View from Frankfurt: Electoral catharsis beckons for Germany

Elections are never good for investor blood-pressure levels. Germany this year is likely to push the heartbeat rate even higher than usual for such uncomfortable events. For there can rarely have been as gruelling a voting calendar as the one that opens with the state election in Lower Saxony on 13 March and reaches its high-point in mid-October at the general election. Nineteen polls in all, at the local, state, European and national levels, testing month after month the stamina of the politicians, the patience of the public and the nerves of investors.

The hugeness of this challenge is not aided by a cloying atmosphere of uncertainty. Chancellor Helmut Kohl, who produced a veritable tour de force this week in Hamburg in an attempt to revive his dispirited Christian Democrats, still displays astonishing reserves of energy and combativeness. But he ran out of new ideas long ago, and is trailing badly, along with his Christian Democrat party, in the polls. The economic recovery, which the government had counted on as being well under way by the summer, in time for the autumn general election, is not in sight. There is an air of fin de regime about, but no-one knows what it will lead to.

Unemployment dominates the polls. Last year's forecast had been for the jobless total to pass the 4 million mark at the end of 1994. Instead, it did so in January, an awful start to an election year. If the number of people on job creation, maintenance, training and early retirement schemes are also taken into account, then the number of jobs lacking in Germany altogether is nearer 6 million, or more than 15 per cent of the workforce. In eastern Germany, where the official statistics speak of 17 per cent joblessness, the disguised total is nearer 30 per cent. These levels will continue rising into 1995. After a 1.9 per cent decline in German GDP last year, the forecast splutter of growth up to 1 per cent in 1994 will have no positive impetus for the labour market.

RAY OF HOPE

Private consumption, hit by rising unemployment, real wage cuts and increases in taxes, duties and social insurance contributions, is being steadily rolled back. Investment activity, despite historically low long-term interest rates, remains weak. Only exports offer a ray of hope, but it has yet to become very bright. The only sure bet is that whoever wins in October will take over an economy beginning to pull more rapidly away from the ravages of recession. But that offers little comfort to the combatants right now.

Such prevailing uncertainty will have inevitable consequences. It is likely to hinder a more aggressive bond rally, and will complicate the task of the Bundesbank by increasing downward pressure on the mark. The central bank wants to get interest rates down - German inflation is clearly on the mend - but it has to be exceptionally careful that the gradual depreciation of the mark against the dollar is kept controlled and limited and that long-term interest rates are not jolted.

If precedents are anything to go by, then previous recessions have always produced political change. In 1966/67, Ludwig Erhard's CDU government gave way to the Right- Left Grand Coalition. In 1974/75, Willy Brandt handed over to Helmut Schmidt. And in 1982/83, the left made way for Helmut Kohl and his Christian Democrats. At present, Mr Kohl trails well behind his youthful Social Democratic challenger, Rudolf Scharping, in the chancellor stakes. The Christian Democrats are also uncomfortably far behind the Social Democrats, though they have begun to pick up slightly. The Chancellor of Unification is paying heavily for the success and boundless expectations of 1990.

With both the big parties fighting against deep-seated voter disenchantment, there are grounds for expecting the outcome of the October general election to be a grand coalition. If neither the CDU nor the SPD is strong enough to put together a dominant coalition, then they will be condemned to govern together, as they did in the late sixties. This need not be alarming. Behind the rhetoric, the big differences between the party programmes are few. The Social Democrats, under pragmatic leadership, have moved towards the centre, notably on the economy. Pressing in on a new government will be the predominant constraint of the budget deficit. If Germany is to meet the Maastricht convergence criteria, and both SPD and CDU have every determination to do so, then fiscal stringency will have to be pursued.

RADICAL SOLUTIONS

But to infer from this that the new administration will have little room for manoeuvre would be overhasty. The United States shows us that fiscal rectitude and radical reforms are not mutually exclusive. Indeed, there are grounds for looking towards the October general election with optimism, no matter the CDU/SPD configuration. For the election could be the occasion to break the semi-paralysis that has gripped Germany's political establishment for the past four years. Corporate Germany is teeming with change at present, radical solutions are being adopted faster than one can count them. But little of this has been knocking-on into new political initiatives.

This is not for lack of things to do. Plenty of important issues have been talked about, endlessly, but few have advanced towards concrete action. The agenda of change to improve competitiveness is now bursting: deregulation of working times and shop-opening hours; privatisation; the reduction of subsidies locking up resources in unproductive sectors; shortening of the school period from 13 to 12 years, to mention just a few. The recession in Germany has sharpened the awareness that reforms are needed. So far, however, the politicians have largely failed to carry this new mood forward. The election may be the moment for releasing the dynamic of change.

If one accepts such an optimistic view, then, election nervousness aside, this is the time to invest in Germany. Many foreign institutional investors are still underweight in Germany, having betted heavily on France last year, but are now reluctant to move.

There is no reason to believe however, that the DAX, for all its apparent expensiveness, will not soar higher, perhaps beyond 2,500. Germany is about two years behind the US in its recovery; there is a lot of room left yet, with grounds for hoping that, come the election, the long-awaited changes can really begin.