View from Frankfurt: Teutonic election campaign in danger of coming to life: As the parties enter the last lap of their race for power, John Eisenhammer argues that it is time for fire in German politics

WITH THE runners in the final lap of this month's German general election, the tension among onlookers is increasing sharply. For too long international investors especially, had lulled themselves into the calming conviction that Chancellor Helmut Kohl had the race sewn up. Suddenly, things are looking less clear, the outcome more open.

The rise of the Christian Democrats and their Bavarian sister- party appears to have faltered around the 42 per cent mark and may even have turned down. Their Social Democratic challenger is no longer languishing, but has edged beyond the mid-30s in the opinion polls.

But even if that balance of forces looks pretty clear-cut, it says little about the arithmetics of building a government in Germany's complex coalition system. Even as the favourite to win, Chancellor Kohl's CDU may still lack a workable majority if its Free Democratic allies fail to win sufficient seats, or if the wild-card former communists in eastern Germany muster enough support to upset the coalition calculations.

It is tempting to say it is high time this election became more exciting; the campaign has been irresponsibly bland. The ruling Christian Democrats do not really have a programme, just a man. Vote for Helmut Kohl, they cry, statesman, unifier and bringer of economic recovery. The government has adopted the traditional slogan of the politically evasive: no experiments.

The Social Democrats are no more adventurous. Since the CDU turned the campaign into a personality contest, the SPD has struggled with its bland standard-bearer, Rudolf Scharping. The palpable spread of the feel-better factor through the country as the recovery accelerates has weakened the SPD's attack on the government's handling of the economy. Its programme is every bit as vague as the CDU's.

But everyone knows what the big issue looming on the other side of the election is: the state. Grappling with the role and weight of the state in Germany is a matter that will not be easily avoided, regardless of party. How much is achieved, both in terms of streamlining and of getting the state to encourage innovation and reform, will be important for the dynamism and competitiveness of the German economy towards the turn of the century. This will demand political determination of a sort all too rarely seen in the past four years - the potential for controversy is enormous, which explains the pre-election silences.

Unification, which marks its fourth anniversary today,has seen a massive expansion of the state. The result has been effectively to wipe out the progress made in the Eighties. Then state spending as a proportion of GDP was brought down to 44 per cent. Now it is pushing 54 per cent. The burden of state debt is about to breach the Maastricht 60 per cent convergence criteria and soaring public spending has been difficult to control, despite massive tax increases, while the rise in social insurance contributions has propelled labour costs to record heights.

The demands of unification also diverted attention away from continuing the process of liberalisation and easing the Teutonic passion for over-regulation. The centrist Free Democrats have traditionally been the heavy hitter on this front, but they have simply hung up their gloves in the past few years - an omission for which they are being punished by a string of state election humiliations.

The only trenchant proposal to come from either the CDU or SPD is for another sharp tax increase. In January, the Christian Democrats are introducing a 7.5 per cent income tax 'solidarity' surchage to help pay for re-building eastern Germany. The SPD argues the 'little man' has done enough and propose instead a 10 per cent surcharge on annual incomes of above DM60,000 ( pounds 24,500). Both swear that will be the last of any tax increases. The next steps are to be savings, about which neither party is willing to offer more than the vaguest declarations of intent.

The constraints on public spending have pushed the CDU and SPD closer together. The CDU talks about state spending growing 'clearly' more slowly than nominal GDP, while the SPD uses the word 'noticeably'. There is no doubt the SPD is just as keen as the CDU to see Germany fulfil quickly the Maastricht economic convergence criteria, which will be an important discipline on a party that does not always instinctively turn towards fiscal rigour.

Given these patches of common ground, it is hard to see why the markets should be so allergic to a grand coalition between the CDU and SPD, which is the second most likely election outcome after a continuation of the present centre-right government.

To some extent, a grand coalition would merely formalise the current set-up whereby the SPD controls the Upper House, and all important legislation is thrashed out in mediation committees with the government-run Bundestag. In the perverse way of politics, a grand coalition could find it easier to take some of the hard decisions pending.

The agenda is bursting after years of vacillation and absent courage. This election can be seen as a potential watershed, after the exhausting period of unification in which the political parties did little more than just cope. Now, the worst is behind them. There is an opportunity for the extraordinary revolution which has swept corporate Germany over the past two years, breaking moulds and prompting much new thinking, to be carried forward by the politicians. A wide-ranging national debate about the international competitiveness of the German economy has identified many of the issues. Businesses have begun doing their bit. Now it is up to the politicians to do theirs.

That means questioning the extent to which the state has grown in this traditionally corporatist culture. It also means easing an excessive regulatory environment, opening up key markets such as energy and telecommunications, reducing wasteful subsidies to uneconomic sectors, and tackling the problem of social spending and contributions-induced high labour costs.

This would not mean an Anglo- Saxon style confrontational revolution, a Big Bang. Germany will continue down its path of consensus and compromise. But as firms across the country are showing, that need not prevent radical change.