Quotes of the Day

There's something different about Angela Merkel. Germans remain spellbound by the novelty of a female Chancellor, but it's her down-to-earth manner that really sets her apart. There isn't a politician in Europe today who would not be giddy with delight if they racked up the approval ratings Merkel has been scoring — 80% in February, the highest for any German Chancellor since World War II. But the former physics lecturer is not one to get carried away with fripperies like opinion polls. A participant at a recent meeting with business leaders in Berlin tells how she batted away praise. "This won't last forever," she told her audience. "The real test is yet to come. The proof of the pudding is in domestic policies."

Sober — and accurate. Merkel heads up a grand coalition with her former adversaries, the Social Democratic Party (spd), and must find consensus on ways to revitalize the economy, repair the health system and boost employment. Victories in three state elections on March 26 gave her coalition a lift, but now, for the first time since it won power four months ago, the German government is set to grasp the nettle of domestic policy. Reforms to reduce joblessness and find new money for health care are due as early as June. As her supporters celebrated their election gains, Merkel cautioned that "tough working weeks lie ahead of us."

It will take more than such warnings, though, to puncture the bubble of good humor enveloping many of her compatriots. Germany was dubbed the land of smiles on the cover of a recent issue of German newsweekly Der Spiegel. Some 85% of respondents in a poll for the magazine anticipated that 2006 would be a "good year." The number of Germans who feel their government can improve their lives has risen fourfold in the past six months, consumer confidence is at its highest in four years, and the business climate index — a measure of how optimistic businesses are about the future — last week reached its highest level since German reunification. The reason for all this good cheer? Columnists call it the Merkel Factor. It was even given solid form on floats at the annual Carnival parade in Cologne. Last year, a vast, papier-mâché Merkel bent over to kiss the bottom of a George W. Bush figure; this year she had undergone a makeover into a motherly barkeeper, huge breasts enveloping her coalition partner, apparently loving him — and Germany — to death.

From figure of fun to Mother Germany, from electoral liability to the pride of her party and country — what has the Chancellor done to effect this transformation? To be sure, after an election campaign in which she blew a 20-point lead, there was nowhere to go but up. The same goes for the grand coalition which, at its inception, inspired more skepticism than confidence. Nor is there much of an opposition in Berlin to highlight a government's shortcomings: the Greens, liberal Free Democrats and post-communist Left Party between them fill just 27% of the seats in the Bundestag.

But Merkel is more than just fortunate: she has made her luck. Meetings with world leaders from President Bush to Vladimir Putin have won praise for a nicely calibrated blend of multilateral fence mending and principled criticism. At home, she toned down the free-market rhetoric that made voters uneasy in last year's poll. And she has won the admiration of party members and rivals alike for her consensual management style and grasp of detail. "I'm convinced that she is really the right person for Germany," Henning Kagermann, ceo of SAP, the software giant, tells Time. "She's very pragmatic, she can listen, and she is not always talking about these grand visions but about small executable steps. We are very comfortable with her style."

But are small steps enough to tackle Germany's underlying economic woes? Merkel has spent her first four months tending to Germany's role in global affairs. Now she will take up a series of reforms to health care, tax, pensions and, most importantly, labor markets that will really test the solidity of her grand coalition and her own popularity. "She has accumulated a heap of political capital," Reinhard Bütikofer, chairman of the opposition Green party, tells Time. "One of these days she is going to have to spend it."

And, despite the burgeoning confidence of business and consumers, Germany's underlying economic problems are still there. The pension system is going bust, state spending on social programs is out of control, and seasonally adjusted unemployment is rising, last month topping 11.4%. Public sector strikes, the first in 14 years, have sparked demonstrations in 11 of 16 states. Last week, IG Metall, Germany's biggest engineering union, staged its own "warning strike," the first in a series aimed at winning a 5% increase in wages. The walkouts expose a yawning gap between workers' expectations and employers' ability to pay. The Merkel Factor, it seems, won't guarantee endless patience. Gunter Thielen, chairman and ceo of Bertelsmann, tells Time: "The grand coalition under Mrs. Merkel's leadership is off to a good start. But the way I see it, urgent reform projects still remain to be tackled. Courageous steps are called for here."

For example: health-care reform. Germany's 123-year-old health-insurance system is hemorrhaging cash, and the two ruling parties are miles apart on how to fix the problem. (The cdu would prefer a flat contribution unrelated to income; the spd wants everyone to pay in, including some groups, such as the self-employed, who have thus far been exempt.) Merkel's government has set itself a deadline of the summer recess in July to come up with a draft compromise. The Chancellor must find a way to balance the egalitarian impulse of the spd, which could impose a heavier burden on employers and increase the cost of labor, against the free-market instincts of her own party, which may not find a way to raise enough cash. But the government also has on its agenda reforms of the tax system and the way in which laws are approved at the federal and state levels. And eventually it has to tackle labor-market restrictions that can make hiring in Germany prohibitively expensive, but which the spd and unions still support. "The coalition will be a success if we get two good years in which they deal with federalism, tax reform, health-care reform and pensions," says Michael Burda, an economist at Humboldt University in Berlin. "But things will get tough once they start talking about labor-market reform."

The question of how to lower the cost of labor speaks to major differences between the two partners in the coalition. Laurenz Meyer, a former secretary-general of the cdu and current economics expert in the Bundestag, says that since last year's elections, the spd has been looking "to align [itself] with the unions" even more strongly than before. It's not been a winning strategy. According to the latest Forsa poll, backing for the party is down to 28%, from 39% six months ago (Merkel's cdu stands at 38%). The spd is also suffering fallout from the tarnished image of former Chancellor Gerhard Schröder, who took a €250,000 job with a subsidiary of the Russian giant Gazprom shortly after leaving office, raising questions about his judgement; and because its ministers have been associated with unpopular government pronouncements. Wolfgang Thierse, a veteran spd deputy and vice president of the Bundestag, says his party recognizes that "the fat years are over and things won't improve without a big sacrifice." But he adds that the cdu needs to shoulder more of the burden of introducing controversial policies. One reason the spd has been losing support, he says, is that Merkel has kept her distance from such measures, leaving them to spd Cabinet members instead. "The Chancellor should put her foot down for painful reforms," says Thierse.

Maybe, but judging by her performance so far, that's just not her style. Merkel appears to prefer working behind the scenes to basking in the limelight. She has brought a collegial atmosphere to the Chancellery that is proving wildly popular. "Suddenly a woman in black enters the stage without any pomp or circumstance and talks in a quite straightforward manner — analytically," says Gerd Langguth, a political scientist at Bonn University. "People like that." Cabinet meetings are more open and less hierarchical than they were in Schröder's day, though Merkel can be ruthless with long-winded colleagues. "When I met her alone it was like meeting a leading business figure," SAP's Kagermann tells Time. "She is very effective at managing discussion."

Merkel also likes to keep her channels of communication open. She often abandons the desk in her vast Chancellery office and works instead from an oval conference table that puts her on a par with colleagues. She prefers visiting staff to summoning them to her office. And while she can be stilted in media interviews, she is hooked on text messaging, requiring even the most tech-reluctant older members of her Cabinet to master the art. Staffers are expected to make bullet presentations to her via sms: short and to the point. "It's the best, sometimes the only, way to reach her," says an aide. So what text messages should her colleagues, coalition partners and electorate be sending? "Well done," for a start. But, also, maybe: "Get a move on." Unless the Merkel Factor translates into tangible economic improvements, the next batch of sms might not make for such pleasant reading.

• ANDREW PURVIS
• Germany's new Chancellor, Angela Merkel, is winning the popularity contest. But what will happen when she gets down to business?