can divide up the energy generated among their plants,` he says. `Why shouldn't it be possible to say that older atomic power stations could be closed sooner, and the newer ones left to run a little longer?`

With domestic issues so prominent, foreign policy has taken a back seat since the end of Germany's chairmanship of the European Union and the Group of Seven industrialised countries last year. But Mr Schroder has adopted an unusually high international profile recently because of foreign reluctance to see his chosen German candidate succeed Michel Camdessus as managing director of the International Monetary Fund.

Washington and Paris have shown the strongest reservations about Caio Koch-Weser, a top civil servant in the finance ministry, but Britain too has had doubts.

Mr Schroder denies his heavy lobbying has harmed relations with Germany's closest allies. "There are no problems with Britain. Nor with France. There was a unanimous vote. France made clear that Europe had a candidate.

"Germany has a highly-qualified candidate. I can't understand the occasionally expressed doubts. I reckon there will be a definitive decision by the end of the month at the latest."

After a bruising first year in office, it is not surprising that he prefers to look forward rather than backwards.

"My responsibility is the present and the future, not the past."